Exam 12: Audit of the Revenue Cycle

The primary purpose of accounts receivable confirmation is to satisfy the

State the five specific balance-related audit objectives as applied to accounts receivable.

Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.

Tamra is performing a test of control consisting of looking at the numerical sequence of credit memos issued by the company. Tamra is performing a block test by looking for any missing number in the sequence. This test will provide evidence of

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?

Which of the following audit procedures is a dual-purpose test?

Your audit client is a large retail chain with its own credit card. It has annual sales of about $100 million. On December 31, there were approximately 40 000 open accounts with total receivables of approximately $18.5 million. Very few customer balances exceed $1000. The company's general office maintains the accounts receivable records. The large volume of transactions processed by the company has necessitated extensive segregation of duties and frequent balancing of data during processing. Accordingly, the company's general and system controls are considered to be very good. A complete record of each customer's account is stored on a relational database and includes the following information: Description of field contents Type of account (personal, corporate) Customer account number Customer name and address Credit limit (code for 8 credit levels) Status code (active, inactive, bad debt) Number of transactions this month Current month's charges Current month's payments Total outstanding balance Aged balance over 30 days Aged balance over 60 days Aged balance over 90 days Aged balance over 120 days Year account opened Year last active Total purchases this year to date Total returns this year to date Number of months active Total purchases last year Number of months active last year Source transactions are store purchase invoices, payments, and adjustments. Daily, all the orders are received, entered into the computer, and processed against the customer master file. Each account is updated and automatically analyzed to determine whether the transactions just processed have created a condition that should be brought to the attention of the authorization or collection departments. Exception reports are automatically printed and forwarded to these groups. The company sends monthly statements to customers on a cyclical basis. About 2000 statements are mailed each billing day.As the accounts are updated, the day's transactions are accumulated and added to the starting control figure for each cycle. The new control figures are balanced with the sum of all the individual accounts in the cycle (accumulated as each account is processed). In addition, a detailed transaction and cycle control report is prepared, providing an audit trail in customer account number sequence. Required: Describe the audit procedures you would perform in your year-end audit work for this company's accounts receivable. For each audit test, state the relevant audit assertion(s). Be sure to include different types of tests as necessary (e.g. manual or computer-assisted audit techniques), and clearly identify those tests that can be completed using CAATs.

IFRS, ASPE, and ASNPO require that related party transactions be disclosed. Gregorio Limited has a materiality threshold of $50 000. Which of the following standards apply to the disclosure of related party transactions for Gregorio Limited?

The defalcation process that postpones entries for the collection of accounts receivable to conceal an existing cash shortage is referred to as

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

Outline the key areas that the auditor would review as part of general controls.

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.

To test for recorded sales for which there were no actual shipments, the auditor traces from the

As part of the audit testing, the auditor is conducting substantive analytical review over time (trend analysis) of bad debts to evaluate the quality of the accounts receivable. Which audit assertion is this associated with?

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.

A risk of material misstatement in accounts receivable associated with the accuracy balance-related audit objective is that "sales recorded at the incorrect price result in revenue and accounts receivable that are over- or understated." Which of the following tests of detail of balances would respond to this risk?

In monetary-unit sampling, the values of the estimated likely maximum misstatements are referred to as the

Trade accounts receivable should exclude

You are conducting an audit and have obtained the following figures with respect to sales and accounts receivable: 2015 2014 Accounts receivable $ 3 343 000 $ 2 694 000 Allowance for doubtful accounts 212 150 207 660 Sales 25 640 000 24 630 000 Required: A) What are the audit implications of these figures? B) Identify key audit steps that you would perform for any of the above accounts.

As part of audit planning, you have calculated accounts receivable turnover for the last five years and compared it to industry averages. Your client's accounts receivable has decreased by about 1.25 times in the current year, while the industry rate has improved. One possible cause of this lowered accounts receivable turnover is