Revenue & Receivables Cycle Audit Flashcards

Flashcards testing core principles, audit formulas, controls, sampling, substantive procedures, and exam rules for the Revenue & Receivables Cycle.

What is the required sentence structure for formulating a Risk of Material Misstatement (ROMM) in an exam answer?

State the risk factor and explain it. This increases / creates a ROMM relating to [ASSERTION] due to fraud OR error, as [explain why], resulting in [line item] being over/understated.

What are the strict rules regarding the use of the terms "fraud" and "error" in a ROMM response?

Use either "fraud" OR "error" — never write "fraud or error". Hedging both ways prevents the marker from awarding marks. Additionally, if the risk is fraud, link it to a specific element of the fraud triangle (incentive, opportunity, or rationalisation).

Which assertion for revenue carries an automatic rebuttable presumption of fraud under ISA 240?

Occurrence. Revenue carries an ISA 240 rebuttable presumption of fraud, and unless explicitly rebutted in the scenario, fictitious revenue is a significant risk resulting in revenue being overstated.

How must the accuracy assertion be written for Accounts Receivable in audit answers?

It must be written as "accuracy, valuation and allocation" ($\text{AVA}$), rather than simply "accuracy".

Why is cut-off of revenue generally tested using a substantive approach rather than relying on controls?

There are usually no internal controls over cut-off. Consequently, cut-off cannot be tested for operating effectiveness during the year and must be tested substantively post year-end.

What is the formula for calculating debtors collection period (debtors days) to evaluate the reasonability of the ECLA?

\text{Debtors Days} = \n\left(\frac{\text{Accounts Receivable}}{\text{Revenue}}\right) \times 365

What common classification error do trainees make regarding Expected Credit Loss Allowance (ECLA)?

Trainees incorrectly link ECLA to revenue accuracy. ECLA impacts the accounts receivable accuracy, valuation and allocation ($\text{AVA}$) assertion, not revenue accuracy.

What are the three distinct objectives evaluated when performing tests of controls?

1. Design (is a control capable of addressing the risk?). 2. Implementation (does it exist and is it applied at a point in time?). 3. Operating effectiveness (has it operated consistently throughout the financial period?).

How does audit sample size selection differ between automated controls and manual controls?

For an automated control, testing $1$ instance is sufficient to confirm functionality. For a manual control, a sample spread across the entire financial period must be tested to evaluate operating effectiveness.

Why are physical security measures like locked storerooms and security cameras NOT classified as key (direct) controls?

They are management controls that safeguard assets or deter theft. Their absence does not directly impact the recording of transactions in the financial statements or directly affect financial statement assertions.

Why is the generation of an exception log of unauthorised access not considered a key control on its own?

Log generation alone does not prevent or detect misstatements. Only the independent review and sign-off of the log achieves the control objective and qualifies as a key (direct) control.

What are the seven steps required for selecting an accounts receivable sample?

1. Ensure the sample is representative to reduce sampling risk. 2. Stratify the population by value. 3. Target-test individually material balances above performance materiality. 4. Target-test high-risk balances (e.g., government). 5. State that target testing is non-statistical and quantify coverage. 6. Compare the remaining balance to clearly trivial. 7. Apply statistical random sampling to the homogeneous remaining population.

What standard substantive procedures should be performed when a positive debtors confirmation reveals a balance discrepancy?

Obtain the debtor's statement reconciliation, agree the balance per reconciliation to the debtor's ledger and confirmation, reperform the mathematical accuracy and logic of the reconciliation, and agree reconciling items to supporting documents (invoices, bank statements, contracts).

What are the three categories of misstatements defined in ISA 450?

1. Factual misstatements (certain errors with no doubt). 2. Judgemental misstatements (differences arising from management's estimates or unreasonable accounting policies). 3. Projected misstatements (the auditor's best estimate of misstatement in a population projected from a sample).

How should a misstatement quantitatively below the clearly trivial threshold be treated if it involves fraud?

It is qualitatively material due to fraud (e.g., management manipulating figures to achieve bonus targets). It must be included on the Summary of Unadjusted Audit Differences (SUAD) and evaluated for its impact on the audit opinion.

What structure is required when presenting control weaknesses and recommendations?

A two-column table formatted as "Control weakness discussion | Recommendation". The weakness discussion must state what is missing/wrong AND explicitly state the potential consequence/risk to earn the mark.

What four limbs establish a Reportable Irregularity under the Auditing Profession Act (APA 2005)?

1. An unlawful act or omission (breaching statutory or common law, not just internal policy). 2. Committed by a person responsible for management. 3. Has caused or is likely to cause material financial loss to the entity, partners, shareholders, creditors, or investors. 4. Is fraudulent, amounts to theft, or represents a material breach of fiduciary duty.

What is the primary distinction between a business risk and a Risk of Material Misstatement (ROMM)?

A business risk threatens the company's operations, strategy, and profitability. A ROMM specifically addresses the risk that financial statement line items or assertions are materially misstated prior to audit.

What are the core components of a Nature, Timing, and Extent (NTE) memo framework?

1. Nature (Necessity, Possibility, Desirability, and assertion-by-assertion approach conclusion). 2. Timing (Interim testing with roll-forward vs post-year-end testing). 3. Extent (Sample size drivers: ROMM, materiality, and control reliance). 4. ISA 330 tests of detail for significant risks.

How does Value Added Tax (VAT) accounting treatment differ between Revenue and Accounts Receivable?

VAT is EXCLUDED from Revenue (revenue is recorded net of VAT). VAT is INCLUDED in Accounts Receivable (the balance represents the total gross amount owed by the debtor inclusive of VAT).