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ADVANCED AUDIT EXAM 1 QUESTIONS AND ANSWERS

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l7 scourse s'processes' s(Figure s10-1, sp. s336) s- sans---Sales s(Chp s10&16 sportion) -Purchasing s(Chp s11&16 sportion) -Payroll s(Chp s12) -Inventory s(Chp s13) -PP&E/Intangibles s(Chp s14) sand sL-T sN/R -Investments s(Chp s16 sportion) -L-T sDebt sand sStockholder's sEquity s(Chp s15) ...

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  • August 10, 2024
  • 34
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
  • ASCS
  • ASCS
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AGRADEPROMASTER
ADVANCED AUDIT EXAM 1 QUESTIONS
AND ANSWERS
Advanced Audit Exam 1
l7 scourse s'processes' s(Figure s10-1, sp. s336) s- sans---Sales s(Chp s10&16 sportion)
-Purchasing s(Chp s11&16 sportion)
-Payroll s(Chp s12)
-Inventory s(Chp s13)
-PP&E/Intangibles s(Chp s14) sand sL-T sN/R
-Investments s(Chp s16 sportion)
-L-T sDebt sand sStockholder's sEquity s(Chp s15) s- s;owest srisk sacct sin sbs/is

lNOTE: sOur sfocus s= sPERCV sassertion
(vs. sintuitive s(text) sassertions slike s'accuracy' s. sTells sus snot snature sof
sinaccuracy/overstatement sor sunderstatement sbut sdoes sif sits san serror) s- sans---Why?

sPublic saccounting sand sthe sCPA sexam suse s'PERCV' s(as swell sas s'COVERU')




-(P) sPresentation/classification sand sdisclosure s(notes): sis san sacct scorrectly sclassified son
sbs/is. sDisclosure sin sfootnotes sor smd&a sfor s10ks.

-(E) sExistence/occurrence sor soverstatemen s(validity)t: soverstmt sof sassets sand srev
-(R) sRights sor sownership sof sespecially sassets: sright sto sowner sor sshould sasset srly sexist
son sbs

-(C) sCompleteness sor sunderstatement: sexps sand sliabs sunderstatements.
-(V) sValuation s(per sunit sprice sor s'value')* s: spreetmterprises sare svalued. sFocuses son
sprices sand snot squantity. sIf scurrent s[rice sof ssecurity sreflected sin sfinancials. sIs snet sreal sval

sof sar sand slcm sappropriately sreflected sin sfinancials. sIs sthe snet sppe sasset sval sor sorig scost

sor sprice s- saccum sdepr sto sdate saprop sreflected sin sfin




'COVERU': sC=completeness; sO=cutoff*; sV=valuation; sE=existence; sR=rights; sU s(vs.
sP)=understanding sper snotes/classification




lRemember sthe s'document sflows' sAND srelated sdepartmental sresponsibilities s(p. s344-
346). s- sans---Fundamental sconcerns sare sweak ssegregation sof sduties s(network saccess
scontrols) sAND sunauthorized ssales sprogram schanges s(management soverride sw/ sCIO sto

schange sunderlying scode sto sinflate ssales snear speriod send)




l s(Further) sIdentification sof sSegregation sof sDuties sConflicts

,-Q1: sWhat s'traditional' sdata stype(s) sare sused sin sassessing ssegregation sof sduties srisk?
sThat screates san sop sfor scooking sthe sbooks sand sgetting saway sw sit s- sans--Looking sfor sdif

skey sdepartments sthat shave sdistinct sseparate scapabilities sand sduties. sSeparate sapproval

sof scredit, sreconciliation sfo scash sduties swithin sdepartments s(custody, srecord skeeping,

sapproval/reconciliation) scant scombine sthese s2 sor smore sof sthese s3 sor stheres san

sincreased sopportunity sfor sfoul splay. sduties: sapproval sof scredit, sapproval sof ssales

sinvoices sor sbills, sreconciliation sof scash sthrough sa sbank sreconciliation.

A: s(traditional). sA-process s'walkthroughts' s-> sflowcharts. sB- sinternal scontrol snarratives
s(ch s11)

Data stypes: sflow scharts sor sprocedures swe swanna sperform sto sget scomfy sw ssegregation
sof sduties sand ssupporting sinternal scontrol snarratives. sFlowchart sto svisualize swhats sgoing

son sand ssome snarrative sdescription sacross seach sof sthe sdepartments, swhat stheir

sresponsibilities sare.




l(Further) sIdentification sof sSegregation sof sDuties sConflicts
-Q2 s(TOUGH): s(In scontrast sto s'traditional' sdata stypes), swhat sis san s'ideal' sdata stype(s) sto
sassess ssegregation sof sduties srisk? s- sans--100% saccess slog sreview. sGoing sinto saccess

slog sthat stells sus severy stime san sindividual sfrom sthe scredit sdept, sbilling, setc saccesses sthe

serp snetwork sand swhat sportion sof snetwork sthey saccessed. sFirms sare sdeveloping

ssoftware sthat sembeds sand shas slearned sthrough smachine slearning swhat sare sthe sfirms

sspecific spolicies sregarding ssegregation sof sduties. sAnd shave sany sof sthose sdepts

svioldated sthe score sfirms sseg sduties sconcerns swhich swill sproduce san salert sfor sauditors

sand sa ssummary sof sexceptions sthroughout sthe syear sand ssee sif stehres ssesetemic

sviolations sor snot. sover s12mo spd sand ssee swhat sdatas saccessed, sadmin saccess sfeature

sso smany sppl shaving sadmin saccess sspeeds sup srecording sand sapproving sfor scompany

sespecially sif ssome1 sis ssick. sOther soption: sUse sjoin sfeature sin stableau sor sclick sto sjoing

stwo sor smore sdatabases stogether sand scompare sthem sside sby sside. sUnauth/unapproved

sprogrammed scode schanges sfor srev sprocess sfrom sthis syear sto slast syear sbeing scompared

sand ssee sif stheres sany slines sthat sare snew sor sdeleted sor sa schange swithin san sexisting sline.

sWhen sthis syrs scode schanges sand sno snew ssystem sinstallled, sbusiness sas susual sno sbig

sacquisitions, su sshould sbe sable sto ssee sdocumentation sof sall sthose schanges. sAppropriate

smgt sapproval sof sthose sprogram scoding schanges sor squestion sit scause sthat smay sbe sfraud

sto sboost srev sfictitous srev spredating sscheme sw shelp sof scio. sIna shigh srisk sengage sment su

sshould shighly sconsider shaving scio ssign sa sdoc sthat ssays sthat sthat sindividual sdid snot

sacquies sto sprogram scode schanges. sThis sis simportant sfor sthem sand sus sto ssing sand sif

sthey swont sthan sits sobvious sfradud sfor shigh srisk sengagement sand swill shave sto swork

sharder sto sget scomfy sw swhats sgoing son.

Admin saccess smeans sa ssupervisor sin scompany shas sability sto srecord stheir sown sentry sand
sapprove stheir sown sentry. sNo scustody sof srelated sinventory sbut sthis sis san sopp sto screate

sfraud. sShould sreduce spe




l(Further) sIdentification sof sSegregation sof sDuties sConflicts
-Q3: sWhat sare spotential s'value sadded' sinsights s(that smay sbe sevident swhen saddressing
sQ1 s& sQ2)? s- sans--Indentigy swhere stheres sadmin saccess

Detect sadditional sfraud sinfo sfor sincreased sadmin saccess

,Human scap sdeficiencies: sunderstaffing sthat smay slead sto sfatigue, slack sof sbeing ssharp,
smissing sprobs sin ssystem, smay slegitamitely sreduce srev sin scompany

Unexpected seffects sof strying sto scut scosts
A3 svalue sadded:
A1: spreviously snon sdetected sfraud sexposure. sIncreased sop sfor sinappropriate srecording
sdetecting sadmin saccess seven sif snot syet sacted supon. sDetect sfraud sexposure

A2: shuman scap sdeficiencies s(previously sunknown sunderstaffing sthat smay sreduce srev sor
sfraud s-> slost srev sor sfraud) smay slead sto sfatigue sand smissing sprobkems. sSalary sexp sthey

swere string sto ssave swas smuch sless sthan sthe srev sthey slost sfrom sunderstaffing.




EARNINGS sMANAGEMENT s- sans--l: sNON-fraudulent smeans sto sincrease srevenues sà
sincrease sin snet sincome sto sjust smeet squarterly/annual sforecasted sEPS swithout sviolating

sGAAP. sContinuoum sbetween searnings smgmt. sand soutright sintent sto sdeceive sor sfraud s.

sPart sof sdif sis smateriality. sEm sshould snever sinvolve sa smaterial sadjustment sto sthe

sfinancials sand snature sof sinvestments sshould sbe smore smute sthan san soutright sfraud.




What sare s2 sor s3 sexamples sof searnings smanagement sapplied sto srevenue s(to smeet
squarterly/annual sforecasted sEPS)? s- sans---NOTE: sThese s'examples' swill sresult sin sa

smuted s'risk sresponse':

l1. smore sliberal scredit spolicies sespecially sduring sa srecession. s2020, ssome sfirms sand
shospitality sare sdesperately string sto skeep ssales sas sthey swere sbefore scovid. sW srelaxing

scredit spolicies sthe schallenge sis sin snext spd sthere swill sbe slarge sincrease sin sbad sdebt sexps

l2. smdoest sincrease sin ssales sdiscounts. sChannel sstuffing s- snear spd send
l3. slegit sacceleration sof swork son slt sconstruction sprojects sresulting sin slegit sincrease sin
spercentage sof scompletion sof sthat sproject sand sincrease sin srevenue stherefore.

l4. s1 stime sshift sform slifo sto sfifo sinv saccounting

Another srisk sin srecession: sbig sbath s- sresults sin soverstatement sof sar sallow sfor sbad sdebts.
sIs sit sem sor sintend sto sdeceive.




(COVID sUpdate*)Lease sRevenue sRecognition s& sMeasurement sOverstatement sRisk
lMany slessors sand slessees sare sin sfinancial sdistress s- sans---Lessors s= sREITs* sand
sBoeing

-Lessees s- sretailers, srestaurants, shospitality s(including shotels) sand sairlines* sin sfinancial
sdistress. sTheir scf smight sbe sdeclining sand smight sbe stempted sto soverstate scurrent sand sor

sexpected slease sconcessions sto sunderstate smaterial ssg&a slease sexp.

lhttps://wakeforestbusiness.knowmia.com/UeK2 s(0:00-1:26) sLA sRestaurants s.

lhttps://wakeforestbusiness.knowmia.com/EcHO s(0:00-1:51) sREIT sCEO*

Brief sReview s(Revenue sRecognition s& sMeasurement)
l5-step sprocess s(ASC s606-10-5-4): s- sans--•Step s1: sIdentify sthe scontract(s) swith sa
scustomer




•Step s2: sIdentify sthe sperformance sobligations sin sthe scontract

, •Step s3: sDetermine sthe stransaction sprice

•Step s4: sAllocate sthe stransaction sprice sto sthe sperformance sobligations sin sthe scontract

•Step s5: sRecognize srevenue swhen s(or sas) sthe sentity ssatisfies sa sperformance sobligation

Revenue srecog sis sextremely shigh srisk. sAdopting snew scomplex sstdrd sfor s1st stime sand
sexperience srecession srelated srev srisk

Key sgoal sof sthis snew sstandard sis sa smore sintegrated sperformance sobligated sapproach.
sThe sidea sof smultiple sperformance sobligations sdidn't sreally sexist sbefore sthis sapproach.

sSo sthere swas sno srev srecog sconsistency sbut snow sw sthis sthere sis.




Brief sReview s(Revenue sRecognition s& sMeasurement)
lStep s1: sIdentify sthe s'contract(s)' swith sa scustomer s- sans---Written sor s*oral ssignatures s=
san s'approved' scontract; s*payment sterms; s*collectability sis sprobable sper seach

scontract/invoice;* scommercial ssubstance s(sellers scfs sare sexpected sto schange sas sa

sresult sof sa ssale sof sgoods sor sservices ssince sin spart swe sexpect scollection sto sbe sprobable)*

Oral scontract scan sbe sconsidered sa svalid scontract s1231. sagreement sbetween scustomer
sand scfo semails s= swritten scontract srequired sif snear spd send. sBc sthere sis sa srisk sthat sif sthey

soral ssigned sthey scould snot sbe sintended sto sbe sfollowed sthru.




lStep s2: sIdentify sthe s'performance sobligations' sin sthe scontract s- sans---(a) sIdentify
spromised sgoods sand sservices

-(b) sWhat spromised sgoods sand sservices sare s'distinct' sdistinctly sidentify stwo sor smore
sperformance sobligations

lEXs s(3)
-Sale sof sretail sgoods sw sdeliver sand sinstall sseperately
-Selling sfood sor sdrinks sw sloyalty sprogram. sSeling sof sintangible sgood sand sloyalty srevenue
ssubscription




Raw smaterials sseparate sis snot san sex sbut sselling sthe sfinished sgoods sseparately sis san sex.

lStep s3: sDetermine sthe s(total) s'transaction sprice' s- sans---DEFN: sthe stotal samount sof
sconsideration sto swhich san sentity s'expects' sto sbe sentitled sin sexchange sfor stransferring

spromised sgoods sor sservices

lMay sbe sFIXED sor sinclude supfront s'variable sconsideration' sESTIMATES ssuch sas:
-EX: sNet s(not sgross) smethod sfor ssales sdiscounts s(1/10) sand ssales sR&A; sreserves s(for
scancellations sor sproduct sloyalty sprograms); sexpected s*interest srevenue s(post sn/30)




lStep s4: s(How sto) s'allocate' sthe s(total) stransaction sprice sto sthe sperformance sobligations
sin sthe scontract s- sans---(Estimated) s'Stand salone' sselling sprices




lStep s5: sRecognize srevenue swhen s(or sas) sthe sentity ssatisfies sa sperformance sobligation s-
sans---*Transfers sthe spromised s'distinct' sgoods sand/or sservices s(Step s2) sand srelated

s'control' sto sthe scustomer; ssatisfied sat sa spoint sin stime sOR sover stime s(e.g., s% sof

scompletion sw sconstruction sor sunearned srevenue sà srevenue)

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