RMM
Significant Accounts
Internal Controls
JE Testing
100
Financial Statement or Account Level Risk? Your client purchased a new accounting system during the year. You do not believe that your client had adequate procedures in place to ensure an accurate transfer of data from the old system to the new.
What is Financial Statement Risk?
100
Significant or not significant? ML - $250,000, Account - Cash, Balance - $14,500, Facts - • Entity has one checking account • Balance is consistent with prior year
What is a Significant Account? Reason: Cash will nearly always be a significant account, regardless of the balance, for qualitative reasons. The account normally contains a large number of transactions and is susceptible to theft.
100
Process or Control? All purchase orders greater than $5,000 are sent to the president for approval.
What is Process? Explanation: The verb here is sent. If verb was approves all purchase orders, then it would be a control.
100
Do you agree with the auditor's judgment? Rocky (third party, acting as internal auditor) prepares all standard journal entries which get posted to the general ledger, primarily by Dudley Do-Right. Given the size of the balance sheet and income statement, any major variances would be noticeable in M&P’s variance analysis of other income/expenses, assets, and liabilities. Pass further testing of journal entries.
What is No? Explanation: The auditor appears to have misunderstood the objective of testing journal entries. SAS No. 99 requires the testing of journal entries to ensure that management has not circumvented the controls; the auditor’s comments appear to be focused on identifying a misstatement only. In addition, the beginning population should be all journal entries, but the auditor here is focusing only on standard journal entries.
200
Financial Statement or Account Level Risk? The entity maintains inventory at 10 warehouses across the United States. Each warehouse has its own purchasing agent and manager on site who are responsible for maintaining adequate inventory levels. Inventory and A/P records are maintained at the home office in Kokomo, Indiana. Goods and invoices are sent to the individual warehouses. Invoices are approved by the warehouse manager and forwarded to the home office for further processing.
What is Account Level Risk?
200
Significant or not significant? ML - $250,000, Account - Note Receivable, Balance - $200,000, Facts - • Represents a new non-interest bearing note due from a related party • A formal note has not been executed
What is a Significant Account? Explanation: The balance is not quantitatively significant, but it represents a new related-party transaction, which often indicates a risk area.
200
Process or Control? The receptionist, who has no access to the accounting system, receives and opens the mail and prepares the deposit slip.
What is Control? Explanation: The key here is that the receptionist has no access to the accounting system, which helps ensure appropriate segregation of duties, an important element of internal controls.
200
Do you agree with the auditor's judgment? NOTE: Sample size for journal entry testing was determined during planning; see 360. The need to incorporate unpredictability was appropriately considered. The following documents our testing of manual journal entries only. Per discussion with Janet Davis, Controller, only she and the computer operators have the ability to manually post journal entries. Each day, a record of these entries is printed and kept in a binder. 12 entries were haphazardly selected for testing, in which supporting documentation was examined and discussed with client personnel. All entried appeared reasonable and no exceptions were noted. Further audit procedures are not considered necessary.
What is No? Explanation: The engagement has not document how it determined the completeness of the population. In general, if the work is not documented then it is presumed not to have been completed. It is not clear from the documentation what testing was performed by the auditor and it does not appear that the auditor determined whether the entry was posted in compliance with the entity’s stated policies.
300
Financial Statement or Account Level Risk? The economy of the community is dependent upon a factory that supplies various parts to the automotive industry. The community’s unemployment rate has increased over the last 8 months and exceeds the national average. The hospital’s CFO has not reviewed or changed her existing model for estimating the allowance for doubtful accounts.
What is Account Level Risk?
300
Significant or not significant? ML - $250,000, Account - Accrued Expenses, Balance - $200,000, Facts - • Represents liability for self-insured workers’ compensation claims • Amount has increased approximately 20% from prior year
What is a Significant Account? Explanation: Account is qualitatively significant because of accounting complexities, along with the possibility of significant contingent liabilities due to the nature of self insurance.
300
Process or Control? The draw requests on the line of credit are prepared by the CFO.
What is a Process?
300
The two fraud risk factors that are presumed to exist on every audit engagement.
What is management override of controls and revenue recognition?
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