1Jan 1 2022001 => 2022365-2022334 ...Current
Dec 31 2022365 => 2022331 - 2022301 ...30 Days Past Due
aging of A/R in computer system.
2doesnt all material fraud cause the financial statements to materially misstated?
example where this isnt the case: retail environment where many things are stolen...you report on the balance sheet things that they have...not what they should have. even if "fraud" happened because items were stolen.
income in these environments are calculated with the assets in mind, so income is "fairly presented". this is a measurement problem, because you cant measure inventory lost due to theft. but income is correct based on this method, it is fairly stated.
3page 193 in course packet: 3.
confirmation addresses existence affirmation(?). critical here is the collectibility of the portfolio of receivables.
take the largest balance of A/R balance files, verify they can collect the money on these.
4Benford's Law
a way of detecting immaterial embezzelment way below scope. e.g. based on probability of a number being...1234 ???
physicist. using advanced logarithmic tables. doesnt use numbers such as zip codes, phone numbers, things like that. every auditing software has Benfard's Law capabilities.
it sees how often a certain number occurs, and will track the probability of it occuring. if someone is concistently writing checks to embezzle for $400, the probability for numbers starting with 4 will jump out of the curve of probabilities for each number.
however, Benfard's Law has a tendency for false positives.
5watch videos for audit standard along with a short powerpoint for audit data and analytics supplies at interim. (for tuesday)
no audits expanded test of controls after interim...however you cannot decide arbitrarily that it doesnt matter you have to have evidence to not have to do these additional tests.
6can no longer use negatives in confirmation requests for A/R...there are circumstances where you can use it though.
in figure 16-5 you can see an example of positive confirmation requrest in the textbook.
blank form confirmation are there to reduce "say yes" behavior. ask "what was your balance at 4/21?" so they have to confirm the exact number, rather than just "saying yes" to whatever number you ask.
7page 543 in chapter 16(?) to see an aging of receivables. figure 16-3 and 16-4 to look at aging of A/R to refresh memory.
11-13 will be on EXAM. 11-13 of what??? not sure...i think somewhere in the course packet?
confirmation of receivables chart course packet 195. maybe print out to look over before exam? this is chapter 16 related.
8file page 170 in course packet, gone over in class for chapter 16.
the way we do a sales cutoff is this: (occurance, completeness, and cutoff are being tested)
substantive test for details of transactions...
public companies, greater risk towards inflated sales. therefore sampling is sales invoices. grab em and make sure they were shipped and booked in the correct period. the scope would be about +/- 3 to 5 days. theyre going to book sales of the previous year's shipments???
small business wants to understate sales to reduce income, which is tax evasion. sampling units becomes the shipping documents to confirm the sales invoice are correct date. theyre going to book shipments from before year end to after year end in sales invoices to reduce previous year's income.
9if you have few customers, but large customers, this must be disclosed. especially if a firm is discontinuing their business with them, thats a huge drop in sales coming up.
1. ensure controls in remaining stub period are good controls. ask, "have you changed anything about how you process sales since we did confirmations in november?"
2. year end balances in gross profit must be ...idk legit? test...?
3. control environment must be strong. most important factor.
theses are the conditions that need to be met to know if we should do confirmations early.
course packet page 152 expounds on this.
10chapter 16 read course packet page 200 (if havent already) for confirms.
AU-C 505 paragraph 8. the confirmation process. flow chart is based on this. then paragraph 15. there's 4 requirements for negative confirmations.
11factors that indicate doubt about confirmation validity.
1. confirm went to client and not auditor.
2. appears to come from a different party than the one we asked to confirm
3. doesnt relate to assertions we want to verify
4. greater or smaller responses than predicted (a lot of negatives coming back...fraud risk factor. or very few responses from positives ...fraud risk factor.)
hello kitty stickers as a code for alarming customers of upcoming audits
12problem 10-28 good example of payroll cycle type question in CPA exam.
cowel company example will NOT be on the exam.
13having a zero-balance payroll account simplifies reconcoling the regular bank account. also, if someone gained access to check stock and writes checks against the payroll account, its empty and the check will bounce.
why would a company give employees money rather than checks? this reduces those without bank accounts having to pay a 5% tax on cashing a check...however you need armored trucks and guards etc. or they get a debit card for their pay.
14item 2 from course packet 218 is most important.
most auditing adjustment entries have to be reversed early in the following year (this is due to the entry being made already in the second year, so we got to offset this in the previous year and reverse it out in the following year)
allowance for bad debts and uncollectibles, since theyre evaluations theres no adjustments necessary
adjusting entries will need to be made when an unrecorded liability exceeds performance materiality.
15how would you adjust scope when you find many unrecorded liabilities? you lower the scope if youre finding a lot of the errors and mistakes.
how about if you havent found any significant unrecorded liabilities? then you raise the scope.
EXAM QUESTION*** what do you do if youre auditing a charitable organization where the worse their earnings are, the more money theyll get from funding agencies? the firm wants to diminish earnings. what would the problem be for the cutoff date? theyre going to be taking expenses from jan to bring back to december of previous year to reduce income.
16why expand the search beyond january? vendors might agree to await payment til after the audits done. the unrecorded liability may not be there until february or march.
if they have vendor statements for that vendor, check the reconciliation for amounts the client owes the vendor.
what if this fraud is going on but theres no vendor statements? send blank form AP confirmation requests.
be sure to document the search for unrecorded liabilities (course pakcet page 227 is an example of this)
17when does merchandize title pass? usually FOB shipping point. (this is only comon in import/export transactions) this also only applies when things are material.
if things in transit at year end was not material, they dont have to book the receivable until they receive it which is technically incorrect...the primary source document is then the receiving report (still not technically right).
18in diagrams drawn for time and cutoff, diagnal lines are bad...there should be straight flow up or down in the same period not across periods.
if it is material, then it must follow FOB shipping point rules and must make an audit adjusting entry to book receivables appropriately.
19when auditing year end accounts payable statements, you will audit the vendor statements and not invoices.
for testing controls and testing transaction level substantive testing, use vendor invoices.
20transactions being booked in the correct accounts = classifications
corrrect amounts = accuracy
accounting period correctness = cutoff
custody = handling assets
accounting = data entry
21purchase orders are needed to authorize vendors that provide services as well. you dont want to receive an invoice for services you never received, and have no purchase order to match to it.
dont ever pay a bill unless its an approved vendor on our master file.
22things to do regarding competitive bids:
when you obtain competitive bids, document any case where bids were not solicitated and why. if you paid more than the lowest price, list why.
make sure prices paid do not exceed market price, or else they might be paying someone more than what the items worth for a kickback (collusion and fraud).
right to audit clauses:
text on p.o.'s sent to your vendors (usually small print) (wording is very particular, be careful)
a common trap here in the clause, the terms of the agreement will be "both parties must agree to the same auditor" and then the vendor wont approve anyone competent
can limit gifts provided to purchasing agent from the vendor, or ban them altogether as a control on the right to audit clause of the purchase orders to vendors.
23blanket P.O.'s are like this:
we're going to order 1000 units every month. instead of writing a new one every month, write one for 12,000 for the whole year and write it down each month. verify you dont receive more or less by the year end.
no ap detail on some invoice.
24drop shipment: someone orders something from you but you dont have the merchandise on hand. so, we contact our vendor to have it shipped directly to the customer rather than to us then to the customer.
the problem with this is cutoff making sure the payment is recorded in the proper time period.
employee vendor fraud: due to weak controls, employee will create a fake company and invoice their own employer to get money from them (to this fake company).
how can we control these frauds? having an approved vendor list. you could also get the articles of incorporation of this new vendor to see when it was created and who are the officers (you want to look for your employee's name). if it is an ammended article, it will start with "A", and you can request the original articles of incorporation. purchase orders will also help combat this (showing what invoices will need to be paid, if we never received items or services DONT PAY EM)
25check signer must cancel documentation in regards to the check so that they arent submitted again either fraudulently or by error, and another check is issued.
ankor sank ink processes: situation where ink will permiate the fibers of the check, if someone tries to wipe it away youll still see the shadow of what was there originally.
26positive pay system is an internal control: a passive one
if the check number, amount, and payee doesnt match what was on the positive pay file transmitted to the bank, then the check will not be cashed/deposited.
27reverse positive pay: an internal control thats not passive. it sends the reverse positive pay info to the bank and you decide within a specified time period wether to let it be cashed or not (as the employer) ?
any time a document is voided, keep it in the population (as you are unsure if its missing or if its actually voided). whats the best way to void a check so it cant be cashed? cut it with scissors.
28two pass system: someone runs a check through the machine, print these out short of signatire. once theyve been run, theyll be risgned by a separate party electronically from across the world.
single pass system: checks are prepared and signed simultaneously.
29controller shouldnt be doing bank reconciliations. they should be done independently.
why do you have to go with the petty cashier if they leave while youre counting? theyll claim you stole the money. follow them around. same reason you want client employees around while youre doing a count to prove youre not doing anything fishy.
30kiting relies upon bank floating. relies on a client having multiple bank accounts.
periodically you must move old checks to cash...
31why do bank recs need to be done monthly?
in the fine print, mistakes need to be taken care of within 2 months (from the bank).
32bank statement must go to reconciler UNOPENED
page 757 in textbook, controls in place for bank recs. reead these.
EXAM: do you need to do step 1 if positive pay isi in place? no.
33cutoff bank statement is the same as normal bank statement, however whenever you request this it is 2 weeks following year end. rather than a month.
outstanding checks: visualize them in paper, take those along with the cutoff statement and put them together. the ones from dec 31 or sooner, trace them to the outstanding check list, if theyre included theyre correct.
34page 761 in textbook shows how to provie the compromised bank statement.
Cash XXX
Liabilities for old outstanding checks XXX
Liability for old outstanding checks XXX
Misc revenue XXX
texas has escheat laws, if these laws govern then the cash money goes to the state treasury in texas
35undue time lag from getting cash and checking it into the bank, despite it being close tot he bank leads to believe someone is borrowing the money.
textbook page 760, standard confirm request example.
36banking relationships must be confirmed on a separate confirmation letter...examples being:
lines of credit, contingent liabilities
compensating balance arrangements
cash is frequently over audited. it is highly vulnerable to manipulation, theft, and poorly controlled in small businesses
37example. employee gains access to blank check stock, took one and wrote a check and cashed it for themselves. is this receipt issue or disburement issue?
disbursement issue. on the bank side, their disbursements will be larger than our books.
38what if someone receives cash in accounts receivable, takes it and books it anyway. then the books will be larger than the banks actuals.
we want to see the deposits in transit are clearing on a timely basis.
39WILL BE ON EXAM
consideration of omitted procedures after the audit report date
other information in documents containing audited financial statements (just introduction)
supplementary information in relation to the financial statements as a whole (just introduction)
40performance materiality isused for day to day testing. planning materiality is over the entirety of financial statements,
two conditions to test internal controls:
-if our risk assessment concludes controls are effective, and theyre good over different assertions, then we must test those controls.
-if substantive procedures alone would not provide sufficient evidence in assertion alone.