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ACCT 5300 c253 midterm EXAM graded
A+
financial statement fraud - correct answer a special case of the risk of material misstatement related to those situations where management intended to mislead the marketplace by issuing fraudulent financial statements may be caused by an error or a fraud the key difference is intent least likely to occur most amount of loss fraud - correct answer intentional misstatement error - correct answer unintentional misstatement fraudulent disbursements - correct answer payments diverted to employees by disguise -setting up fake companies and sending fraudulent invoices -setting up fake employees misappropriation of assets - correct answer is the use of fraudulent means to take money or other property from and employer consist of three phases
most likely fraud to occur least amount of loss misappropriation of assets three phases - correct answer 1. the fraudulent act
- the conversion of the money or property to the fraudsters use
- cover up fraud risk assessment - correct answer identify risk of management override controls -examine journal entries and other adjustments -review accounting estimates for biases -evaluate business rationale for significant unusual transactions audit tem brainstorming discussion - correct answer required procedure set proper tone for engagement discussion should be ongoing throughout the engagement fraud triangle - correct answer three conditions that are likely to be present when a fraud occurs -incentive/pressure (motivation) -opportunity -rationalization incentive/pressure fraudulent financial reporting - correct answer -profitability of company threatened
presentation and disclosure cash strong internal control activities - correct answer -dual custody of cash at all times -lockbox arrangement -fidelity bonds cash assertions - correct answer -existence -valuation -presentation and disclosure substantive test of analytical procedures - correct answer not super helpful regarding cash limited to comparison of this year vs. last substantive test of details - correct answer test of the bank reconciliation primary audit evidence used to test cash - correct answer -bank reconciliations -bank statements (year end and cutoff) -bank confirmations audit of cash - correct answer obtain a bank reconciliation for each cash account and audit them in the correct manner cutoff bank statement - correct answer showing activity after year end audit of cash auditing manner - correct answer balance per books +deposits in transit
-outstanding checks +-other debit/credit memes =balance per books balance per bank - correct answer -confirm directly with bank -agree amount to cutoff bank statement deposit in transit - correct answer -trace to cash receipts journal -vouch to cutoff bank statement outstanding checks - correct answer -vouch to cash disbursements journal -trace checks cleared form cutoff bank statement debit/credit memos - correct answer -inspect bank credit/debit memo and audit reasonableness -examine relevant supporting documentation balance per books - correct answer -foot the entire reconciliation for mathematical accuracy -trace the amount of the trial balance footing - correct answer checking the mathematical accuracy confirmation of bank balances standard bank confirmation inquiry: - correct answer -must be mailed under auditor's own control. -used to confirm deposit balances and loan balances -also can be used to request information about contingent liabilities and secured transactions
persuasive evidence of an arrangement exist - correct answer purchase order delivery has occurred or services have been rendered - correct answer shipping documents the sellers price to the buyer is fixed or determinable - correct answer price list master file evidence of standard price of good ordered collectability is reasonably ensured - correct answer credit check basic actives in revenue and collection cycle - correct answer 1. receiving and processing customer orders
- delivering goods and services to customers
- billing customers and accounting for accounts receivable
- collecting and depositing cash received from customers audit evidence in managements reports and data files - correct answer -pending order and back order master file -customer master file -price list master file -sales detail (journal) file -sales analysis report -accounts receivable listing and aging -cash receipts listing -customer Statements using the Audit Risk Model - correct answer 1. set audit risk at desired levels (normally, low).
- assess risk of material misstatement, which incorporates inherent risk based on the nature of the account balance or class of significant transactions and control risk based on gaining an understanding of internal control. Note that AS 2110 indicates that the auditor should [presume that there is a fraud risk involving improper revenue recognition.
- set detection risk at the significant account and assertion level based on the level of audit risk and risk of material misstatement. inherent risk - correct answer improper revenue recognition -cut off -bill and hold -channel stuffing returns and allowances collectability of receivables bill and hold - correct answer client bills a customer with an agreement to later ship the good causing improper revenue recognition channel stuffing - correct answer a good is shipping and recorded with the expectation the customer won't pay until needed causing improper revenue recognition revenue and collection cycle: separation of duties - correct answer separate functions for recording, authorization, custody revenue and collection cycle: authorization of transactions - correct answer -write offs -EDI transactions -credit checks prior to approval of sale -pricing
-comparisons with industry analytical procedures: allowance for doubtful accounts, bad debt expense - correct answer -bad debt expense as a percentage of sales -allowance for doubtful accounts as a percentage of gross receivables analytical procedures: accounts receivable - correct answer -days sales in accounts receivable -accounts receivable turnover using confirmation - correct answer primarily for verifying existence factors likely to affect the reliability of confirmations - correct answer -pervious audit experience -intended recipient of the confirmation -type of information being confirmed -auditor ma confirm entire balance or individual transactions -type of confirmation being sent positive confirmations - correct answer -smaller number of accounts are involved -large number of error are anticipated most common negative confirmations - correct answer -the combined assessed level of inherent and control risk is low (RMM) -a large number of small balances is involved -the auditor has no reason to believe that the recipients of the request are unlikely to give them consideration
rarely used blank confirmations - correct answer should be used if the recipient is likely to return a positive confirmation without verifying the accuracy of the information a positive confirmation omitting the balance Three sets of circumstances that could justify the omission of the confirmation of a client's accounts receivable - correct answer -not material to the financial statements -if the risk of material misstatement I slow -confirmation of accounts receivable is expected to be ineffective non-response to positive/blank confirmation requests - correct answer -follow up with second and sometimes third request -a lower than expected response rate could be indicative of fictitious customer accounts -alternative procedures non response to negative confirmation request - correct answer -only limited evidence concerning financial statement assertions -alternative procedures are not necessary fo unreturned negative confirmation request sales cutoff procedures - correct answer -used to verify whether sales/revenues recorded in the correct accounting period -examine sales invoice and shipping documents shortly prior to and after year end -examine returns after year-end. alternative procedures - correct answer -vouch subsequent cash collections -examine shipping documents
-determine when to pay invoice -properly prepare voucher control procedures: separation of duties - correct answer -authorization of the purchase is done by the purchasing department. -custody of the inventory item(s) is held by the receiving department and, ultimately, the requesting department. -transactions are recorded by general accounting (control account) and accounts payable department (subsidiary accounts). -reconcile liabilities to customer statements and general ledger account. -bids are received by someone independent of the purchasing decision. control procedures: physical controls - correct answer -prepare a receiving report upon initial receipt of inventory -count and verify inventory quantities upon delivery to the inventory warehouse -restrict access to inventories by keeping them in a secured location control procedures: performating reviews - correct answer -compare purchase data to data from previous years or expected purchases data -review bids to ensure that documentation exist regarding the selection of the vendor completeness assertion - search for unrecorded liabilities - correct answer -inquire about procedures for identifying and recording liabilities -review cash disbursements occurring after year-end -examine unmatched vendor statements or invoices -examine unmatched receiving reports occurring near year-end -scan open purchase order file -trace unpaid vouchers in accounts payable ledger to receiving reports -confirm account payables with normal suppliers (even those with zero balances)
purchase cutoff - correct answer verify cut offs for purchase examine receiving reports and vendor sales invoices occurring around year end to ensure inventory received is included in the appropriate period accused liabilities - correct answer major differences between accrued liabilities and accounts payable these differences may make it more difficult to detect unrecorded accruals auditing accrued liabilities and prepaid expenses - correct answer -agree balances to prior year work papers -verify payments -examine underlying agreements -recalculate amounts -search for unrecorded accruals -analytical procedures income taxes payable - correct answer -extremely complex area -usually requires tax specialist -vouch payments -examine correspondence with government agencies -follow standard for auditing estimates auditing property plant and equipment - correct answer -small number of transactions -authorization of transactions takes on added importance -less concern for access to assets
the payroll cycle - correct answer -often process by service bureaus -balance sheet accounts usually small -rely on test of controls/substantive test of transactions inherent risk in payroll cycle - correct answer -ghost employees -overpaying for time or production -incorrect accounting -failure to pay third parties
