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Chapter 15

Management and Organizational Studies 3363A/B Chapter Notes - Chapter 15: Analytical Review, Accounts Receivable, Gross Margin


Department
Management and Organizational Studies
Course Code
MOS 3363A/B
Professor
Santos
Chapter
15

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Chapter(15(Notes(
Review&
1. Pre+planning&
2. Client&Risk&Profile+&preliminary&analytical&review&
3. Develop&the&strategic&audit&Approach&
4. Develop&Audit&Programs&
5. Tests&of&Controls&
6. Substantive&Tests&
& & Analytical&
& & Tests&of&Details&of&Balances&
7. Ongoing&evaluation,&quality&control&and&final&evidence&gathering&
8. Complete&quality&control&and&issue&Auditors&report&
&
control risk The risk that material error in a balance or transaction class will not
be prevented or detected on a timely basis by internal controls.
inherent risk The susceptibility of a balance or transaction class to error that
could be material, when aggregated with other errors, assuming no related
internal controls.
detection risk The risk audit procedures will lead to a conclusion that material
error does not exist when in fact such error does exist.
&
&Sales&and&Collection&Cycle&
If#there#were#mistakes#in#billing#of#customers,#then#there#would#be#an#overstatement#of#
sales#and#A/R.#
Transactions&flow&through&Accounts&Receivable&are&almost&always&material,&
unless&collections&are&highly&automated.&Materiality&is&set&for&the&financial&
statements&as&a&whole&rather&than&for&each&account.&
The&inherent&risks&are&mainly&in&two&audit&objectives&for&accounts&recievable&
& & 1.&Stated&at&net&realizable&value+&based&on&clients&&& & &
& & judgment&
& & 2.&Correct&cutoff+&can&be&easily&misstated&
The&control&risk&of&accounts&receivable&varies&among&clients,&but&generally&
Managers&want&accurate&records&to&maintain&good&relationships&with&
customers.&
If&internal&controls&are&weak,&auditor&will&increase&tests&of&details&of&balances.&
&
In&deciding&the&appropriate&evidence&for&test&of&details&of&balances,&the&Auditor&has&
to&consider&the&inherent&and&control&risk.&It&is&complicated&because&inherent&and&
control&risk&both&vary&by&objective.&&An&evidence(planning(spreadsheet&is&used&to&
determine&the&tests&of&details&of&balances&(see&p518&for&example).&
&
Materiality&
Assess&Control&Risk+&Applied&to&Sales&and&Collections&Cycle&in&Chapter&14&
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