Revenue Testing
What are the two main assertions for revenue?
Occurrence and completeness
Name and describe the two types of customer confirmations
Positive confirmation: Respond for both a match or a discrepancy.
Name two of the main assertions for the purchasing process.
Occurrence, completeness, accuracy, cutoff
What is the most important control for cash?
Segregation of duties
Berica works as the accountant for a small company. Due to the lack of staff, Berica is responsible for receiving payments from customers and recording them in the books. What control should be in place to prevent this?
Segregation of duties
What are the typical transactions involved in the revenue process?
Making credit sales, collecting cash receipts, recording sales adjustments
What is one control relating to AR balances and/or credit sales?
Preventing sales to customers who exceed credit limit
Approval for new customers to obtain credit
Writing down AR account for bad debt expense (proper aging schedule)
What is the three way match?
Vendor invoice, receiving report, purchase order
Name two key assertions for cash testing.
Valuation/Accuracy, existence, rights and obligations
Mr. Beast wants to hire Bim for tax planning. While placing his order for tax services, Mr. Beast also places an order for "additional services" from Bim for $5.
Bim sends Mr. Beast his invoices, which he pays on 12/26. Bim records both payments as revenue as she expects to complete the services in the following days. Bim then completes the tax planning on 12/29, but Mr. Beast has to leave town before she can complete additional services...
Mr. Beast returns on 1/2 and Bim performs them when he returns, but makes no adjustment for the completion of additional services. What assertion did Bim violate?
Revenue cutoff
What are the 4 pieces of supporting documentation for vouching sales?
Sales order, shipping document, sales invoice, cash receipts
Name a common fraud scheme for AR
BONUS 100pts: Describe how it works
Lapping
BONUS: Using one customer's funds to fill the balance for another customer and pocketing the rest.
What is the most important test of details for the purchasing process?
Search for unrecorded liabilities
Name the two procedures performed for inventory testing.
Inventory observation
Inventory price testing
Bacob is responsible for taking sales recorded in the ledger and vouching them to the appropriate supporting documentation. What assertion is Bacob testing?
Occurrence of revenue transactions
Describe the process for revenue cutoff testing.
1) Select "x" amount of transactions from end of current year and beginning of subsequent year
2) Inspect shipping documents and invoices to ensure obligation was satisfied in correct period
What should you do once you've obtained an AR listing?
Foot
Agree to GL balance
Verify mathematical accuracy
Perform aging
Name two fraud risks for the purchasing process.
Fictitious vendors
Kickbacks
Bid rigging
Personal purchases
Describe the process for inventory observation (client role, auditor role, timing, extent)
Client will count the inventory
Auditor will observe the client counting
Will be performed immediately after year-end, often overnight
Only specific items will be counted, not everything
Borna and Bhiron have created a scheme where Borna purchases goods from "Bhiron Supplies", who is really her SO. They are able to pocket the payments from the company for a large profit since Bhiron charges more, which is obviously not approved by management. What type of fraud is this and what control would help prevent this?
Fictitious vendors
Only allowing purchases from vendors on an authorized list of vendors that has been approved by management.
When vouching supporting documentation for recorded revenue transactions, what assertions are satisfied? Explain how.
Occurrence: Sales invoice/shipping documents prove a sale occurred and obligations were satisfied
Accuracy: Comparison of amounts on documentation to amounts recorded in the ledger
Cutoff: Date of invoice/shipping doc agree with recorded date
Classification: Ensures recorded transactions are actually sales (vs. consignment)
A/R Testing
What is the initial procedure?
What is performed as an alternative procedure?
1) Confirmation sent to customer regarding A/R balance
2) Vouch A/R balance to bank statement and cash receipts
Describe the procedures for search for unrecorded liabilities.
Select subsequent disbursements
Examine supporting documentation (3 way match)
Determine if obligation should exist at balance sheet date
Trace to AP listing (Verify completeness)
Explain the difference between a bank confirmation, bank statement, and bank reconciliation
Bank confirmation: Confirmation from the bank that the client's accounts had specific balances at a specific date (Directly from bank)
Bank statement: A snapshot of the account balances at the client's bank for a specific date
Bank reconciliation: Comparison of client's cash balance to bank balance (PBC)
Bhase claims that his inventory is worth $8,000 which is the amount he purchased it for 5 years ago. After performing testing, it has been determined that Bhase has actually crashed his inventory in the school parking lot, meaning his inventory is no longer worth the full $8,000 but instead should be revalued as $4,000 on the books. What inventory test is being described?
Inventory obsolescence