Question

In: Accounting

1 A.Mention some misstatement of fraud risk in revenue cycle! B.Mention some analytical procedure ratio related...

1
A.Mention some misstatement of fraud risk in revenue cycle!

B.Mention some analytical procedure ratio related to inventory and payment cycle!

C.Why cash is considered as high inherent risk?

D.What is the different between disposal and impairment of non current (fixed) asset?

E.Mention some test of control regarding inventory and payment cycle!

F.Provide example of each management fraud and employee fraud regarding cash account!

Solutions

Expert Solution

A) Some misstatement of fraud risk in revenue cycle:-

  • Recognition of revenue on shipments that never occurred.
  • Recording consignment sales as final sales
  • Early recognition of sales that occurred after end of fiscal period.
  • Recording shipments to company’s own warehouse as sales
  • Incorrect aging of accounts receivable.
  • Recording reshipment as a sale of new goods before issuing credit for the returned sale

B) Analytical procedures consist of ‘evaluations of financial information through analysis of plausible relationships among both financial and non-financial data’. They also encompass ‘such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount’ (ISA 520). A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of conditions to the contrary.

Analytical procedures for analyzing inventory based on financial metrics such as

  • gross margins,
  • days inventory on hand,
  • inventory turnover ratio, and
  • costs of inventory historically.

EXAMPLES OF THE ANALYTICAL PROCEDURES FOR Payment Cycle

(a)        Compare purchases expenses with budgeted amount.
b)        Compare purchases expenses with prior year.
(c)        Compare individual accounts payable with previous year.
(d)        Calculate ratios of purchases to account payable and compare with last year.

c) The following are the primary inherent risks of cash that could occur:

  • Cash could be manipulated and stolen by management and employees. The fraud related to cash is usually due to three factors including incentive, opportunity, and rationalization, which is also referred to as the triangle of fraud.
  • Cash is susceptible to error due to high transactions and volume as either incomes or expenses tend to be related to cash.
  • Not all cash transactions are recorded due to error or fraud (e.g. error such as bank reconciliation items or fraud such as cash received from customers was stolen by employees)
  • Money laundering due to the cash can be easily transferred from one location to another

D) A disposal is pretty straightforward. It means that the company disposed ( threw away ) a fixed asset. Usually this is done when the fixed asset is no longer working and is pretty much junk. A good example would be a Machine that stopped working and is physically disposed of ( thrown away ) .

Impairment of a fixed asset refers to an abrupt decrease in the economic benefits that an asset can generate due to damage, obsolescence etc. Impairment is recognized by reducing the book value of the asset in the balance sheet and recording impairment loss in the income statement.

E) Test of controls for payment cycle

  • Examine proper approvals for purchase requisitions, purchase order, and goods received notes.
  • Examine the indications of internal verification for these documents.
  • Account for the numerical sequence purchase order and goods received notes.
  • Trace samples of goods received notes to the related suppliers’ invoices and entries in the purchase journal.
  • Compare the dates on goods received notes and entries on purchase journal.
  • Review documents for unrecorded suppliers’ invoices exist.

Test of controls for inventory

a)Observe physical security of inventories and environment in which they are held.
b) Test procedures for recording of inventory movements in and out of inventory.
c) Test authorization for adjustments to inventory records.
d) Test authorization for write-off or scrapping of inventories.

F) example of management fraud regarding cash account

  • Stealing cash funds from registers, safes or petty cash drawers
  • Overcharging a customer and pocketing the difference
  • Skimming (not registering a sale or recording a transaction in accounting books and taking the cash)
  • The employee endorses and cashes customer checks payable to the company, then keeps the funds.Today, as more payments become electronic the essential crime is the same. The employee may set up a bank account with a fictitious name similar to the employer’s to divert electronic payments into. Small banks and credit unions can be lax in allowing accounts to be established by the employee using fake “doing business as” names.

example of management fraud regarding cash account

  • Cash sales made but not recorded in books of accounts.
  • Intentional totalling errors or errors in balancing in cash book by management.
  • Casual receipts like sale of old newspaper not recorded by management in the books of accounts
  • Unaccounted sale proceeds of assets which have been fully written off and misappropriating the money received.
  • Recording fake expenditures such as payment to dummy workmen etc.

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