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arens15irm14
Chapter14
AuditoftheSalesandCollectionCycle:
TestsofControlsandSubstantive
TestsofTransactions
Thisisanessentialchapterbecauseitisthefirstchaptertodealwithspecificevidenceinanauditarea.Itisessentialthattheconceptsofpreviouschaptersbeappliedtothesalesandcollectioncycle.Thefollowingaretheprimaryareascovered:
⏹Chapteropeningvignette
⏹Accountsandclassesoftransactionsinthesalesandcollectioncycle
⏹Accountingrulesforthetimingofrecordingtransactions
⏹Factorsaffectingevidenceaccumulation
⏹Overviewoftheauditforthesalesandcollectioncycle
⏹Typesofaudittestsappliedtosalesandcashreceipts
⏹Methodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsforsales
⏹Designandperformanceformatauditprocedures
⏹Methodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsforcashreceipts
⏹Effectoftheresultsoftestsofcontrolsandsubstantivetestsoftransactions
⏹Suggestedhomeworkproblemsandcases
ChapterOpeningVignette―“TheChoiceIsSimple–Relyon
InternalControlorResign”
Thisvignettemakesthepointthatsomecompaniesaresolargeandsocomplexthattheonlywaytheycouldpossiblybeauditedisthroughrelianceoninternalcontrols.Thispresentsadilemma:
whatdoesanauditordoifheorshefindsthatalargeclienthaspoorcontrols?
Theproblemisexacerbatedbythedemandsforpubliccompaniestoissueannualreportsatanearlydate,andtofiletheirForm10-KwiththeSEC.WeremindstudentsthattheSarbanes–OxleyActrequiresauditorstoalsoreportoninternalcontroloverfinancialreportingforacceleratedfilerpubliccompanies.
Thiscaseoffersanopportunitytodiscussthedifferencesbetweenauditinglargeandsmallcompanies,andauditingpublicandnon-publiccompanies.Studentsmaybeinterestedinthefactthateventhelargestfirmshavemoresmallclientsthanlargeonesinabsolutenumbers.However,mostaudithoursarespentonthelargeengagements.
AccountsandClassesofTransactionsintheSalesandCollectionCycle(p.440)
Weliketostartwithasetoffinancialstatementsandremindstudentsthatthefinancialstatementsasawholearebeingaudited.ReferencecanalsobemadetotheHillsburgHardwareCompanyfinancialstatementsincludedintheglossyinsert
tothetext.Allsalesandcollectioncycleaccountsinthestatementscanbeidentifiedtoshowwhichareasareinvolved.Figure14-1(page440)ishelpfulhere.
(SeeFigure14-1;shownonSlide14-5)
Next,wefinditusefultotalkabouttherelationshipbetweenthefinancialstatements,documents,andrecords.
Itisimportantthatstudentsthoroughlyunderstandhowtheinformationgetsintothefinancialstatements,thenatureandpurposeofjournals,masterfiles,anddocumentsaffectingthecycle.Itisdifficulttoteachthematerialwithoutactuallyseeingdocumentsandrecords.Theamountoftimeyouneedtospenddependsonthestudents’backgroundinaccountinginformationsystems.WegothroughOH-141tohelpstudentsunderstandtherelationshipintheauditofsalesandcashreceipts.
(SeeOH-14-1)
Atthesametimedocumentsandrecordsarediscussed,thebusinessfunctionsinthecyclecanbereviewed(page441).AskstudentstoexplainhowthetransactionsforeachbusinessfunctiondiscussedintheearlypartofChapter14affectthebalancesinthestatements,andhowtheyarerecordedsothattheyareproperlyreflected.
Table14-1(page441)isanexcellentsummaryoftheclassesoftransactions,accounts,businessfunctions,andrelateddocumentsandrecordsinthesalesandcollectioncycle.Problem14-25providesanicesummaryofthebusinessfunctionsrelatedtosalesandcashreceiptsforfourtypesofbusinesseswithwhichstudentsarefamiliar.Thisproblemcanhelpstudentsseehowthefunctionsandrelateddocumentsandrecordsdifferacrossentities.
(SeeTable14-1)
AccountingRulesfortheTimingofRecordingTransactions
Itisimportantthatstudentsunderstandthe“keypoint”forrecordingeachtypeoftransactioninthecycleasdescribedonOH-14-2.ConsiderassigningResearchProblem14-1thathighlightstherevenuerecognitionfraudatBallyTotalFitness.
(SeeOH-14-2)
FactorsAffectingEvidenceAccumulation
WeuseOH-14-3torelatethematerialfromearlychapterstothiscycle.
⏹Fourauditevidencedecisionsthatmustbemadeinthecycle(Chapter7).
⏹Acceptableauditrisk(Chapter9).
⏹Expectationofmisstatementsforeachaccount(Chapter9).Weemphasizeinternalcontrol,materialityofaccountsreceivable,salesreturnsandallowances,baddebts,andresultsofprioryeartestsasbeingespeciallysignificant.
⏹Understandinginternalcontrolandassessingcontrolrisk(Chapter10).
⏹Scoperestrictionsbytheclientorconditions(Chapter3).
⏹Reliabilityofconfirmations(Chapter7).
(SeeOH-14-3)
OverviewoftheAuditfortheSalesandCollectionCycle
Beforewegetintothedetailsoftheaudit,wegoovertheapproachinFigure10-11(page318),appliedtosalesandcashreceipts.Wewantstudentstounderstandthatthisapproachmustbeappliedtoeachcycle.AlsoreferstudentstoFigure14-2(page446)andmakesurestudentsunderstandthedecisionprocess.
(SeeFigure10-11)
(SeeFigure14-2;seealsoSlide14-21)
TypesofAuditTestsAppliedtoSalesandCashReceipts
Itisworthwhiletoreviewthetypesofaudittestsusedinconductingtheauditanddiscussthembrieflyforsalesandcashreceipts.
(SeeOH-14-4)
Askstudentstogiveexamplesofeachtypeoftestsforsalesandcashreceipts.ItisusefultorefertoFigure13-1(page403)asthisdiscussiontakesplace.
(SeeFigure13-1;seealsoSlide13-6)
MethodologyforDesigningTestsofControlsandSubstantiveTestsof
TransactionsforSales(page445)
WearenowreadytoreviewTable14-2(page450).
⏹Askstudentswhytransaction-relatedauditobjectivesareusedtodeveloptheauditprogram.
⏹Discusstheneedto,andhowtoconvertthegeneraltransaction-relatedauditobjectivestothoseusedincolumn1ofTable142.
⏹Remindstudentsthattherearefourauditevidencedecisions.Onlyauditproceduresarestudiedinthischapter.
⏹Selecttwotransaction-relatedauditobjectivesandgooverthemindetail,coveringcolumns1through5.Theimportantthingistoemphasizehowthecolumnsrelatetoeachother(seeOH-14-5).
1.Transaction-relatedauditobjectives–allfourothercolumnsaretiedtotheobjectives.
2.Keyinternalcontrols–relatetoobjectives.
3.Commontestsofcontrols–relatetokeycontrols.
4.Deficiencies–relatetoobjectivesandindicateanabsenceofeffectivecontrols.
5.Commonsubstantivetestsoftransactions–relatetoobjectives.
(SeeOH-14-5)
⏹AskstudentstoexplaintheeffectontestsofcontrolsandsubstantivetestsofeliminatingcertainspecificcontrolsinTable14-2.
⏹Askstudentstoexplainthedifferencebetweenoccurrenceandcompletenessforsales.Figure14-4(page453)isahelpfulillustrationhere.
(SeeFigure14-4;shownonSlide14-26)
⏹AskstudentswhycertainproceduresonTable14-2areincludedinmorethanoneplace.
⏹GooverProblem14-26.
DesignandPerformanceFormatAuditProcedures(page456)
Distinguishbetweenadesignandaperformanceformatauditprogram,andexplainwhyeachisimportant.ItisusefultocombineseveraloftheproceduresinTable14-2toshowhowitshouldbedone.
ReferstudentstoTable14-2(page450),Table14-3(page459),andFigure14-6(page460)toillustrategoingfromadesigntoaperformanceformat.Weaskstudentstotraceaprocedureineachdirection.Askthestudentswhichformatisdonefirstbytheauditorandwhichformatisusedbytheauditorinthefield.
(SeeTables14-2and14-3,Figure14-6)
MethodologyforDesigningTestsofControlsandSubstantiveTestsof
TransactionsforCashReceipts(page456)
Wespendlittletimecoveringcashreceiptsexcepttoemphasize:
⏹Theobjectivesandconceptsareidenticaltothosecoveredinsales.
⏹Thepotentialfortheftincashreceiptsandtheimportanceoftheprelisting.
⏹Therelationshipofsalesandcashreceipts,andwhytheyareapartofthesamecycle.
⏹Certainobjectivesaremoreimportantforcashreceiptsthansales,andothersarelessimportant.Itisusefultodiscusswhichonesareimportantandwhy.
⏹Defineandexplainthemeaningofaproofofcashreceiptsanditsimportanceasanaudittest.
⏹Defineandexplainlapping.
EffectofResultsofTestsofControlsandSubstantiveTestsofTransactions
(page462)
Itisimportanttoremindstudentsthatonlytestsofcontrolsandsubstantivetestsoftransactionsauditprocedureshavebeendiscussed,notsamplesize,oritemstoselect.Alsodiscuss,again,therelationshipbetweentestsofcontrolsandsubstantivetestsoftransactionsandtherestoftheaudit.
Figure14-7(page463)providesagoodsummaryofthechaptermaterial.Thisfiguresummarizesthemajoraccountsinthesalesandcollectioncycle,howthetypesofaudittestsareusedtoaudittheseaccounts,andhowtheauditriskmodelrelatestotheauditofthesalesandcollectioncycle.
(SeeFigure14-7;seealsoSlide14-39)
SuggestedHomeworkProblemsandCases
Tocompletethecoverageofthematerialinthischapter,wesuggestassigningProblem14-31orCase14-33.WesuggestusingPartVofthePinnacleManufacturingIntegratedCase(Case1434)ifyouassignedPartsIIIandIV(Cases10-44and11-34)earlier.
14-6
CHAPTER14
CROSS-REFERENCEOFLEARNINGOBJECTIVESANDPROBLEMMATERIAL
LEARNINGOBJECTIVES
REVIEWQUESTIONS
MULTIPLECHOICEQUESTIONS
DISCUSSIONQUESTIONSANDPROBLEMS
ACLPROBLEMANDCASES
14-1Identify
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