Question

The following audit procedures are included in the audit program because of heightened risks of material misstatements due to fraud.

1. Use audit software to search purchase transactions to identify any with nonstandard vendor numbers or with vendor names reflecting related parties.

2. Search sales databases for missing bill of lading numbers.

3. Use audit software to search for journal entries posted to the sales revenue account from a nonstandard source (other than the daily sales journal).

4. Use audit software to search cash disbursement master files for missing check numbers.

5. Search the accounts receivable master file for account balances with missing or unusual customer numbers (e.g., “99999”).

6. Use audit software to create a list of all credits to the repair and maintenance expense account for follow-up testing.

7. Engage an actuarial specialist to examine management’s assumptions about average length of employment and average life expectancy of retirees used in pension accounting decisions.

8. Send confirmations to customers for large sales transactions made in the fourth quarter of the year to obtain customer responses about terms related to the transfer of title and ability to return merchandise.

Required

For each audit procedure:

1. Describe the type of fraud risk that is likely associated with the need for this audit procedure.

2. Identify the related accounts likely affected by the potential fraud misstatement.

3. Identify the related audit objective(s) that this procedure addresses.

Answer 1

Audit Procedure	Fraud Risk	Accounts likely affected by potential fraud	Audit Objective addressed
Use audit software to search purchase transactions to identify any with nonstandard vendor numbers or with vendor names reflecting related parties.	Unauthorized Vendor Code creation to book fake purchases and pay off the fake liability to Related Parties.	Purchases Accounts Payable Cash	Existence
Search sales databases for missing bill of lading numbers.	Fake Sales	Sales / Sales Returns Accounts Receivables	Occurrence
Use audit software to search for journal entries posted to the sales revenue account from a nonstandard source (other than the daily sales journal).	Fake Sales	Sales / Sales Returns Accounts Receivables	Occurrence
Use audit software to search cash disbursement master files for missing check numbers.	Missing Checks could mean unauthorized disbursements, not recorded in books.	Expenses Accounts Payables Cash	Completeness
Search the accounts receivable master file for account balances with missing or unusual customer numbers (e.g., “99999”).	Unauthorized Customer Code creation to book fake Sales/Sales Returns or allowance for doubtful debts.	Sales / Sales Returns Accounts Receivables Allowance for Doubtful Debts	Existence
Use audit software to create a list of all credits to the repair and maintenance expense account for follow-up testing.	Capitalization of revenue expenses/items.	Expense PPE	Completeness / Existence
Engage an actuarial specialist to examine management’s assumptions about average length of employment and average life expectancy of retirees used in pension accounting decisions.	Understatement of retirement benefit expenses.	Retirement Benefit Expenses Retirement Benefit liabilities	Valuation
Send confirmations to customers for large sales transactions made in the fourth quarter of the year to obtain customer responses about terms related to the transfer of title and ability to return merchandise.	Overstatement of Sales Revenue by recording fake Sales or Sales with return arrangements.	Sales Accounts Receivables	Existence Valuation Cut off procedures