Accounting Chapter 11: Revenue and AR Process

Ensuring inventory items have unique tags to avoid double-counting.

Sampling inventory items to check accuracy of full count.

Checking for empty spaces or containers affecting quantity.

Inventory from third parties, requiring separate accounting.

Possible future loss, contingent on uncertain events.

A contingent liability that is highly probable to occur.

Contingent liabilities with a more than remote yet less than likely chance of occurrence

Contingent liability with an extremely small chance of occurring.

Formal confirmation request from attorneys involved to the client. Attorneys can not speak about client's case without permission.

Document signed by management confirming factual data affecting financial statements during an audit.

A bank statement covering the period after the balance sheet date, used to verify cutoff testing.

Fraud risk assessment technique that reconciles cash receipts and disbursements between accounting records and the bank.

Fraudulent practice where cash is stolen before recording, often covering shortages with future receipts.

Fraudulent practice where cash is stolen after recording, transferring funds between accounts to inflate balances.

Audit procedure where the auditor verifies the accuracy and completeness of the physical inventory count.

Periodic counting of a small portion of inventory to compare with perpetual records, testing the existence assertion.

Procedure to verify the cost of inventory, obtaining purchase documents to recalculate costs.

Assessing obsolescence and slow moving inventory to ensure accurate valuation.

Procedure to verify all inventory items are recorded in the perpetual records, comparing physical counts to perpetual records.

Checking for proper ownership and responsibility over inventory (e.g., consignment inventory).

Initial audit planning involves understanding the client's revenue process, assessing risks associated with revenue assertions, and conducting analytical procedures.

Understanding internal controls and preliminary audit strategy. It includes understanding client controls, transaction flows, and identifying weaknesses and related controls.

Consignment sales, rights/returns, and bill-and-hold transactions are common areas where revenue can be manipulated.

Primary test for existence assertion in AR. Direct communication with customers for verification.

Auditing invoices around the year-end to ensure revenue is recorded in the correct period.

Reconciling bank and book balances to identify discrepancies, a key control over cash.

Auditing procedure to verify bank balances, transactions, and loan details.

Checking sales and disbursement transactions around the year-end to confirm they are recorded in the correct accounting period.

Events that happen after the end of the fiscal year that can affect the company's financial statements. Two types exist.

A subsequent event that provides evidence of conditions that existed at the end of the fiscal year. Requires adjustments to the financial statements.

A subsequent event that provides evidence of conditions that arose after the end of the fiscal year. Requires disclosure but no adjustments.

Auditors need to understand how management identifies and manages subsequent events, often by reviewing records like meeting minutes and financial statements.

These procedures are performed at the very end of an audit to evaluate the overall reasonableness of the financial statements. They involve analyzing financial data and looking for any unusual trends or patterns.

The auditor must re-evaluate the materiality threshold based on the audit findings. This means assessing whether the original materiality level is still appropriate after considering any significant risks or misstatements found.

To corroborate the significant oral representations made by management during the audit. Essentially, it provides written confirmation of what management has already stated verbally to the auditors.

Right at the completion of the audit. It's typically obtained after the auditor has conducted all other necessary audit procedures.

The assumption that a company will be able to continue its operations for at least the next year. Auditors must assess whether there is substantial doubt about this assumption.

Auditors must communicate certain key findings to the audit committee or other governance body. This includes information about material noncompliance with laws and regulations.

These are significant accounting methods used by the company that require careful consideration by the auditor. The auditor must communicate with those charged with governance about these policies and practices.

If the auditor has disagreements with management about the accounting treatment of certain transactions, these disagreements must be communicated to those charged with governance.