ACCY 131 PG-3a Solutions

ACCY 131 PG-3a Solutions - GroupProblemSet#3(PG3)fromChs1113

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Group Problem Set #3 (PG 3) from Chs 11 13 Review Questions (6 points total; 1 point each) 11 2 Explain why the audit of revenue and receivables may present the auditors with significant audit risk. ANS: (From the text) The audit of revenue and receivables is of significant audit risk because (1) overstatement of revenue has been a factor in many instances of fraudulent financial reporting, (2) the overstatement of revenue results in a corresponding overstatement of net income, (3) the determination of the amount of revenue recognized may be determined by the application of complex accounting principles, and (4) significant accounting estimates may be involve in the determination of the financial statement presentation of receivables and revenue. (From the lecture/slides): 1. Fraud is likely to be perpetrated through the revenue accounts (ex. COSO study). 2. Revenue is an area of extreme interest for analysts and investors, so there is incentive to “manage” revenues. 3. Further, compensation (such as bonuses and stock options) may be tied to revenue creating additional incentive for misreporting. 4. Finally, accounting involving revenue tends to involve significant judgment and estimate by management and/or requires knowledge of complex, technical accounting standards. 11 9 Among specific procedures that contribute to good internal control over the business processes related to accounts receivable are (a) the approval of uncollectible account write offs and credit memoranda by an executive and (b) the sending of monthly statements to all customers. State two other procedures conducive to strong internal controls=. ANS: Other specific procedures which contribute to good internal control over the business processes related to accounts receivable include (only two required): (1) The separation of the duties of the accounts receivable accountant from all cash handling functions. (2) Regular balancing of the subsidiary ledger of receivables with the general ledger control account by an employee other than the accounts receivable accountant. (3) Regular aging of accounts receivable and review by management. (4) Periodic review of delinquent accounts by an appropriate executive.
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(5) Periodic confirmation of accounts receivable by internal auditors. (6) Serial numbering of shipping documents, sales invoices, and credit memoranda, and regular accounting for all numbers in the series. 12 1 Many auditors consider the substantiation of the figure for inventory to be a more challenging task than the verification of most other items on the balance sheet. List several specific factors that support this view. ANS:
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This note was uploaded on 10/25/2011 for the course ACCY 131 taught by Professor Ekanayake,c during the Spring '08 term at CSU Sacramento.

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ACCY 131 PG-3a Solutions - GroupProblemSet#3(PG3)fromChs1113

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