Authorization C. Occurrence

D. Completeness

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 12

80. When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion.

A. Cutoff

81. When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.

A. Classification

82. When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion.

A. Valuation and allocation B. Rights and obligations C. Existence

D. Completeness

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement

83. Explain how revenue recognition is important to the audit of the revenue process.

To determine whether the financial statements are presented fairly and in conformity with GAAP, the auditor must know what is in accordance with GAAP and what is not. There are specific guidelines regarding revenue recognition under GAAP and these guidelines should be reflected in the financial statements. The understanding of when it is appropriate to recognize revenue is very important in testing the occurrence and completeness assertions. Further, the revenue area is subject to high fraud risk and numerous significant fraudulent financial reporting incidents involved improper revenue recognition schemes. Accordingly, the auditor must possess knowledge about the client's revenue recognition process and plan the audit accordingly.

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Difficulty: Moderate Learning Objective: 1

84. Listed below are six assertions regarding the financial presentations made in the revenue process. For each, give an example of how an auditor could use one of the types of documents contained in the revenue process to test the assertion.

Occurrence

Student Answers will vary, but here are some examples:

Occurrence - The shipping document provides important evidence regarding the occurrence assertion. Because sales are not recorded until the product has been shipped, all recorded sales should have a valid shipping document that documents the sale. The auditor can use these documents to test whether the sales did occur.

Completeness - The auditor can use the client's sales invoices and sales journal to test for completeness. In this case, the auditor will trace the sales invoice to the sales journal. This will provide assurance that all shipped items have been recorded as revenue.

Authorization - One example of a document used to test authorization is the write-off authorization form. This form authorized the write-off of an uncollectible account. The

auditor can determine that all written off uncollectible accounts have been properly authorized by reviewing these documents.

Accuracy - To ensure that Accounts Receivable is recorded at its proper net amount, the auditor will need to consider the Allowance for Uncollectible Accounts. The credit approval form can aid in this consideration, by giving the auditor an idea of the level at which credit is granted to determine the anticipated overall creditworthiness of the client's customers.

Cutoff - The Open-Order Report can be helpful in testing for cutoff. The auditor could obtain this report for year-end and test that the orders listed as open have not been recorded as revenue.

Classification - The Sales Journal is used to test for proper classification through an auditor's review of the journal. The journal provides details about each of the transactions made and to which accounts the transactions were posted.

AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Moderate Learning Objective: 4 Learning Objective: 9

85. The XYZ Company billing department has decided to assign one employee to each of its customers. This employee will be responsible for granting credit to the client and then handling the billing. XYZ believes this will result in better customer service, because the client will only have to deal with one person and that one person will be very familiar with the credit terms. As an auditor, would you agree with XYZ's decision?

From an audit perspective, the policy is risky. By not segregating the duties of granting credit and billing, sales can easily be made to customers who are not credit worthy, especially if the XYZ employee is in any way compensated for the number of sales made. Even if there is no compensation, the XYZ employee may give credit to a friend or family member who wouldn't otherwise qualify. All this could lead to a misstatement in Accounts Receivable.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Easy Learning Objective: 6

86. What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?

The auditor will want to consider industry-related factors such as the high competition of the industry, as well as the high rate of technological change. If the company is unable to keep up with the competition, they may try to cover the poor performance with inflated sales. The auditor will also want to consider any long-term contracts the manufacturer may be in the process of completing. The timing of the revenue recognition for a large project could have a significant impact on the financial statements. Accounts that may be difficult to audit, such as Allowance for Uncollectible Accounts and any prior misstatements in the financials may also increase the inherent risk assessment of the auditor.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Moderate Learning Objective: 7

87. Match the test of controls described below to the appropriate assertion it is used to test:

1) Recompute financial information on a sample of sales invoices 2) Review of cash receipts journal for unusual items

3) Observe the endorsement of checks

4) Test a sample of sales invoices for the presence of authorized customer order and shipping document

5) Compare the dates on the sales invoices with the dates of the relevant shipping documents 6) Test a sample of cash receipts transactions for proper cash discounts.

1) d; 2) f; 3) b; 4) a; 5) e; 6) c

88. Assume an account receivable confirmation is returned with a note to the auditor describing a difference between your client's records and the customer's records. Clearly describe below two potential non-misstatement timing differences that could cause a

discrepancy between a client's receivable records and his/her customer's records. The timing differences you describe should be such that after investigation you would determine that your client's receivable balance is not misstated due to these differences.

1. Client shipped to customer before year end but customer received after year end.

2. Customer sent payment to client before year end but client received after year end.

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis

89. You are auditing the allowance for doubtful accounts (ADA) and perform the analytical procedures shown below. Assume that no significant changes have occurred during the year in either the client's credit policies or customer base. What concerns, if any, about adjusting the ADA should the auditor have based on the information shown below?

It appears that the industry has remained relatively stable in both its ADA/AR and Days AR outstanding while the client has significantly increased in the Days AR Outstanding in 2011.

Assuming no significant changes in customer base or credit policies, the client should increase the allowance in 2011 since Days AR Outstanding has increased.

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Analysis

Difficulty: Moderate Learning Objective: 11

90. Identify whether the following tests are tests of controls, substantive analytical procedures, tests of details of transactions, or tests of details of account balances:

1) Select a sample of customer receivables and send positive confirmations to each one 2) Examine monthly bank reconciliations for the internal auditors' initials indicating internal verification and review of the reconciliation.

3) Select a sample of entries in sales journal and trace each to the shipping documents 4) Compute receivable turnover and compare with previous years

5) For a sample of new customers, determine whether credit approval was properly administered and documented

6) Compare the dates on a sample of sales invoices with the dates of shipment and the dates they were recorded in the sales journal

1) Tests of details of account balances 2) Tests of controls

3) Tests of details of transactions 4) Substantive analytical procedures 5) Tests of controls

6) Tests of details of transactions

AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Hard Learning Objective: 11 Learning Objective: 12 Learning Objective: 13 Learning Objective: 9

91. Describe the two types of confirmations and indicate which one is more reliable and why.

The two types of confirmations are positive and negative. A positive confirmation requests that customers indicate whether they agree with the amount stated in the confirmation. A response is required either way. A negative confirmation only requires a response if there is a disagreement. The positive confirmation is more reliable, because there is always a response.

If a negative confirmation is not returned to the auditor, he/she must assume that there is no problem with the amount, which may or may not, be true. There is less assurance provided about the correctness of the amounts from a negative confirmation.

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Easy Learning Objective: 14

92. Assume you are working on a 12/31 year-end audit. It is now March 31^st and the 12/31 accounts receivable aging shows a large receivable that was outstanding on 12/31 for 120 days. Further, the client's receivables are typically collected in less than 45. You anticipate that the client's allowance for doubtful account should be increased and inform the client about your disposition. The client disagrees. Is there an alternative substantive procedure that you could perform that would provide convincing evidence that this balance is collectible? If so, explain.

Determining that the balance was paid after year end would provide convincing evidence that balance was in fact collectible as of 12/31.

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 13

93. According to the Certified Fraud Examiners, there are eight common methods for committing financial statement fraud. List 4 of the 8.

1. Early revenue recognition

2. Holding the books open past the accounting period 3. Fictitious sales

4. Failure to record returns

5. Fraud in the percentage of completion method 6. Related party transactions

7. Overstating receivables and inventory 8. Liability and expense omissions

AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 1

94. Identify four of the seven primary functions in the revenue cycle and describe each function.

Answer should include four of the following:

AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Easy Learning Objective: 5