ACCT 417 Quiz 3

Define population characteristics

Monetary Value of an account balance (ex: Accounts recievable, inventory)

Define Sampling unit

Individual dollars in the population: Logical Units

Logical units

Customer accounts, inventory items, investment securities.

Risk of incorrect acceptance

1- Confidence Level = Risk auditor accepts balance as fairly stated when it is not (Type II error)

Tolerable misstatement

Maximum amount by which the account can be misstated and still be acceptable to the auditor as being fairly presented in all material respects. Same as Chapter 3 either 50% or 75% of overall planning materiality. Inversely related to sample size

Expected population misstatement

Auditor estimate of error in population – could be based on prior years, pilot sample, results from other related substantive procedures or test of controls

Population size

Directly related to sample size in MUS methods because MUS uses dollars as its unit.

Tolerable Deviation Rate

Tolerable mistatement/ Book Value of Population

Expected population deviation rate

Expected populatopn misstatement/ Book Value of Population

Sampling interval

Book value of population/ sample size

Basic Percision

misstatement factor x sampling interval

Tainting factor

Audit difference/Book Value of the logical unit

Projected misstatement (MUS)

Tainting factor x sampling unit

Upper Limit Misstatement for each subpopulation =

Projected misstatement in the subpopulation  x Incremental increase in the misstatement factor

UML

Basic precision + UML for each logical unit + Misstatement for units > sampling interval

Sample Size (non statistical)

(Sampling population book value/ Tolerable - Expected misstatement) x Confidence factor

Ratio projection

Projects the ratio of misstatement in the sample to the population.

Misstatement ratio

Misstatement/ Book Value of sample

Projected misstatement (Ratio Projection)

Book Population (Value) x Misstatement ratio

Difference projection

Projects the average misstatement of each item in the sample to all items in the population

Misstatement per item

Misstatement/ Customers in sample

Projected misstatement (Difference Projection)

Misstatement per item x Customers in population (balance)

Credit Approval Form

For credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer.

Customer Sales Order

Contains the details of the type and quantity of products or services ordered by the customer

Open-Order Report

A report of all customer orders for which processing has not been completed.

Shipping Document

This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information.

Sales Invoice

Used to bill the customer; contains information on the type of product or service, the quantity, the price, and the terms of trade.

Sales Journal

Once a sales invoice has been issued, and revenue can be recognized and the sales journal is used to record information about the sales transaction.

Customer Statement

This document is mailed or emailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions

Accounts Receivable Subsidiary Ledger

This ledger contains an account and the details of transactions for each customer.

Aged Trial Balance of Accounts Receivable

This report summarizes all the customer balances in the accounts receivable subsidiary ledger and each account is classified as current or placed into one of several past due categories.

Remittance Advice

This is usually the part of the customer’s bill that should be returned with the payment.

Cash Receipts Journal

This journal is used to record the cash receipts of the entity.

Credit Memorandum

This document is used to record credits for the return of goods by a customer.

Write-Off Authorization

This document authorizes the write-off of an uncollectible account receivable. Final approval is generally authorized by the treasurer

Order entry

Acceptance of customer orders for goods and services into the system in accordance with management criteria.

Credit authorization

Appropriate approval of customer orders for creditworthiness.

Shipping

Shipping of goods that has been authorized.

Billing

Issuance of sales invoices to customers for goods shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns.

Cash receipts

Processing of the receipt of cash from customers

Accounts receivable

Recording of all sales invoices, collections, and credit memoranda in individual customer accounts.

General ledger

Proper accumulation, classification, and summarization of revenues, collections, and receivables in the financial statement accounts.