Term
| primary purpose of evidence collection |
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Definition
| test relevant assertions about the transaction classes, balances, and disclosures in the F/S. The auditor then uses these assertions as a bases for assessing RMMs and designing and performing further audit procedures. Many audit procedures performed in accordance w/risk assessment are intended to detect overstatement of sales, receivables, and cash. |
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Term
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Definition
| entity's claims against customers that have arisen from the sale of goods or services in the normal course of business or from a financial institution's loans |
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Term
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Definition
| result from an entity's ongoing major or central operations. |
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Term
| testing A/R and revenue assertions |
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Definition
| Testing assertions about A/R also results in evidence relevant to the assertions about sales revenues. Thus, testing for the completeness of receivables tests the completeness of sales. DR: Receivables and CR: Sales- recorded in sales journal. |
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Term
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Definition
| record a large volume of similar items |
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Term
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Definition
| entries not suitable for one of the special journals is recorded here |
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Term
| SEC Staff Accounting Bulletin (SAB) 101 |
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Definition
| provides guidance for the reporting of revenue in F/S filed with the SEC, including the criteria for revenue recognition. SAB 101 follows current GAAP but applies them to transactions not addressed in the authoritative literature. |
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Term
| relevant assertions (CAVE CROC) |
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Definition
completeness
accuracy
valuation/allocation
existence/occurrence
cutoff
rights and obligations
occurrence
classification and understandability |
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Term
| completeness of sales-receivables |
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Definition
Do sales-receivables reflect all recordable transactions for the period?
Reconcile recorded amounts in the subsidiary ledger w/A/R amount recorded in the G/L. |
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Term
| What audit procedures are performed to test completeness? |
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Definition
Analytical procedures.
Use appropriate data sources for expectations, then compare your estimates with those of management.
Calculate and compare ratios w/prior periods and industry norms.
Account for the numerical sequence of sales-related documents.
Compare shipping documents w/sales invoices and journal entries to test whether the related sales were recorded at the time of sale. |
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Term
| accuracy of sales-receivables |
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Definition
| Have transactions and events been recorded appropriately? |
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Term
| What audit procedures are performed to test accuracy? |
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Definition
Obtain a management representation letter that includes assertions relating to sales and receivables.
Evaluate management's disclosures about reportable operating segments and related information, including products and services, geographic areas, and major customers. |
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Term
| valuation/allocation of sales-receivables |
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Definition
| Are A/R measured in accordance w/GAAP? |
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Term
| net realizable value (NRV) |
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Definition
| gross A/R - allowance for uncollectible accounts |
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Term
| What audit procedures are performed to test valuation/allocation? |
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Definition
Age the A/R
Trace subsequent cash receipts |
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Term
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Definition
| classify the receivables by age, and compare %s within classifications with those of the prior year |
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Term
| trace subsequent cash receipts |
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Definition
Cash receipts after the B/S date provide the best evidence of collectibility. By the end of the field work, the auditor should be able to judge the likely collections of the outstanding balances and therefore judge the proper value of the allowance account.
Review delinquent customers' credit ratings to assess collectibility. |
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Term
| best evidence of collectibility |
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Definition
| cash receipts collected after the B/S |
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Term
| existence of sales-receivables |
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Definition
| Are the A/R valid assets? |
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Term
| What audit procedures are performed to test existence? |
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Definition
| confirmation of A/R and vouch recorded A/R to shipping documents |
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Term
| What provides more assurance: confirmation at year-end or confirmation at an interim date? |
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Definition
| Confirmation at year-end. |
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Term
| Must auditors document if they do not confirm A/R? |
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Definition
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Term
| What are the frauds/errors that confirmation helps discover? |
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Definition
| lapping and improper cutoff |
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Term
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Definition
| theft of a cash payment from one customer concealed by crediting that customer's account when a second customer makes a payment. |
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Term
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Definition
client may have held open the sales journal after year end and improperly recorded sales and receivables for the period under audit rather than for the subsequent period.
In this case, responses to confirmations would indicate that amounts owed by debtors at year end are smaller than the recorded amounts. |
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Term
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Definition
| contains the recorded balance of the receivable; debtor to respond only if the amount is incorrect. |
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Term
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Definition
| debtor must respond regardless of whether the amount is correct. |
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Term
| blank form (of positive confirmation) |
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Definition
| requests that the debtor fill out the amount owed to the entity being audited. |
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Term
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Definition
| examination of subsequent cash receipts, shipping documents, etc.; are used to examine accounts that cannot be confirmed |
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Term
| When should alternative procedures be performed? |
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Definition
| When customers fail to answer a second request for a positive confirmation, the accounts may be in dispute, uncollectible, or fictitious. |
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Term
| vouch recorded A/R to shipping documents |
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Definition
| B/c shipment of goods is typically the event creating the sale and receivable, vouching recorded receivables to shipping documents (bills of lading) tests for existence. |
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Term
| cutoff for sales-receivables |
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Definition
| Have transactions been recorded in the proper period? |
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Term
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Definition
Test to determine that a sale and receivable were recorded when title passed to the customer, which often occurs when goods are shipped.
Shipping documents are traced to the accounting records for several days to and after year-end to determine proper recognition in the appropriate period. This test detects inflated sales. |
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Term
| cash receipts cutoff test |
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Definition
Test the recording of the receipts of cash and the associated reduction in A/R.
Inspection and tracing of the items on the daily remittance list for several days prior to and after year end provides evidence of proper recording. |
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Term
| rights and obligations of sales-receivables |
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Definition
| Does the entity have the right to collect receivables? |
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Term
| What audit procedures are used to test rights and obligations? |
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Definition
| inquiries of management and tracking cash receipts |
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Term
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Definition
| Consider the motivation and opportunity for factoring or selling the receivables, and inquire of management as to whether such transactions have occurred. |
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Term
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Definition
Determine that the entity is collecting and depositing the proceeds into bank accounts it controls.
Determine whether sales have been made with a right of return and what the expected and actual returns are after year end. |
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Term
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Definition
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Term
| What audit procedure is used for testing occurrence? |
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Definition
| Vouch a sample of recorded sales to customer orders and shipping documents. Large and unusual sales should be included in the same selected for testing. This test is useful for detecting overstatements. |
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Term
| classification and understandability |
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Definition
| Are sales and receivables appropriately described and disclosures fairly and clearly expressed? |
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Term
| What audit procedures are used for testing classification and understandability? |
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Definition
Inspect the I/S to determine that sales are reported as a revenue - returns and allowances.
Inspect the B/S to determine that A/R are presented as a current asset - allowance for uncollectible accounts.
Evaluate note disclosures to determine that accounting policies are disclosed. Pledges of A/R should be disclosed. Any significant sales or receivables transactions w/related parties also should be disclosed. |
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Term
| If RMM is low, which assertions will be tested the most? How are these assertions tested? |
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Definition
existence and occurrence assertions
The auditor ordinarily tests the documentation that supports the return. This procedure determines whether proper authorization exists, and the credit to the customer's account was supported by a receiving report representing the return of goods. |
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Term
| audit procedures for the write-off of bad debts |
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Definition
| If the RMM is relatively low, the audit plan of A/R described above should provide sufficient appropriate evidence. However, if controls are ineffective, the auditor will perform specific procedures to reduce detection risk to an acceptably low level. |
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Term
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Definition
| cash on hand, demand accounts, and other asset accounts held in financial institutions. |
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Term
| Assertions related to cash testing are associated with which F/S? |
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Definition
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Term
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Definition
| Does the balance at the end of the accounting period reflect all cash transactions? |
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Term
| Audit procedures for testing cash receipts? |
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Definition
For cash receipts, trace the daily remittance list to the last validated deposit ticket for the period.
For cash disbursements, determine the last check written for the period, and trace the effect to the accounting records. Determine that all outstanding checks have been listed on the bank reconciliation.
Use analytical procedures is not typically as effective for cash as for other accounts b/c it is a managed account. |
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Term
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Definition
| Has cash been recorded appropriately? |
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Term
| Audit procedures for testing accuracy? |
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Definition
| Compare a sample of daily remittance lists w/deposits, journal entries, and ledger postings. |
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Term
| valuation/allocation of cash |
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Definition
| Is cash valued in accordance w/GAAP? |
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Term
| Audit procedures for testing valuation/allocation? |
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Definition
| U.S. currency has low inherent risk relative to this assertion. Holdings of foreign currency and other special circumstances may require additional testing. |
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Term
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Definition
| Does cash exist? B/c inherent risk is high for cash, most audit procedures are directed toward existence. |
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Term
| Audit procedures for testing existence? |
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Definition
Count cash on hand.
Bank confirmation.
Bank reconciliation.
Cutoff bank statement.
Schedule of interbank transfers.
Proof of cash. |
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Term
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Definition
Control all cash and negotiable securities to protect against substitution.
Determine that all received checks are payable to the client.
Determine that all received checks are endorsed “For Deposit Only into Account Number XXXX.” |
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Term
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Definition
| The AICPA Standard Form used for specific deposits and loans. |
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Term
| What does the standard form confirm? |
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Definition
The form confirms the account name and number, interest rate, and balance for deposits.
For direct liabilities on loans, the form confirms account number/description, balance, due date, interest rate, date through which interest is paid, and description of collateral. |
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Term
| Who requests a bank confirmation? Who should send in the confirmation? |
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Definition
| A confirmation is requested by the client, but it should be sent by the auditor to any bank w/which the client has had business during the period. |
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Term
| What does the standard form do for the auditor? |
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Definition
| Standard form (and separate letter) is designed to substantiate only the information that is stated on the confirmation request. Thus, the auditor should be aware that the standard form is not intended to elicit evidence about the completeness assertion. |
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Term
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Definition
verifies the agreement of the bank statements obtained directly from the institution and the amount of cash reported in the F/S. These amounts should be equal after adjustment for deposits in transit, outstanding checks, bank charges, etc.
Inspect or prepare a bank reconciliation for each account. |
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Term
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Definition
| Should be requested directly from the bank for the period 7-10 days after year end. Use this statement to test reconciling items on the year-end bank reconciliation. |
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Term
| What frauds does the cutoff statement help detect? |
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Definition
kiting- improper recording of a bank transfer.
window dressing- trying to improve the current ratio |
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Term
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Definition
improper recording of a bank transfer.
To cover a cash shortage- cash is in the accounting records but not in the bank's records- an employee writes a check just prior to year end on the disbursing bank but does not record the disbursement in the accounting records in the current year.
Furthermore, the check also does not appear as a disbursement on the year-end statement issued by the disbursing bank b/c it would not have cleared. However, the receipt is recorded by the receiving bank, thereby covering the shortage. |
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Term
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Definition
| To uncover kiting, the auditor should match the returned checks written prior to year end listed on the cutoff bank statement with the outstanding checks listed on the bank reconciliation for the disbursing bank. B/c the kited check was not recorded, it will not be listed as outstanding. |
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Term
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Definition
trying to improve the current ratio.
The client may write checks to pay current liabilities but not mail them until next accounting period. |
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Term
| schedule of interbank transfers |
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Definition
| Preparing this schedule can help detect errors in transfers but may not be effective to detect kiting if a disbursement has not been recorded. For this procedure to be effective, the auditor should be assured that all transfers have been identified. |
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Term
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Definition
| It provides direct evidence that amounts recorded by the bank (beginning and ending balances, deposits, and disbursements) reconcile with amounts recorded by the entity for a period of time. |
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Term
| When is a proof of cash used? |
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Definition
| When internal control over a transaction process is not effective, a proof of cash may be prepared. |
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Term
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Definition
| When internal control over a transaction process is not effective, a proof of cash may be prepared. |
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Term
| Audit procedures for testing cutoff? |
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Definition
Inspect and trace the daily remittance lists for several days prior to and after year end.
Identify and trace the last check written for the year into the records. |
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Term
| rights and obligations of cash |
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Definition
| Does the entity have the ownership right to to the cash? |
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Term
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Definition
| Did the cash transactions occur? |
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Term
| Audit procedures for testing occurrence? |
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Definition
Vouch a sample of recorded cash receipts to A/R and cash orders.
Vouch a sample of recorded cash disbursements to approved vouchers. |
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Term
| classification and understandability of cash |
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Definition
| Is cash appropriately described and disclosures fairly and clearly expressed? |
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Term
| Audit procedures for testing classification and understandability? |
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Definition
Inquire of management about disclosure.
Determine that restricted cash is reported as a noncurrent asset on the B/S.
Assess SCF.
Evaluate F/S not disclosures. |
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Term
| inquire of management about disclosure |
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Definition
| Include references to cash in the management representation letter. |
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Term
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Definition
| sinking funds and compensating balances |
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Term
| assess statement of cash flows (SCF) |
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Definition
Determine proper presentation: direct or indirect method.
Reconcile information with I/S and B/S presentations.
Examine elements of SCF classifications: operating, investing, and financing activities. |
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