Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
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Chapter 16, Problem 10RQ
To determine
Explain whether test of control and substantive tests of transactions are more effective than confirmation where
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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.
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.
Which of the following is most closely related to the relevance of audit evidence?a. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian.b. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable.c. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year.d. Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.
Chapter 16 Solutions
Auditing And Assurance Services
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Explain why you agree or disagree with the...Ch. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Prob. 9RQCh. 16 - Prob. 10RQ
Ch. 16 - Prob. 11RQCh. 16 - Under what circumstances is it acceptable to...Ch. 16 - Prob. 13RQCh. 16 - Prob. 14RQCh. 16 - Prob. 15RQCh. 16 - Prob. 16RQCh. 16 - Prob. 17RQCh. 16 - Prob. 18RQCh. 16 - Prob. 19RQCh. 16 - Prob. 20.1MCQCh. 16 - Prob. 20.2MCQCh. 16 - Prob. 20.3MCQCh. 16 - The following questions deal with confirmation of...Ch. 16 - Prob. 21.2MCQCh. 16 - Prob. 21.3MCQCh. 16 - Prob. 22.1MCQCh. 16 - Prob. 22.2MCQCh. 16 - Prob. 22.3MCQCh. 16 - Prob. 23.1MCQCh. 16 - Which of the following is least likely to be a...Ch. 16 - The following questions concern auditor...Ch. 16 - Prob. 24DQPCh. 16 - Prob. 25DQPCh. 16 - Prob. 26DQPCh. 16 - The following misstatements are sometimes found in...Ch. 16 - Prob. 28DQPCh. 16 - Prob. 29DQPCh. 16 - Prob. 30DQPCh. 16 - Prob. 31DQPCh. 16 - Prob. 32DQPCh. 16 - Prob. 33DQPCh. 16 - Prob. 34DQPCh. 16 - Prob. 35DQPCh. 16 - Prob. 36DQPCh. 16 - Prob. 38DQPCh. 16 - Prob. 39ICA
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- Based 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. c. Describe the advantages of using data analytics software to identify unusual transactions or entries.arrow_forwardThe 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…arrow_forwardRead the case. Then answer the questions based on it. BACKGROUND: Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 2. How should the auditors mitigate the risk associated with both very large and…arrow_forward
- Physical examination is usually more costly than observation. True False Analytical procedures are usually the most costly type of evidence. True False Physical examination is normally more reliable than observation. True False Inquiries of the client are rarely sufficient by themselves to provide competent evidence to satisfy an audit objective. True False A canceled check written by the client, made payable to a local vendor, and drawn on the client’s bank account is one type of internal document. True Falsearrow_forward1. The negative form of accounts receivable confirmation request is particularly useful except when a. Individual account balances are relatively large b. Internal control surrounding accounts receivable is considered to be effective c. A large number of small balances are involved d. The auditor has reason to believe the persons receiving the request are likely to give them consideration 2. The starting point for the verification of the balance in the general ledger account is to obtain a. A bank reconciliation from the client b. The client’s cash account from the general ledger c. A cutoff bank statement directly from the bank d. The client’s year-end bank statementarrow_forwardYou will have the opportunity in this discussion to recommend adequate internal controls over sales invoices and receivables. If controls are not in place over these functions, companies are susceptible to errors, fraud, and losses. In the following scenarios, recommend internal controls that need to be in place to eliminate the problems described: An inexperienced clerk does not have the knowledge to prepare sales invoices properly. They are confused about the actual items shipped. As a result, the clerk has been preparing invoices at prices below the company's sales prices. During your audit, the controller approaches you about a problem with missing invoices. They think that these missing invoices were never recorded in the system, which results in the accompanying receivables not being recorded either. They read the monthly sales data and calculates that the company has faced significant losses as a result.arrow_forward
- When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following excepta. Send a second request.b. Do nothing for immaterial balances.c. Examine shipping documents.d. Examine client correspondence files.arrow_forwardExplain why it is common for auditors to send confirmationrequests to vendors with “zero balances” on the client’s accounts payable listing butuncommon to follow the same approach in verifying accounts receivablearrow_forwardQuestion: Which of the following statements accurately describes a fraud detection technique in accounting? a) Fraud detection relies solely on analyzing financial statements. b) Regular internal audits are unnecessary for fraud detection. c) Segregation of duties is an effective fraud detection measure. d) Fraud detection techniques do not require the use of technology.arrow_forward
- You are appointed as an auditor for Sohar Electric Trading Company and finds that controls over sales order processing are weak, for assertions related to receivables, as an auditor you may place more reliance on O a. Overall audit strategy O b. Tests of details OC. Substantive analytical procedures O d. Audit evidencearrow_forwardThe 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?arrow_forwardYour answer is incorrect. During the audit of Millennium Corporation, the audit firm, Tyson CPAs has advised firm management that they plan to confirm a sample of accounts receivable balances with a randomly selected pool of the client's customers. The client has refused permission for the auditors to undertake this procedure, citing customer privacy over balances owed to the firm. At this juncture, what might the auditors decide to do? Ⓒ The auditors are most likely to consider withdrawing from the engagement. If management is uncooperative, it is probably because they are hiding fraud or other material errors. O The auditors are likely to proceed with contacting a sample of accounts receivable customers anyway. As these customers represent third parties, the auditor does not need the client's expressed permission to contact them. O The auditors may attempt perform alternative audit procedures. If they are able to do this, they may be able to offer the same level of assurance in this…arrow_forward
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