1) Accountants should not have access to cash and internal controls prevent misuse of funds.
2) Ratio analysis involves comparing financial metrics over multiple years and within a year to identify anomalies.
3) Accounts receivable turnover ratio indicates how quickly a company collects payments, and an increasing average age of receivables could signal weak collection efforts or customer screening.
1) Accountants should not have access to cash and internal controls prevent misuse of funds.
2) Ratio analysis involves comparing financial metrics over multiple years and within a year to identify anomalies.
3) Accounts receivable turnover ratio indicates how quickly a company collects payments, and an increasing average age of receivables could signal weak collection efforts or customer screening.
1) Accountants should not have access to cash and internal controls prevent misuse of funds.
2) Ratio analysis involves comparing financial metrics over multiple years and within a year to identify anomalies.
3) Accounts receivable turnover ratio indicates how quickly a company collects payments, and an increasing average age of receivables could signal weak collection efforts or customer screening.
Accounting does not look at Deposit slip, only look at Cash Report.
Accountant should not be in
position to get access to money. Internal Control is prevented measure. Horizontal: compare number & ratios several years. Vertical: compare within a year (B/S: compare with Total Asset, I/S: compare with Sales). Ratio analysis: mixed & matched btw B/S & I/S, and more creative, resourceful & powerful. A/R Turnover: Sales/Net AR how quickly we collect A/R. Good or bad depends how many days competitor collect A/R, how many days we collect previously, how previous payment term. If the age of A/R increase -> not good because we may have weak screening of customers or we are doing weak job of collecting. If Sales decreases but Profit Margin increase Fraud/Fake COGS. Sales are normally recorded on the date of the invoice. The SEC requires revenue to be recognized when evidence of an arrangement exists, delivery occured or services rendered, price is fixed or determinable. Matching principle: expenses are recorded in the same period they were incurred to generate revenue; for example, interest expense is to be matched with our loans (long term debt). (accrual is expense matched with liability). Accrual is liability: reported on the balance sheet as a liabilityunder the liabilities section; accrual is not a legal obligation. It is a liability for accounting purposes, a GAAP concept that requires the entity to record for services received. Accrued interest is not to be associated as an expense, it is a liability not legally liable. Payable is a legal obligation; Accrual is an accounting obligation. We can use ratio analysis to evaluate the accuracy of the accrued expenses (on the balance sheet) against the related expenses (on the income statement) Retained Earnings: if R/E is lower than it should be (compared to what we calculated), it could be that (1) an expense was not recorded – it was delayed; did not record expense but we did pay the expense in cash (2) the expense was recorded, but it was against retained earnings and not under expenses on the income statement (which is where it should rightfully be). Revenues must also be realized or realizable when earned (Service is rendered, retailer and wholesaler: when shipping is made to customers(a) or title passes (b) whichever is later). Dividends: found on the cash flow statement, or on the footnotes. FOB shipping: title passes when seller shipped to customers Seller preference ( a & b simultaneously) FOB destination: Sale is recorded when it is received by customer (seller ships without charging customers) Customer preference ( a><b). Custody of inventory is transferred to the shipping area upon authorization of the shipping order. Accelerating Sales: Sale recognized earlier than it should be/ Sales Delayed: Shipping before billing & recording sale. So, sending out confirmation/receiving confirmation of A/R helps detecting fraud & customers mention they pay early for discount & book does not show the discount tracing from source to bookkeeping. Testing sales for understatement? Trace shipping documents to invoices recorded in salesjournal. Approach used to perform cutoff tests: Analyze transactions few days before and after year-end When auditing the revenue and collection, auditors normally select balances to confirm from the AR. Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities of unrecorded sales. Management fraud generally refers to intentional distortion of F/S. If fictitious credit sales recorded + fictitious accounts receivable directly written off as bad debt Income would not be misstated. Purpose of analytical procedures: identify unusual condition