16–11
16–17 (continued)
of controls based upon the selection of the significant controls. The auditor
would then perform the tests of the significant controls to determine the
effectiveness ofthe controls and to plan the substantive tests that are necessary
16–18 The determination of test of details procedures is directly affected by
results from tests of controls and substantive test of transactions. When results
Multiple Choice Questions From CPA Examinations
16–19 a. (4) b. (2) c. (4)
Discussion Questions and Problems
Persuasive evidence of an arrangement exists,
Delivery has occurred or services have been rendered,
requests shipment to designated locations.
16–12
16–23 (continued)
c. Normally, such an arrangement does not qualify as a sale because
d. The SEC states that the following are important criteria:
The risks of ownership must have passed to the buyer;
The customer must have made a fixed commitment to
purchase the goods, preferably in written documentation;
bill and hold basis;
There must be a fixed schedule for delivery of the goods.
The date for delivery must be reasonable and must be
consistent with the buyer’s business purpose (e.g., storage
periods are customary in the industry);
other orders; and
The goods must be complete and ready for shipment.
16–24 a. One of the risks of material misstatement related to notes
receivable generally relates to the existence balance–related audit
of material misstatement, particularly related to whether the
receivable is properly classified as a short–term or long–term
receivable.
misstatement related to the existence balance–related audit
objective might also be considered a significant risk.
16–13
16–24 (continued)
d. Assuming the notes receivable balances are material, the auditor
would send notes receivable confirmations in the current year to
obtain evidence related to the existence and accuracy balance–
e. The confirmation of notes receivable will provide little, if any,
evidence related to the realizable value balance–related audit
objective. While the confirmation would confirm the existence of
16–25 a. 1. Completeness
2. a. Detail tie–in
b. Realizable value
3. Detail tie–in
4. a. Existence
b. The auditor would likely perform the steps in the following order: 4,
3, 2, 1, 6, and 5. The auditor would perform analytical procedures
as part of the planning process to identify potential misstatements.
The auditor would next perform the detail tie–in procedure of
footing and cross–footing the listing of aged accounts receivable
16–25 (continued)
completeness. Next, the auditor would select a sample of accounts
to confirm, mail the confirmations, receive confirmations and
16–26
a.
BALANCE–
RELATED AUDIT
OBJECTIVE
b.
PREVENTIVE
INTERNAL CONTROL
c.
TESTS OF DETAILS OF
BALANCES AUDIT
PROCEDURES
1. Customer
balances stated
at the correct
amount
(accuracy).
The client should scan
the remittance advice
returned with the
customer payment
electronically rather
than manually entering
the customer number.
The auditor should note any
replies to the confirmation of
accounts receivable which
indicate disputes between a
customer and client.
2. Transactions are
recorded in the
proper period
(cutoff).
The client should
establish cutoff
procedures so that only
shipments made before
year–end are recorded
as current period sales.
Examine shipping documents
for sales recorded immediately
before and after year–end to
test whether sales are
recorded in the proper period.
3. Accounts
receivable are
stated at
realizable value
(realizable value)
The client should
perform an analysis of
the collectibility of
accounts receivable at
the end of the year and
should communicate
with its customers to
determine the likelihood
of the collectibility of
individual accounts.
The auditor should keep informed
of current economic conditions
and consider their effect on
collectibility of accounts
receivable for the client.
The auditor may compare cash
receipts after year–end to the
cash receipts of the similar
period of the previous year and
consider any changes as to
their effect on the collectibility
of the accounts receivable.
16–26 (continued)
a.
BALANCE–
RELATED AUDIT
OBJECTIVE
b.
PREVENTIVE
INTERNAL CONTROL
c.
TESTS OF DETAILS OF
BALANCES AUDIT
PROCEDURES
4. Accounts
receivable are
stated at the
correct amounts
(accuracy).
The client should record
claims for defective
merchandise as soon
as possible after the
claim is received to
keep accounts
receivable balances as
accurate as possible.
The auditor should note any
replies to the confirmation of
accounts receivable which
indicate disputes between a
customer and client.
The auditor should review the
client’s correspondence files
from customers.
5. The company
has rights to
accounts
receivable
(rights and
obligations)
(also presentation
and disclosure).
The controller should
maintain a schedule
containing all required
disclosure information,
including pledging or
other restrictions on
accounts receivable.
The auditor’s standard bank
confirmation should contain an
inquiry as to assets pledged
for loans from that institution.
When loan confirmations are
sent by the auditor, they should
contain an inquiry as to any
assets pledged for the
indebtedness.
6. Transactions are
recorded in the
proper period
(cutoff).
The client should
establish cutoff
procedures so that
sales returns received
in the current period
are recorded as current
period sales returns.
Examine receiving reports for
sales returns recorded
immediately before and after
year–end to test whether sales
returns are recorded in the
proper period.
The auditor should perform an
analytical test to determine
whether or not returns in the
first month of the next year are
similar in magnitude to those
experienced in the same
period of previous years.
7. Existing
accounts
receivable are
included in the
aged trial balance
(completeness).
The accounts receivable
master file should be
reconciled to the
control account
periodically by an
independent person.
Foot the aged trial balance and
compare the total to the
general ledger.
Trace a sample of accounts
from the master file to the
aged trial balance to
determine if all are included.
16–26 (continued)
a.
BALANCE–
RELATED AUDIT
OBJECTIVE
b.
PREVENTIVE
INTERNAL CONTROL
c.
TESTS OF DETAILS OF
BALANCES AUDIT
PROCEDURES
8. Accounts
receivable exist
(existence).
The accounts receivable
master file should be
reconciled to the
control account
periodically by an
independent person.
Foot the aged trial balance and
compare the total to the
general ledger.
Trace from the aged trial
balance to the master file,
looking for duplicates.
9. Accounts
receivable
are properly
classified
(classification).
The client should maintain
separate accounts for
the recording of
receivables due from
affiliated companies.
The auditor should review the
trial balance of accounts
receivable to determine
whether or not accounts from
affiliated companies are
included in the customer
accounts.
The auditor should be aware of
affiliated companies and the
transactions between them
and the client, and should
inquire and follow up to
determine that accounts
receivable from affiliates are
not included in the accounts
receivable from customers.
16–27
PROCEDURE
a.
TYPE OF TEST
b.
BALANCE–RELATED AUDIT OBJECTIVE
1
Test of details
Existence and accuracy
2
Test of details
Cutoff
3
S T of T
Cutoff
4
Test of details
5
S T of T
Classification
Accuracy and existence
(may also include realizable value if cash
6
S T of T
Rights
7
Test of details
Completeness
8
ST of T
Existence
16–17
16-27 (continued)
PROCEDURE
a.
TYPE OF TEST
b.
BALANCE–RELATED AUDIT
OBJECTIVE
9
Test of control
Accuracy
10
S T of T
Completeness
11
Test of details
Detail tie–in
12
S T of T
Detail tie–in
13
Test of details
Classification
and–hold sales).
b. See the table below. The sales invoice number can be ignored,
except to determine the shipping document number. In this
goods are shipped.
INVOICE NO.
MISSTATEMENT
IN SALES
CUTOFF
OVERSTATEMENT
OR
UNDERSTATEMENT
OF AUG. 31 SALES
August sales
5431
5434
5432
5433
5435
2164
2169
2165
2168
2166
none
4,214.30
none
1,620.22
none
5,834.52
overstatement
overstatement
September sales
5437
5436
5438
5440
5439
2163
2167
2170
2171
2172
2,541.31
106.39
none
none
none
2,647.70
understatement
understatement
Net overstatement
3,186.82
Adjusting entry
Sales
Accounts receivable
3,186.82
3,186.82
16–18
16–28 (continued)
Amount of sale
2168 1,620.22
2169 4,214.30
sheet date to determine if they were correctly dated.
An alternative, if there are perpetual records, is to follow up
showed a total of 526, and a shipment of 100 units included on the
perpetual August 31. This is a likely indication of a September
shipment that had been dated August 31.
cutoff.
1. Be present during the physical count on the last day of the
accounting period to determine the shipping document
2. During year–end field work, select a sample of shipping
documents preceding and succeeding those selected in
procedure 1. Generally, shipping documents with the same
3. During year–end field work, select a sample of sales from
the sales journal recorded in the last few days of the
16–19
16–28 (continued)
help prevent cutoff misstatements.
CONTROL
TEST OF CONTROL
(1) Policy requiring the use of
prenumbered shipping documents.
Examine several documents for
prenumbering.
(2) Policy requiring the issuance of
shipping documents sequentially.
Observe recording of documents, examine
document numbers and inquiry.
(3) Policy requiring recording sales
invoices in the same sequence as
shipping documents are issued.
Observe recording of documents, examine
document numbers and inquiry.
(4) Policy requiring dating of shipping
documents, immediate recording
of sales, and dating sales on the
same date as the shipment
(depending on shipping terms).
Observe dating of shipping documents
and sales invoices, and timing of
recording.
(5) Use of perpetual inventory
records and reconciliation of
differences between physical and
perpetual records.
Examine worksheets reconciling physical
counts and perpetual records.
16–29
a.
TYPE OF EVIDENCE
b.
TYPE OF TEST
c. and d.
OBJECTIVE(S)
1. Reperformance
(4) Test of details of
balances
Detail tie–in
2. Inspection
(1) Test of control
Completeness
3. Inquiry
(4) Test of details of
balances
Cutoff
4. Observation
(1) Test of control
Posting and
summarization
5. Inspection
(2) Substantive test of
transactions
Timing
6. Inspection
(1) Test of control
Occurrence
7. Inspection
(4) Test of details of
balances
Cutoff
8. Analytical procedure
(3) Substantive analytical
procedure
N/A
16–20
Copyright © 2017 Pearson Education, Inc.
16–30 a. The two types of confirmations used for confirming accounts
receivable are “positive” and “negative” confirmations. A positive
confirmation is a letter, addressed to the debtor, requesting that the
recipient indicate directly on the letter whether the stated account
balance is correct or incorrect and, if incorrect, by what
amount. A negative confirmation requests a response from the
debtor only when the debtor disagrees with the stated amount.
When deciding which type of confirmation to use, the
auditor should consider the assessed control risk in the sales and
collection cycle, the make–up of the population, cost/benefit
expensive than negative confirmations. Positive confirmations
should be used when the population is comprised of a small
number of large accounts, and when there are suspected
conditions of dispute or inaccuracy. When negative confirmations
are used, the auditor has normally assessed control risk below
from the general public.
b. When evaluating the collectibility of accounts receivable, the
auditor may review the aging of accounts receivable, analyze
subsequent cash receipts from customers, discuss the collectibility
economic conditions.
c. When customers fail to respond to positive confirmation requests,
the CPA may not assume with confidence that these customers
checked the request, found no disagreement, and therefore did
post office as undeliverable. Confirmations returned as
undeliverable by the post office will require appropriate action to
obtain better addresses.
Follow–up is necessary when customers do not reply
to mail second requests.