The expense cycle offers employees many opportunities to commit fraud in processing cash purchases and disbursements. Buyers are usually easy targets for suppliers who offer large returns if they are willing to transact more. Analytical procedures are a cost-effective tool to identify misstated accounts in the expense cycle. a. Please list some analytical procedures that can be used by the auditor to estimate the possibility of misstatement and explain the significance of the audit. b. Why does a trade payable turnover day analysis provide a more precise analysis of trade payables than the current ratio? c. Why do auditors pay more attention to debt understatement than debt overstatement? d. Please identify the elements of environmental control that are relevant to initiation and recording of purchases?

The expense cycle offers employees many opportunities to commit fraud in processing cash purchases and disbursements. Buyers are usually easy targets for suppliers who offer large returns if they are willing to transact more. Analytical procedures are a cost-effective tool to identify misstated accounts in the expense cycle. a. Please list some analytical procedures that can be used by the auditor to estimate the possibility of misstatement and explain the significance of the audit. b. Why does a trade payable turnover day analysis provide a more precise analysis of trade payables than the current ratio? c. Why do auditors pay more attention to debt understatement than debt overstatement? d. Please identify the elements of environmental control that are relevant to initiation and recording of purchases?

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 12CYBK

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The expense cycle offers employees many opportunities to commit fraudin processing cash purchases and cash disbursements. Buyers usually becomeeasy targets for suppliers who offer large returns if willing to transactmore. Analytical procedures are a cost-effective means of identifying accounts in the expense cycle that are misstated.a. Please list some of the analytical procedures the auditor may use forestimate the likelihood of misstatement and explain the significance of the audit?b. Why a trade payable turnover day analysis provides a more precise analysis of debteffort rather than current ratio?c. Why do auditors pay more attention to debt understatement than debt overstatement?d. Please identify the elements of environmental control that are relevant toinitiation and recording of purchases?
Which of the following statements is correct? Select one: a. Account receivable turnover is equal to net credit sales divided by average net accounts receivable. b. Buying aged receivables from businesses and then collects the payments directly from the customers is called Allowance for uncollectible accounts. c. Auto generated document numbers is a fraud preventive method which is more efficient than physical controls. d. If the same people are responsible for a series of related accounting activities is called Segregation of Duties.
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?a. Examining reported purchase returns that appear too low. b. Examining vendor statements for amounts not reported as purchases. c. Searching for customer-returned goods that were not reported as returns. d. Reviewing bank transfers recorded as cash received from customers.
The following are various changes in audit circumstances. Audit Circumstance The client began experiencing an increase in returns due to product changes that resulted in increased defects. You found several pricing errors in your substantive tests of transactions for sales. In performing substantive tests of transactions for cash receipts, you found that receipts were promptly recorded in customer accounts, but there were delays in depositing the receipts at the bank. The client entered into a new loan agreement with the bank. Accounts receivable are pledged as collateral for the loan. The client did not reconcile the accounts receivable subsidiary records with the accounts receivable balance in the general ledger on a regular basis. Substantive analytical procedures indicated a significant slowing in accounts receivable turnover. The client entered into sales contracts with new customers that differ from the client’s standard sales contracts. The client had a significant increase in…
1. A threat to the expenditure cycle that involves an employee creating and approving fictitious purchase orders is known as: A. Inventory theft B. Unauthorized access C. Check tampering D. Billing schemes 2. Purchase orders are used to initiate a payment in the disbursement cycle. True or False 3.Vendor audits are conducted to address the threat of unauthorized access in the disbursement cycle. True or false
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. Inventory.b. Wage expense.c. Consulting service expense.d. Property tax expense.
1. What does it mean to say that internal control has limitations and what are these limitations? 2. Provide an appropriate response based on the following scenarios. Assume that the accounting clerk posts a customer’s payment for the wrong amount, giving the customer credit for less than he or she actually paid. How will this error be detected? How might this error have been prevented? Assume that the employee who opens the mail steals a customer payment. How will this theft be detected? How might this theft have been prevented? 3. What is petty cash and what purpose(s) does it serve? 4. What types of controls should be in place to make sure people in the office don't just take from petty cash (for their own personal use) whenever they feel like it? In your opinion, what is an appropriate amount to have in petty cash? 5. Prepare the necessary journal entries for each of the following: (a) On March 1, issued a check to establish a petty cash fund of $1,410 (b)…
Why are receivables and revenue ripe areas for abuse or outright fraud? Income tax rules have been adjusted in recent years to make it easier to hide revenue from credit sales. OSEC rules have been adjusted in recent years to make it easier to hide revenue from credit sales. No real event, such as the receipt of cash, is necessary to record a debit to Accounts Receivable and a credit to Revenue. Generally accepted auditing standards do not allow auditors to scrutinize the detailed records of credit sales.
After completing a horizontal and vertical analysis of the Balance Sheet and Income Statement. It is noticed that the companies Accounts Receivables is rising faster than both sales and revenue. This brings up concerns of fraud. What type of documentation and information should the auditors request to further evaluate for potential fraud? What might explain this increase in AR?
ased on an assessment of audit risk, the auditors are concerned with the following two risks: The risk that that the client might be making duplicate payments to vendors. The risk that the client’s accounting clerk might be making unauthorized payments to himself. Required: a. Assuming that the client has a manual accounting system, describe how the auditors can design a test to identify the duplicate payments and unauthorized payments. b. Assuming that the client has an IT accounting system, describe how the auditors might use data analytic software to design a test to identify the duplicate payments and the unauthorized payments. b. Assuming that the client has an IT accounting system, describe how the auditors might use data analytic software to design a test to identify the duplicate payments and the unauthorized payments.
The fraud triangle asserts that the following three factors must exist for a person to commit fraud.A. Opportunity B. Pressure C. RationalizationIdentify the fraud risk factor (A, B, or C) in each of the following situations. No one matches the cash in the register to receipts when shifts end.
Provide an appropriate response based on the following scenarios. Assume that the accounting clerk posts a customer’s payment for the wrong amount, giving the customer credit for less than he or she actually paid. How will this error be detected? How might this error have been prevented? Assume that the employee who opens the mail steals a customer payment. How will this theft be detected? How might this theft have been prevented?