Audit
456 Chapter Eleven
Appendix 11B
Illustrative Audit Case: Keystone Computers & Networks, Inc.
Part III: Substantive Tests—Accounts Receivable and Revenue
This part of the audit case illustrates the manner in which the auditors design substantive tests of balances. The substantive tests are illustrated for two accounts—receivables and revenue. This aspect of the audit is illustrated with the following audit documentation: • ABC’s risk assessment working paper that combines the auditors’ assessments of inherent and control risks into an overall risk of material misstatement for the assertions. • The substantive audit program of accounts receivable and revenue. • The audit sampling plan for the confirmation of accounts receivable. Adams, Barnes & Cos. assessment of control risk is described in Part II of the audit case on pages 441 through 454. To refresh your knowledge of the case, review that part as well as Part I on pages 213 through 220 of Chapter 6.
Risk Assessment—Revenue Cycle
Client: Keystone Computers & Networks, Inc. Financial Statement Date: 12/31/X5
RA-8 WL 11/24/X5
Assertion
Existence of receivables and occurrence of revenue transactions Completeness of receivables and revenue Rights to receivables Valuation of receivables Presentation and disclosure
Inherent Risk
Control Risk
Overall Risk of Material Misstatement
Fraud risk Moderate High Fraud risk Moderate
Moderate Low Moderate Moderate Maximum
High Low Moderate/High High Moderate
Fraud Risks: Description: Management may be motivated to overstate revenue and receivables to improve financial results due to impending sale of
business.
Controls: Because Keystone is a nonpublic company without an independent board or audit committee, there are no significant internal
controls to prevent management from overstating results. Audit Response: The nature, timing, and extent of audit procedures will be modified as described below: a. Accounts receivable will be confirmed
Appendix 11B
Illustrative Audit Case: Keystone Computers & Networks, Inc.
Part III: Substantive Tests—Accounts Receivable and Revenue
This part of the audit case illustrates the manner in which the auditors design substantive tests of balances. The substantive tests are illustrated for two accounts—receivables and revenue. This aspect of the audit is illustrated with the following audit documentation: • ABC’s risk assessment working paper that combines the auditors’ assessments of inherent and control risks into an overall risk of material misstatement for the assertions. • The substantive audit program of accounts receivable and revenue. • The audit sampling plan for the confirmation of accounts receivable. Adams, Barnes & Cos. assessment of control risk is described in Part II of the audit case on pages 441 through 454. To refresh your knowledge of the case, review that part as well as Part I on pages 213 through 220 of Chapter 6.
Risk Assessment—Revenue Cycle
Client: Keystone Computers & Networks, Inc. Financial Statement Date: 12/31/X5
RA-8 WL 11/24/X5
Assertion
Existence of receivables and occurrence of revenue transactions Completeness of receivables and revenue Rights to receivables Valuation of receivables Presentation and disclosure
Inherent Risk
Control Risk
Overall Risk of Material Misstatement
Fraud risk Moderate High Fraud risk Moderate
Moderate Low Moderate Moderate Maximum
High Low Moderate/High High Moderate
Fraud Risks: Description: Management may be motivated to overstate revenue and receivables to improve financial results due to impending sale of
business.
Controls: Because Keystone is a nonpublic company without an independent board or audit committee, there are no significant internal
controls to prevent management from overstating results. Audit Response: The nature, timing, and extent of audit procedures will be modified as described below: a. Accounts receivable will be confirmed