1. A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that a)Cash receipts recorded in the cash receipts journal are reasonable b)Cash receipts are properly classified c)Recorded cash receipts result from legitimate transactions d)Existing cash receipts are recorded 2. An auditor tests a company?s policy of obtaining credit approval before shipping goods to customers in support of management?s financial statement assertion of a)Valuation or allocation b)Completeness c)Existence or occurrence d)Rights and obligations 3. Which of the following internal controls would most likely reduce write-offs of un-collectible accounts receivable? a)Employees responsible for authorizing sales and charge-offs of uncollectible accounts receivable are denied access to cash. b)Shipping documents and sales invoices are matched by an employee who does not have the authority to charge off uncollectible accounts receivable. c)Employees involved in the credit-granting function are separated from the sales function d)Accounts receivable master file records are reconciled to the control account by an employee who is not involved in the credit-granting function 4. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was not prepared until after the auditors had completed the field work. The returned merchandise was included in the physical inventory. What control should have prevented the misstatement? a)Aged trial balance of accounts receivable is prepared. b)Credit memoranda are pre-numbered and all numbers are accounted for. c)A reconciliation of the trial balance of customer?s accounts with the general ledger control is prepared periodically. d)Receiving reports are prepared for all materials received and such reports are accounted for on a regular basis. 5. The sales manger credited a salesman, Jack Smith, with sales that were actually ?house account? sales. Later Smith divided his excess sales commissions with the sales manager. What control should have prevented the misstatement? a)The summary sales entries are checked periodically by persons independent of sales functions. b)Sales orders are reviewed and approved by persons independent of the sales department. c)The internal auditor compares the sales commission statements with the cash disbursements records. d)Sales orders are pre-numbered, and all are accounted for.

4-5: Farzaneh Mostatabi Chapter 4 BUSAC 283 How does the auditor's responsibility for gathering evidence differ between the balance sheet and income statement accounts? The revenue business process involves income statement and balance sheet accounts. On the income statement, the revenue process includes sales revenue, sales returns, allowances, and bad debt expense. On the balance sheet, the revenue process includes accounts receivable, the allowance for doubtful accounts, and increases to the cash account. As with all business processes, the auditor is concerned with determining that the income statement and balance sheet accounts in the business process are recorded in accordance with an applicable financial reporting framework and that disclosure in the accounts associated with the business process is consistent with GAAP. For the income statement, the auditor gathers evidence to support the transactions recorded in the accounts for 12 months. For the balance sheet, the auditor gathers evidence to determine whether the account balance on one day of the year, the end of the year, is correct. The auditor uses the substantive tests to gather evidence relating to income statement transactions. The auditor uses substantive test of balances to gather evidence relating to balance sheet transactions. These tests provide the auditor with evidence about whether the accounts in the revenue business process are prepared in accordance with an applicable financial reporting framework. 4-10: What are errors and fraud? An unintentionally misstatement in the financial statements is an error and an intentional misstatement in the financial statement acts of the company is fraud. When a company uses methods to overstate revenue and receivables this is fraud. Methods Such as recording fictitious sales, recognizing revenue on shipments that were not made, early recognition of sales, recognizing revenue in the current year even though shipment of goods or providing the service occurs in the following year. Early shipment of goods, recognizing revenue before the customer requests delivery. Shipment of a larger quantity of goods than the customer ordered. Recognition of revenue based on swap (exchange) transactions, when the customer and the client exchanged products or services and both parties recognize revenue based on the exchange 4-20: When does the auditor test internal controls? The auditor uses substantive tests of transactions to gather evidence for income statement accounts in a business process. In the revenue business process, the income statement accounts are sales revenue, sales returns and allowances, and bad debt expense. The auditor may perform substantive tests of transactions for revenue as part of the audit of the internal controls. The auditor does this by using dual-purpose tests. Dual-purpose tests allow the auditor to select one sample of transactions and perform internal control and substantive tests of transactions on the sample Farzaneh Mostatabi Chapter 5 BUSAC 283 5-3: How does the auditor determine the amount of evidence he must gather? The sufficiency of audit evidence is a measure of the quantity of evidence needed . Appropriateness is a measure of the quality of audit evidence needed . The auditor measures the quality of evidence by its relevance and its reliability. Both the quantity and the quality of audit evidence that needed for an audit, May be affected by the risk of material misstatement for the relevant assertion in a significant account. The greater the risk of material misstatement, the more audit evidence that is likely to be required 5-7: Describe the documentation requirements of the Auditing Standards Board An auditor should prepare audit documentation that will enable an experienced auditor, with no previous connection to the audit, to understand: The nature, timing, and extent of auditing procedures performed. The results of the audit procedures performed and the audit evidence obtained. The conclusions reached by the auditor on significant matters. That the accounting records agree to the audited financial statements). The significant findings that an auditor needs to document are including the actions taken to address them and the basis for the conclusion reached. These significant Findings are: accounting for complex or unusual transactions or accounting estimates or uncertainties results of audit procedures indicating that the financial statements or disclosure could be materially misstated or the need for an auditor to revise his previous assessment of the risk of material misstatement, circumstances that made it difficult for the auditor to apply auditing procedures findings that could result in modifications to the auditor's report, and adjustments that the auditor has proposed to the financial statements. 5-13: What is the purpose of the fraud discussion in an audit engagement? The auditing standards require the audit team assigned to the audit of a company to discuss the susceptibility of the financial statements to fraud. This discussion allows the more experienced members of the audit team to explain how they believe the financial statements may be susceptible to fraud and gives the audit team the opportunity to plan an appropriate response to the fraud susceptibility. The fraud discussion should be documented in the work papers and may include the following elements: A discussion of management's involvement in supervising employees with access to cash or other assets susceptible to misappropriation. A consideration of unusual or unexplained changes in the behavior or lifestyle of employees that have come to the attention of the auditor. A consideration of the types of circumstances that might indicate the possibility of fraud. A discussion of how an element of unpredictability will be built into the nature, timing, and extent of audit procedures. A consideration of the types of audit procedures that might be effective in responding to the susceptibility of the company's financial statements to material misstatement and whether some of the audit procedures may be more effective than others. A discussion of any accusations of fraud that have come to the attention of the auditor