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Importance of Depositing Cash Daily and Making All

Disbursements by Check: Ensure that the bank records are a
full backup record of the company's cash transactions
2. Benefit of a Sophisticated Cash Receipts System: Ensures
proper segregation of duties
3. Lockbox Cash Receipts System and 2 Benefits: A lockbox is
a post office box controlled by the company's bank so that the
bank can pick up the mail and credit the company's checking
account for cash received and send a remittance advice to the
company. A benefit of the lockbox is that it reduces the risk of
collusion because the cash is handled by a third-party. The other
benefit is that it hastens the depositing of cash receipts (380).
4. Additional Tests of Controls for Cash: This includes
comparing the detail (the listing of the amount of each individual
check and the total amount of currency composing the day's
receipts) of the original cash receipts listing to the detail of the
daily deposit tickets. For cash disbursements this includes
tracing selected items back through the cash disbursements
journal to original source documents. Also, the auditor may
review the file of paid checks to test the client's procedures for
accounting for the numerical sequence of checks (391).
5. Purpose of Sending Standard Bank Confirms: The
purposes of procedure 2 include corroborating the existence of
recorded information and discovering additional accounts or
loans in order to determine the completeness of recorded
amounts (392). The most important piece is confirming the
6. Issue of Having Long Term Outstanding Checks: This is
an issue because it indicates an internal control weakness. An
employee aware of a long outstanding check may omit it from the
bank reconciliation so that an apparent increase in cash balance
exists and allow the employee to take a corresponding amount of
cash on hand (394).
7. Cutoff Bank Statement and Use: A cutoff bank statement is a
statement covering a specified number of business days following
the end of the client's fiscal year. This statement is used to test
the accuracy of the year-end reconciliation of the company's
bank accounts. It allows the auditors to examine firsthand the
checks listed as outstanding and the details of deposits in transit
of the company's reconciliation (395).
8. Difference of Auditing Notes and Accounts Receivable:
The big difference with accounts receivable is the need for
9. Substantive Evidence of Sales During Interim: An auditor
can obtain substantive evidence in support of sales recorded
earlier in the year by looking at cash receipts during the year and
looking at credits to sales earlier in the year.
10. Substantive Testing of Sales Cutoff: An auditor tests the
sales cutoff by comparing the sales recorded for several days
before and after the balance sheet date with the duplicate sales
invoices and shipping documents. The sales cutoff is important
because there is usually an incentive to padding the Sales
account (449).
11. Confirmation: Confirmation is the process of obtaining and
evaluating a direct communication from a third party in response
to a request for information about a particular item affecting
financial statement assertions.
12. When Confirmation is Not Needed: An auditor does not
need to send confirmations when the accounts receivable is
immaterial or it would be ineffective for the auditor to try to send
confirmations. Government never sends back confirmations.
13. Substantive Evidence of A/R When Confirmation Not
Effective: Examination of subsequent cash receipts and
vouching the sale (AU 330.32).
14. Steps Necessary to Audit Allowance for Uncollectible
Accounts: The essential steps are to compare the details of the
aging of accounts receivable to prior years' aging, investigate the
credit ratings for delinquent and unusually large accounts,
review confirmation exceptions, summarize in doubtful
collectability of accounts, review with the credit manager the
current status of significant doubtful accounts, and computing
relationships to compare to prior years.
15. Importance of a Review of Sales Returns and
Allowances: The purposes of a review of sales returns and
allowances subsequent to the balance sheet date are to ensure
that the client did not channel stuff (inducing customers to buy
substantially more inventory than they can promptly resell)
16. Timing of Auditing Sales vs. Cash: It would be more
advisable to perform substantive tests during interim for sales
because cash fluctuates and sales are relatively stable and you
can go back and review old transactions of sales.
17. Observation: Observation is a generally accepted auditing
procedure because this is the most effective means of ensuring
the client has recorded the proper amount of inventory in its
financial statements.
18. Timing of Inventory Count: The inventory count does not
need to be made as of fiscal year end if the client has well-kept
perpetual inventory records checked with periodic physical
19. Inventory Count Does Not Need to be Observed: An
inventory count does not need to be done if inventory is
immaterial (i.e. service company or utilities company). Also, if
the inventory is held in a public warehouse, the auditor may use a
direct confirmation with the custodian (AU 331.10, .13, .14).
20. Purpose of Obtaining Inventory Listings: Procedure 1
involves obtaining listings of inventory and reconciling them to
the ledgers so that the auditors can plan out what they need to
look at. The purpose of this procedure is to make sure the
inventory records agree with what is recorded in the financial
statements (506).
Auditing Exam 3
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21. Purpose of Evaluating the Client's Inventory
Procedures: Procedure 2 involves selection of an individual
employee for responsibility of the physical inventory by the client
management and developing a plan to count the inventory. Once
this plan is in place the auditor will determine the adequacy of
the plan. This is especially important for the first-ever audit. The
purpose of this procedure is to ensure efficient use of audit staff
members during the inventory taking and help ensure that all
auditors understand their assignments (506-509).
22. Purpose of Observing the Taking of Physical Inventory:
Procedure 3 involves observing the inventory taking process and
doing test counts as the client's count team goes through and
places tags on the inventory items. The client then uses the tags
to update the inventory listing and the auditor takes a copy of the
inventory listing and compares his/her test counts with that.
This includes determining that all usable inventory owned by the
client is included in the count and that the client's employees
comply with the written inventory instructions. The purpose of
this procedure is to alert the auditors to the possibility of
inclusion of any obsolete or damaged merchandise in inventory
23. Purpose of Testing Sales and Purchases Cutoffs:
Procedure 4 includes examining on a test basis the purchase
invoices, receiving reports, and bill of lading for several days
before and after the inventory date. The purpose of this procedure
is to make sure that both sides of a purchase transaction are
reflected in the same accounting period (514).
24. Purpose of Obtaining a Copy of the Completed Inventory
Listing: The auditor should trace to the completed physical
inventory their test counts made during the observation of
physical inventory. The purpose of this procedure is to ensure
that the client has not omitted inventory items from the listing or
included additional items that were not present during the
physical inventory.
25. Purpose of Evaluating Methods of Inventory Pricing:
Determining what pricing method the client used this year and in
prior years and if the client has been consistent and accurately
applying this method. The purpose of this procedure is to make
sure the client is pricing inventory in accordance with GAAP and
fulfills the valuation assertion (515).
26. Purpose of Testing Inventory Pricing: Verifying the price of
the raw materials by referring to the purchase invoices. For
goods in process and finished goods, however, the auditor
should test the pricing method by examining the client's cost
accounting records for overhead, direct materials, and direct
labor. The purpose of this procedure is to determine the adequacy
of the valuation assertion (515).
27. Purpose of Determining Existence of Pledged Assets or
Commitments: The purpose of this procedure is to make sure
that these obligations are properly disclosed (517).
28. PP&E summary analysis: This summary analysis helps the
auditors by showing all the additions and retirements for the year
and points them in the right direction of some of the riskier
29. Purpose of Analyzing Repair and Maintenance Expense:
The auditor's purpose is to discover items that should have been
capitalized (542). This is the only time in which auditors would
look for expenses that need to be capitalized.
30. Assertions When Examining Lease Agreements: The
rights and obligations assertion and the valuation assertion are
in play here (544).
31. Difference Between Confirms for A/P and A/R:
Confirming accounts payable differs from confirming accounts
receivable by being considered less necessary (not required by
generally accepted auditing procedures) and there is more of a
need to use a blank form confirmation vs. the other types (569).
32. Assertions When Vouching Balances Payable: The
existence, rights and obligations, and valuation assertions are in
play (568).
33. Importance of Reconciling Liabilities With Monthly
Statements from Creditors: This is an important procedure
because normal accounting procedures usually do not provide for
recording invoices as liabilities until the merchandise has been
received and therefore the auditor needs to determine if the in-
transit shipments should have been recorded and if so if they are
material enough to warrant year-end adjustment (569).
34. Important A/P Accounts to Confirm: The auditors should
focus on accounts with substantial purchases during the year
with zero or low balances at year-end, accounts without monthly
statements, accounts reflecting unusual transactions, accounts
with parent and subsidiary corporations, and accounts secured
by pledged assets (569).
35. "Tip" as to Existence of Unrecorded Liabilities: The
client's routine operations for recording cash disbursements after
the year-end is a direct tip as to the existence of possible
unrecorded liabilities because the client has to eventually pay the
liabilities off (570). Nonrecurring item may also go unrecorded
and so auditors should look for that.
36. Internal Controls that Enhance the Reliability of
Accounting Estimates: Management communication of need
for proper accounting estimates, accumulation of relevant,
sufficient, and reliable data on which to base an accounting
estimate, preparation of the accounting estimate by qualified
personnel*, etc. see AU (AU 342.06)
37. Auditor's Objective When Auditing Accounting
Estimates: Evaluating the reasonableness of accounting
estimates, all accounting estimates that could be material to the
financial statements have been developed, and the accounting
estimates are presented in conformity with GAAP and are
properly disclosed (AU 342.07).
38. Approach to Evaluate Reasonableness of Accounting
Estimates: Review and test the process used by management to
develop the estimate (AU 342.10).
39. Fraud Definition: Fraud is an intentional act that results in a
material misstatement in financial statements that are the
subject of an audit (AU 316.05).
40. Fraud Triangle: Fraud is likely to occur in circumstances when
incentive, opportunity, and attitude are present (AU 316.07).
41. Two Types of Fraud: The two types of fraud are fraudulent financial reporting (practically more concerning to auditors because of
materiality) and misappropriation of assets (AU 316.06).
42. Auditor's Responsibility for Fraud: The auditor's responsibility is to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether caused by fraud or error (AU 316.12).
43. Fraud Risk Factors: Fraud risk factors help the auditor to identify events or conditions that may lead to fraud since fraud is difficult to
detect (AU 316.31).
44. Auditor's Discussion About Fraud Includes:: The discussion should focus on the susceptibility of the entity's financial statements to
material misstatement due to fraud based on potential incentives, opportunities, and culture of rationalizing (AU 316.15).
45. Other Parties Auditor Inquires With About Possible Fraud: Employees with varying levels of authority, operating personnel not
directly involved in financial reporting, employees involved with unusual transactions, and in-house legal counsel (AU 316.25).
46. Auditor's Response to Risk of Material Misstatement Due to Fraud: (1) in terms of how the audit is conducted overall (2) in terms
of the nature, timing, and extent of audit procedures to be performed, and (3) by performing additional procedures to further address the
possibility of management override of the internal controls
47. Auditor's Response to Possible Fraud: (1) Overall Consideration: An auditor's overall response may include assignment of
personnel, investigating potential management bias overall in choosing accounting principles, and predictability of auditing procedures
(AU 316.50).
48. Auditor's Response to Possible Fraud: (3) Possible Management Override: The focuses of this response are toward examining
the appropriateness of journal entries, reviewing accounting estimates for biases, and evaluating the business rationale for unusual
transactions (AU 316.57-.67)
49. Audit Evidence Pointing to Fraud: Discrepancies in the accounting records, conflicting or missing audit evidence, and problematic or
unusual relationships between the auditor and management (AU 316.68).
50. Auditor's Response to Material Fraud: The auditor's response to material fraud includes obtaining additional audit evidence,
considering the implications for other aspects of audit, discussing the matter with an appropriate level of management, and suggest that the
client consult with legal counsel (AU 316.77).
51. Responsibilities for Communicating Fraud: The auditor's responsibilities for communicating fraud related matters include bringing
all evidence of fraud to the attention of the appropriate level of management and reporting directly to those charged with governance if
senior management is involved (AU 316.79).