Exam 12: Audit of the Revenue Cycle

You are the auditor for GreenAcres, a non-profit home for homeless elderly. GreenAcres has a December 31 year end. It receives government funding and also relies on donations for revenue. GreenAcres has a major funding drive in November, when it collects pledges by means of activities at a garage sale, a walkathon, and bake sales in the community. In late February you had a meeting with Ellen Famous, the President of GreenAcres, at the organization's premises. Ellen reviews and approves bank statements and is the second and final cheque signer. Two other accounting staff have the following responsibilities: •Paul approves pledge write-offs (which normally average about 15%), opens the mail, endorses cheques received in the mail, prepares and delivers bank deposits, and posts transactions into the accounting system. •Diana, a retired bookkeeper, volunteers about 10 hours per week to reconcile the bank account, review journal entries posted to the general ledger, and prepare payroll and accounts payable transactions for processing. Ellen normally reviews pledge write-offs, but was very busy in February, so she took a look while you were there. To her surprise, she found that about 40% of the pledges had been written off. She asked Diana to investigate, and Diana found that most of the write-offs had actually been paid. Required: A) What are possible causes of the inconsistency with the pledge write-offs? B) What are the weaknesses in internal control that could allow the excess write-offs to occur? Provide recommendations for improvement. C) Identify audit procedures that you would complete to quantify any potential misstatement with respect to the pledges receivable balance as at December 31.

The auditor traces items from the source documents to the journals in order to satisfy the

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the balance sheet date?

In the sales and collection cycle, the results of the tests of controls determine

Stefano is performing a review of the accounts receivable for large and unusual amounts. Of the following accounts receivables, Stefano should pay special attention to an account receivable

Comparison of individual customer balances with previous years will detect what type of possible misstatement?

An effective procedure to test for unbilled shipments is to trace from the

When there are problems with program change procedures or with access controls, the auditor may choose to

The most important test of details of balances to determine the existence of recorded accounts receivable is

A) Describe the differences between positive and negative confirmations. Which type is more reliable? B) Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations. C) Discuss the circumstances in which it is acceptable to use negative confirmation requests. D) The auditor's decision regarding the type of accounts receivable confirmation to use involves a continuum, starting with using no confirmations in some circumstances, to using only negatives, to using both positives and negatives, to using only positives. Discuss the primary factors affecting this decision.

Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) that may be revealed by each analytical procedure. Note: students could also be asked to separately discuss ratios for planning and ratios as substantive tests.

You are the auditor of Foundry Inc., a company that manufactures chocolate bars and assorted candies. The description of the sales and collection cycle for Foundry is as follows. Clients and Credit Limits Foundry has 50 clients, as it mostly sells to grocery stores' central purchasing departments or distributors. For each customer, Foundry performs a credit check prior to setting the credit limit for the client. The credit limit is reviewed each year. In the past year, the credit limits were increased by 10%. This is due to the growth in Foundryès product lines and increased demand from customers. This also came at the same time the CEO of Foundry set the objective of growing the company's revenue by 25% over the next two years. Increasing the credit limit has helped Foundry move towards that objective. Allowance for Doubtful Accounts The allowance for doubtful accounts is calculated by the controller by taking a percentage of the total sales for the month. The controller has been taking 3% of total sales. The estimate has not been revised in the current year, but it has always been sufficient to cover for any write-offs incurred. Required: For each of the two areas discussed above, identify the risk areas and the most likely misstatements for Foundry.

Negative confirmations of accounts receivable is less effective than positive confirmations of accounts receivable because

A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective. B) Discuss what is meant by proof of cash receipts and explain its purpose.

Zhang Corporation returned $6000 of defective goods to Meli Inc. Meli has a strict policy of no cash refund. Meli should

A) Describe each of the six key control activities for sales. B) When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points. C) When testing the existence objective for sales, the auditor is concerned with the possibility of three types of misstatements. One type is sales being included in the journal for which no shipment was made. Discuss the other two types of misstatements.

After the auditor has identified the key internal controls and weaknesses and assessed control risk, it is appropriate to decide whether

The auditor traces items from the journals back to the source documents in order to satisfy the

Three presentation and disclosure audit objectives are not affected by assessed control risk for the sales transactions. These are

Beltrand, a PA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent property taxes or receivables over the due date. The internal controls at the municipality are weak. To determine the existence of the accounts receivable balances at the balance sheet date, Beltrand would most likely