The study and evaluation of management risk mitigation control is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which performance of the control can be evaluated. Next they must specify procedures to obtain the evidence on which an evaluation can be based. Insofar as possible, the standards and related evidence must be quantified. The following description gives certain information (in italics) that internal auditors would know about or be able to determine on their own. Fulfilling the requirement thus amounts to taking some information from the scenario and figuring out other things by using accountants’ and auditors’ common sense. The Scenario Ace Corporation ships building materials to more than a thousand wholesale and retail customers in a five-state region. The company’s normal credit terms are net/30 days, and no cash discounts are offered. Fred Clark is the chief financial officer, and he is concerned about risks related to maintaining control over customer credit. In particular, he has stated two management control principles for this purpose. 1. Sales are to be billed to customers accurately and promptly. Clark knows that errors will occur but thinks company personnel ought to be able to hold quantity, unit price, and arithmetic errors down to 3 percent of the sales invoices. He considers an invoice error of $1 or less not to matter. He believes prompt billing is important because customers are expected to pay within 30 days. Clark is very strict in thinking that a bill should be sent to the customer one day after shipment. He believes he has staffed the billing department well enough to be able to handle this workload. The relevant company records consist of an accounts receivable control account; a subsidiary ledger that enters customers’ accounts by billing (invoice) date and credits and by date of payment receipts; a sales journal that lists invoices in chronological order; and a file of shipping documents cross referenced by the number on the related sales invoice copy kept on file in numerical order. 2. Accounts receivable are to be aged and followed up to ensure prompt collection. Clark has told the accounts receivable department to classify all customer accounts in categories of (a) current, (b) 31–59 days overdue, (c) 60–90 days overdue, and (d) more than 90 days overdue. He wants this trial balance to be complete and to be transmitted to the credit department within five days after each month-end. In the credit department, prompt follow-up means sending a different (stronger) collection letter to each category, cutting off credit to customers over 60 days past due (putting them on cash basis), and giving the over-90-days accounts to an outside collection agency. These actions are supposed to be taken within five days after receipt of the aged trial balance. The relevant company records, in addition to the others listed, consist of the aged trial balance, copies of the letters sent to customers, copies of notices of credit cutoff, copies of correspondence with the outside collection agent, and reports of results—statistics of subsequent collections. Required: Take the role of a senior internal auditor and write a memo to the internal audit staff to inform them about comparison standards for the study and evaluation of these two management control policies. You also need to specify two or three procedures for gathering evidence about performance of the controls. The body of your memo should be structured as follows: 1. Control: Sales are billed to customers accurately and promptly. a. Accuracy. (1) Policy standard. . . (2) Audit procedures. . . b. Promptness. (1) Policy standard. . . (2) Audit procedures. . . 2. Control: Accounts receivable are aged and followed up to ensure prompt collection. a. Accounts receivable aging. (1) Policy standard. . . (2) Audit procedures. . . b. Follow-up prompt collection. (1) Policy standard. . . (2) Audit procedures. . .
> How does the production order record provide a control over the quantity of materials used in production?
> Describe how the functions of (a) authorization of production transactions, (b) recording of these transactions, and (c) physical custody of inventories can be separated among the production, inventory, and cost accounting departments.
> During the audit of Mason Company Inc. for the calendar year 2014, you noted that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed a large stockpile of raw aluminum in storage. Your invento
> Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authoriz
> Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial st
> A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit pro
> To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts? a. Miscellaneous income. b. Petty cash. c. Miscellaneous expense. d. Sales returns.
> Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor t
> Based on this information, the auditor is most likely concerned about a. Unrecorded costs. b. Improper credit approvals. c. Improper sales cutoff. d. Fictitious sales.
> Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases. b. Unrecorded sales. c. Merchandise purchases being c
> Why is it important to emphasize the existence assertion when auditing accounts receivable?
> What is dual-direction test of controls sampling in the revenue and collection cycle?
> What is a walkthrough of a sales transaction? How can the walkthrough work complement the use of an internal control questionnaire?
> What specific control procedures (in addition to separation of duties and responsibilities) should be in place and operating in internal controls governing revenue recognition?
> A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to a. Establish employee assistance programs. b. Require a fidelity bond on all employees. c. Require reconciliations of all
> What effect do entity level controls have on the control risk assessments of an auditor?
> Embezzlement is a type of fraud that involves a. An employee’s misappropriating an employer’s money or property not entrusted to him or her. b. A manager’s falsification of financial statements for the purpose of misleading investors and creditors. c. An
> Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a. Write-offs must be approved by a responsible officer after review of credit department
> Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable? a. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. b. Separate dut
> The control procedure “credit sales approved by credit department” is directed toward which assertion? a. Existence/Occurrence. b. Completeness. c. Valuation/Accuracy. d. Cutoff.
> When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a. Sales journal. b. Accounts receivable listing. c. General ledger. d. Cash receipts listing.
> What are some red flags that may indicate a cover-up or concealment of a fraud?
> Sales are normally recorded on the date of the a. Customer purchase order. b. Bill of lading. c. Sales invoice. d. Payment check.
> Revenues are normally considered to have been earned when a. All possibility of return has expired. b. The company has substantially accomplished what it must to be entitled to the benefits. c. The cash is collected. d. Goods have been shipped.
> During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and select another customer’s balance to confirm. b. N
> An auditor is required to confirm accounts receivable if the accounts receivable balances are a. Older than the prior year. b. Material to the financial statements. c. Smaller than expected. d. Subject to valuation estimates.
> The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positi
> What is lapping? What procedures can auditors employ to detect lapping?
> Which of the following internal control activities most likely would deter lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. b. Authorization of
> Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control
> Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control
> When an audit team does not receive a response on a positive accounts receivable confirmation, a second request. b. Do nothing for immaterial balances. c. Examine shipping documents. d. Examine client correspondence files.
> The best way to enact a broad fraud prevention program is to a. Install airtight control systems of checks and supervision. b. Name an “ethics officer” who is responsible for receiving and acting on fraud tips. c. Place dedicated hotline telephones on wa
> Write-offs of doubtful accounts should be approved by a. The salesperson. b. The credit manager. c. The treasurer. d. The cashier.
> When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that a. Shipments to customers were invoiced. b. Shipments to customers were recorded as sales. c. Recorded sales were
> The negative request form of accounts receivable confirmation is useful particularly when the Assessed Level of Risk of Material Number of Small Balances Is Proper Consideration by the Recipient Is Misstatement Relating to Receivables Is a. Low Many
> When accounts receivable are confirmed at an interim date, auditors need not be concerned with a. Obtaining a summary of receivables transactions from the interim date to the year-end date. b. Obtaining a year-end trial balance of receivables, comparing
> In the audit of accounts receivable, the most important emphasis should be on the a. Completeness assertion. b. Existence assertion. c. Rights and obligations assertion. d. Presentation and disclosure assertion.
> When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to a. Sales invoices with shipping documents and customer sales invoices. b. Records of accounts receivable write-offs. c. Cash remittance lists and b
> Why should a list of cash remittances be made and sent to the accounting department? Wouldn’t it be easier to send the cash and checks to the accountants so they can enter the credits to customers’ accounts accurately?
> Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the a. Collectability of the balances confirmed. b. Ownership of the balances confirmed. c. Existence of the
> Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the a. Collectability of the balances confirmed. b. Ownership of the balances confirmed. c. Existence of the
> Upon receipt of customers’ checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the a. Internal auditor to investigate the list for unusual transactions. b
> When auditing with “fraud awareness,” auditors should especially notice and follow up employee activities under which of these conditions? a. The company always estimates the inventory but never takes a complete physical count. b. The petty cash box is a
> You have identified relevant controls for several assertions within the revenue cycle, and you must use IDEA to perform several tests of controls. Required: a. ELM has a policy of using prenumbered customer order forms to help control for the completene
> For this exercise, your client, Bright IDEAs Inc., has provided you with data for two related files, a listing of sales invoices, and a listing of customers with credit limits. To test whether credit authorization controls are in place, the auditor must
> The following article was published in Newsday on February 9, 2009: Call for Probe of Ticket Sales Bruce Springsteen fans were victims of a “classic bait and switch” scam by the nation’s largest concert ticket seller, Senator Charles Schumer said yester
> The following four questions are taken from an internal control questionnaire. For each question, state (a) one test of controls procedure you could use to find out whether the control technique was really functioning and (b) what error or fraud could oc
> The following narrative description of a company’s cash receipts and billing system is in the auditors’ audit files: Rural Building Supplies Inc. is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and ele
> You are the director of internal auditing of a large municipal hospital. You receive monthly financial reports prepared by the accounting department, and your review of them has shown that total accounts receivable from patients has steadily and rapidly
> What is the basic sequence of activities in the cash collection process?
> Your firm has audited the Rock Island Quarry Company for several years. Rock Island’s main revenue comes from selling crushed rock to construction companies from several quarries owned by the company in Illinois and Iowa. The rock is priced by weight, qu
> You are using computer audit software to prepare accounts receivable confirmations during the annual audit of the Eastern Sunrise Services Club. The company has the following data files: Master file—debtor credit record. Master file—debtor name and addre
> What can an auditor find using net worth analysis? Expenditure analysis?
> This case is designed like the ones in the chapter. Your assignment is to write the “audit approach” portion of the case, organized around these sections: Objective. Express the objective in terms of the facts supposedly asserted in financial records, ac
> Each morning the controller gets the prior day’s list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that a. No checks were return
> Which of the following might be detected by auditors’ cutoff review and examination of sales journal entries for several days prior to the balance sheet date? a. Lapping year-end accounts receivable. b. Inflating sales for the year. c. Kiting bank balanc
> L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally a
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Required: For each client control procedure numbered 1–15, write a test of controls that could pro
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Required: For each error/control objective, identify the asse
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Make a copy of the exhibit page and complete the following requirements. Required a. Opposite the
> The case below tells the actual story of a cash embezzlement scheme. The case has two major parts: (1) problem and (2) audit approach. For the case, please consider how the auditor may have discovered the cash embezzlement scheme. Problem Albert owned a
> Take a closer look at Exhibit 6.3 given below, Is there anything wrong with the bank statement? What are some ways to tell whether any of the amounts have been altered? 27 XFirst RepublicBank FIRST REPUBLICBANK AUSTIN, N.A. ACCOUNT P.0. BOX 908 60401
> The case below tells the actual story of a cash embezzlement scheme. The case has two major parts: (1) problem and (2) audit approach. For the case, please consider how the auditor may have discovered the cash embezzlement scheme. Problem The petty cash
> Which audit procedures are usually the most useful for auditing the existence assertion?
> An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most e
> Assume you have received a message from an informant regarding the following case. Your assignment is to write the “audit approach” portion of the case. a. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “de
> You can use the computer-based Electronic Workpapers on the textbook website to prepare the net worth analysis required in this problem. Net worth analysis is performed when fraud has been discovered or is strongly suspected and the information to calcul
> Immediately upon receipt of cash, a responsible employee should a. Record the amount in the cash receipts journal. b. Prepare a remittance listing. c. Update the subsidiary accounts receivable records. d. Prepare a deposit slip in triplicate.
> Expenditure analysis is used when fraud has been discovered or strongly suspected and the information to calculate a suspect’s income and expenditures can be obtained (e.g., asset and liability records, bank accounts). Expenditure analysis consists of es
> The following are some “suspicions”; you have been requested to select some effective extended procedures designed to confirm or deny the suspicions. Required: Write the suggested procedures for each case in definite terms so another person can know wha
> Consider the following story of an actual embezzlement. This was the ingenious embezzler’s scheme: (a) He hired a print shop to print a private stock of Ajax Company checks in the company’s numerical sequence. (b) In his job as an accounts payable clerk
> Consider the following scenario: Adam worked for the local hardware store as an outside sales representative. His job was to visit local companies and contractors in an attempt to identify their needs for tools and materials and provide a bid to supply t
> Suppose you are auditing cash disbursements and discover several payments to a company you are unfamiliar with and cannot find information about this company on the Internet or in the local telephone directory. The invoices from this company have numbers
> How can you tell whether the amount on a check was altered after it was paid by a bank?
> What is the difference between a normal procedure and an extended procedure?
> Caulco Inc. is the audit client. The February bank statement is shown in Exhibit 6.3Â in the text. You have obtained the client-prepared bank reconciliation as of February 28 (see the following). Required: Check 2231 was the first check writt
> You can use the computer-based Electronic Workpapers on the textbook website to prepare the schedule of interbank transfers required in this problem. EverReady Corporation is in the home building and repair business. Construction business has been in a s
> You can use the computer-based Electronic Audit Documentation on the textbook’s website to prepare the proof of cash required in this problem. The auditors of Steffey Ltd., decided to study the cash receipts and disbursements for the month of July of the
> Auditors typically will find the items lettered A–F in a client-prepared bank reconciliation. Required: Assume these facts: On October 11, the auditor received a cutoff bank statement dated October 7. The September 30 deposit in trans
> You are the auditor for Konerko’s Office Supply Store, which is opening for business next week. The store owner has established all the controls you have recommended for ensuring that sales are recorded properly and cash is accounted for. The owner has h
> Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? a. Review the composition of authenticated deposit slips. b. Review subsequent bank statements. c. Prepare a schedule of the ban
> You are the in-charge auditor examining the financial statements of the Gutzler Company for the year ended December 31. During late October, with the help of Gutzler’s controller, you completed an internal control questionnaire and prep
> Taylor, a CPA, has been engaged to audit the financial statements of University Books, Incorporated. University Books maintains a large cash fund exclusively for the purpose of buying used books from students for cash. The cash fund is active all year be
> The Runge Controls Corporation manufactures and markets electrical control systems: temperature controls, machine controls, burglar alarms, and the like. The company acquires electrical and semiconductor parts from outside vendors and assembles systems i
> Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following stateme
> How can a proof of cash reveal unrecorded cash deposit and cash payment transactions?
> Is there anything odd about these two situations? (a) A check to Larson Electric Supply was endorsed with “Larson Electric” above the signature of “Eloise Garfunkle.” (b) Numerous checks were issued and dated December 25, January 1, and July 4.
> Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except a. Varying the timing of the audit procedures. b. Selecting items for testing that have lower amounts or are o
> In what way can audit procedures be modified to address assessed fraud risks? a. Obtain more reliable information. b. Perform procedures close to year-end. c. Apply computer-assisted techniques to all items. d. All of these are valid modifications.
> If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? a. Inquire of management as to the possibil
> Which of these arrangements of duties could most likely lead to an embezzlement or theft? a. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records
> Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? a
> Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? a. Overstating sales revenue and overstating customer accounts receivable balances. b. Overstatin
> Fraud risk factors are events or conditions that indicate which of the following? a. An opportunity to carry out a fraud. b. An attitude or rationalization that justifies a fraudulent action. c. An incentive or pressure to perpetrate fraud. d. All of the
> Which of the following is least indicative of fraudulent activity? a. Numerous cash refunds have been made to different people at the same post office box address. b. Internal auditors cannot locate several credit memos to support reductions of customers
> A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company’s code of conduct? a. The establishment of a chief ethics officer. b. The establishment of a hotline for reportin
> How does a schedule of interbank transfers show improper cash transfer transactions?
> Is capability required to commit a fraud? Is capability part of opportunity, or should it be considered a separate element of fraud?
> Give some examples of rationalizations that people have used to excuse fraud. Can you imagine using them?
