Types of Assertions
PERCV
-Presentation/classification and disclosure
-Existence/occurrence (overstatement of revenue and assets)
-Rights and ownership (assets)
-Completeness (understatement of expenses and liabilities)
-Valuation (per unit prices)
Why would the credit function be separate from order entry?
Because if there was no separation the credit limits could be artificially adjusted for customers to purchase more than they can afford. Overextending to friends and family or themselves
Why should shipping be separate from billing?
To prevent fictitious revenues or manipulation. Premature revenue recognition schemes such as bill and hold
What is the most commonly manipulated accounts when perpetrating financial statement fraud?
Revenues and Receivables
Reasons for larger than expected gross sales increase and same gross profit %
Have good relationship with supplier so got lower rate
Inelastic product so can control price
Using gross method rather than net method, so not including discounts and returns
Explanatory Variables
Variables that explain fluctuations in something
Unadjusted r sqaured
Adjusted r squared
Unadjusted= Tells how much of the variation is being explained by explanatory variables
Adjusted= Controls for the number of variables in the model. A large variance between the two means the large number of variables is leading the explanation
T-State
P value
Tstate of 2.0+ means there is a strong relationship between variable and variable of interest
P value of .05 or lower means 2+ tstat
New Revenue Recognition Standards
1) Identify contract with customer (terms/collectibility)
2) Identify performance obligations
3) Determine transaction price (net of discounts/returns)
4) Allocate the transaction price to the performance obligation(s) in the contact IF there are 'stand a
Vouching vs Tracing
Vouching = Existence. Looks for overstatement of revenue or assets. Starts at cash receipts/JE and moves back into supporting doc
Tracing= Completeness. Looks for understatement of expenses or liabilities. Start with sales order up to JE
Audit assertion for Per Unit Pricing
Valuation
Why are reviewing Board Minutes helpful?
Board minutes are helpful because can see what the material transactions (that must be approved from board) were approved
Ex. Personal loans to management
Basic inquiry of management
Sole source contracts by key vendors who could be related to a board mem
How to catch Kiting Scheme
Look at per client books for double counting in disbursing and receiving bank accounts