Audit Exam 3

Five classes of transactions in the sales and collection cycle:

1. Sales (cash and sales on account)2. Cash receipts3. Sales returns and allowances4. Write-off of uncollectible accounts5. Estimate of bad debt expense

There are eight business functions within the sales and collection cycle:

1. Processing customer orders2. Granting credit3. Shipping goods4. Billing customers and recording sales5. Processing and recording cash receipts6. Processing and recording sales returns and allowances7. Writing off uncollectible accounts receivable8. Providing for bad debts

The key control activities for sales

1. Adequate Separation of Duties2. Proper Authorization3. Adequate Documents and Records4. Prenumbered Documents5. Monthly Statements6. Internal Verification Process

Design Substantive Tests of Transactions for Sales

1. Sales Are Accurately Recorded—Auditor 2. Sales Transactions Are Correct in the Master File and Correctly Summarized3. Recorded Sales Are Correctly Classified4. Sales Are Recorded on the Correct Dates

Controls And Substantive Tests Of Transactions For Cash Receipts

1. Determine Whether Cash Received Was Recorded2. Prepare Proof of Cash Receipts3. Test to Discover Lapping of Accounts Receivable

Methodology For Designing Tests Of Details Of Balances

1. Identify Significant Risks and Assess the Risk of Material Misstatement for Accounts Receivable2. Assess Control Risk for the Sales and Collection Cycle (Phase I):3. Design and Perform Tests of Controls and Substantive Tests of Transactions

Substantive Analytical Procedures

done after the balance sheet date but before tests of details of balances.

Existing Accounts Receivable Are Included

It is difficult to test for account balances omitted from the aged trial balance except by relying on the self-balancing nature of the accounts receivable master file.

Accounts Receivable Are Accurate:

Confirmation is the most common test for the accuracy of accounts receivable.

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Cutoff misstatements exist when current period transactions are recorded in the subsequent period or vice versa

contingent liability

1. There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.2. There is uncertainty about the amount of the future payment or impairment.3. The outcome will be resolved by some future event or events.

If an attorney refuses to provide the auditor with information

auditors must modify their audit report to reflect the lack of available evidence

Sarbanes-Oxley requires attorneys serving public companies to

report material violations of federal securities laws committed by the company.

analytical procedures

partner to do analytical procedures during the final review of the audit documentation

Going-Concern

Company will continue to operate into the foreseeable future without forced liquidation

Management Representation Letter

usually in a letter of representation documenting management's most important oral representations made during the audit

Materiality

Decisions regarding materiality in specific audit situations involves judgment on the part of the auditor. These decisions are based on the following: