 Hello and welcome to the session in which we would look at a CPA exercise or simply put a simulation that deals with testing assertions. Simply put, you're going to be giving an audit procedure and that audit procedure will test asserting assertion, maybe more than one assertion. The difficulty in the audit exam is this. In the audit exam, you have to use your judgment. You can memorize certain terms, certain concepts, but when it comes to application, you have to use your knowledge in order to apply certain audit procedures. So I hope this exercise will help you apply those audit procedures and get you used to those type of audit procedures. Now, obviously, you can pause this recording now, try to solve this problem, then we can work it together. But before we start, if you are a CPA candidate, which most likely you are, or an accounting student for that matter, I strongly suggest you check out my website, farhatlectures.com. What I do is I supplement your CPA review course. I don't replace your CPA review course. You keep it. That's not what I do. I add value to your CPA review course by explaining, by teaching you the material better. That's the difference between what I do in another supplemental course. I don't give you the same thing that the CPA course given you. I teach you the material. And by doing so, I can add 10 to 15 points to your CPA exam score because by learning the material, you can do better on the exam. Now, here's your risk. You can try my system because my system, I set up my courses to be very similar, not very similar, the same as your CPA review course. So when you sign up with my Wiley FAR or my Wiley AUD, it's set up the same way. You risk $30. Are you willing to risk $30 to find out whether you can improve your score or not? Now many students use my system before you can go to my LinkedIn account and check out my LinkedIn recommendation to find out how students use the system to pass. And if not for anything, check out my website to find out how well or not well your university is doing on the CPA exam. It gives you the average score. I do have a full audit course if you are an auditing student. I strongly suggest you check it out. Please connect with me on LinkedIn, like this recording, share it and follow me on Instagram and Facebook. So let's take a look at this CPA exam simulation or an exercise that's going to help you understand the audit procedures as well as testing of assertion for the account receivable slash revenue cycle because when you are doing it, when you are auditing account receivable, you are also auditing the revenue cycle at the same time because they are related to each other. So your client is Adam's company, electronic wholesaler, and what I want you to do is select the most appropriate audit procedure to test the assertions. So here are the audit procedures and we have the assertions here. Starting with the first assertion, ensure that the entity has legal title to account receivable, which is the assertion is rights and obligation. How can we test this? Now think about what are you doing here? What we are doing is we wanted to make sure that the account receivable that's listed on the books is actually the company's account receivable. Now you were saying, why not? If they are listing the account receivable, it should be their account receivable. Well, you have to be looking for if they are pledging those receivable because that could happen. They can pledge it. They can pledge it simply put. They can go to the bank and tell the bank look, we're going to pledge. Simply put, we're going to, we will give you the receivable if we don't pay. It's basically pledging your receivable to get a loan. So how do you find out whether those receivable are pledged or not? Well, you have to look at their loan agreement. In the loan agreement, if the bank is taking your receivable as a collateral as being pledged, that will appear in the loan agreement. Also, what could happen is you could be also selling your receivable. If you're selling your receivable, the bank statement, the bank confirmation, the cash receipts will identify this. Therefore, you should be looking for answers that deal with loan agreement, something to do with the bank. Let's look at the first option, review bank confirmation and loan agreement. Yes, that will solve this problem because once you review the bank agreement, you will find out whether anything is pledged or not. The loan agreement will tell you this because that's the risk. It's really on their books, but it's being pledged. And if it's being pledged, well, it's not, you know, we have to disclose this at least in the financial statement. We might have to do additional work, but at least this has to be disclosed somewhere. B, determine that recorded amount a count receivable include all amounts owed to the client, which is the completeness assertion. How do we test for the completeness assertion? So what is the completeness assertion? The completeness assertion means you are keeping something out. You are not recording something. So it's basically something that does not exist on the books. So how do we find out whether you are, how do we test for that completeness to find out whether you recorded everything? If we are dealing with sales, what do we have to do? Well, we have to make sure that select maybe a sample of shipping document and find out if those items were shipped. And if they were shipped, that's great. Are they recorded in the sales journal? Are they recorded in the account receivable? Are they updated the sub ledger for the client to make sure all the shipment has been recorded completeness? So let's see. Review the draft of the financial statement that will not help us. Select the sample of shipping document. That's good. Match them with the related sales invoice. That's good. And determine that they've been included in the sales journal. Excellent. And the account receivable sub ledger. Yeah, I would say three will be the answer for this. Why? Because you want to make sure that everything that was shipped, all sales are actually recorded. So you will start with the shipping document and you want to make sure everything that's been shipped that's actually a sale exists actually on the books is recorded on the books. It's completed. Therefore, this will satisfy the completeness. Verify that all account receivable are recorded in the correct period, which is the cutoff assertion. How do we make sure that it's recorded in the proper period? For one thing, what is the risk here? The risk is toward the end of the period we could be recognizing some sales, some account receivable prematurely, or we could be deferring some sales because we met our expectation to period two. Therefore, what we have to do, we look toward the end of the period and look at the cutoff, look at documents to find out when was it shipped, when did the sale took place, and when was it actually recorded. So few days after, few days before, few days after during the period to find out if they are recorded in the proper period, which is the cutoff. So select the sample of shipping document for a few days before and few days after your end. I would say four is the answer for this. That will do this. That will satisfy your cutoff assertion. Let's take a look at D. Ensure that all allowance for incollectible account is properly stated, which is accuracy, valuation, and allocation. What does that mean? Here we are dealing with the credit worthiness. Here we are dealing with the credit worthiness of the receivable. Do they have to book any allowance for doubtful account? How long is the account receivable outstanding? What do you do under those circumstances? For one thing, you have to understand the industry itself. That's good. Like for example, if the industry is experiencing some difficulty, you will notice they're going to have to increase their allowance. But what you have to do too is talk to the manager, review the account receivable with the manager, with the credit manager at the company, and learn how did they come up with those allowance for doubtful account, then you would use your judgment. I would say you would review the aging of account receivable with the credit manager. You would still have to use your judgment, whether that number is appropriate or not. But this is the audit procedure you would use to test for these assertions. E, confirm that recorded account receivable are valid existence. Are they really actual sales? This should be an easy step in a sense that you should know this by heart. The best way to do so is to send a confirmation to the customers. Now, the customer may or may not respond. There are alternative procedures. You really want to know that this step for existence confirmation is the best. So confirmation of account receivable. Now there's a lot of steps for confirmation. If you go to my website, farhatlectures.com, I do cover, I have one whole recording, one whole lesson about confirmation. There's positive confirmation, negative confirmation, alternative procedures when the client doesn't respond, so on and so forth. So you have to be very familiar, extremely familiar with confirmation. It's not only, you know, it tests existence, yes, it tests existence, but there are other steps that deals with a confirmation. F, ensure all revenue related disclosures are made in the financial statements. How do you know whether they made all the disclosure? You would review the financial statements and you would read the notes. And based on your knowledge about the company, you want to make sure that all the notes, the notes reflect everything that's stated in numbers and any relevant information that the users of these financial statement would need to know. So you would review the draft of the financial statement and make sure everything is there. Everything that's supposed to be there is there. For example, if something is pledged, you want to make sure it's there. If they have anything outstanding in terms of lawsuits, you want to make sure it's there, so on and so forth. So this is how you would do so. So notice here, what you do, what we did is we looked at the assertions. So you want to, first of all, like, why is this topic, it can be difficult for students? Well, for one thing, if you don't understand fully the assertions, what does it mean completeness? What does it mean cut off? What does it mean existence? Then you're not going to be able to match the assertion with the other procedure. So first, you really have to understand, so here you have to understand three things. You have to understand the revenue cycle and each cycle will have different assertions. And again, on farhatlectures.com, I have plenty of recordings for the revenue cycle, the expenditure cycle, the inventory and warehousing cycle, the payroll cycle. So we'll teach you all these cycles. But the point is you have to have a good understanding of the cycle, so that you have to know three things in this recording. You have to understand really the revenue cycle itself. From an accounting perspective, how does the revenue cycle work? You have to understand assertions, then you have to understand the type of evidence, and you have to match those three together in order to properly answer a problem like this. Again, this is only about revenue. This question could be given about expenditure, about how to verify the inventory assertion, so on and so forth. So again, I'm going to invite you to visit farhatlectures.com and you will find the appropriate resources to help you prepare for these type of questions. The difference between what I do in a CPA review course is I teach you the material. I don't give you any shortcuts. I don't promise you I'll help you pass in 20 days. I will help you understand the material, whether it takes you 20 days or whatever time you need to take, but I will help you learn it. That's the difference between what I do in a CPA review course and other supplemental material. Other supplemental material, they even sometimes they cut down on their material to help you pass faster. I don't help you pass faster. I help you pass period. For now, stay safe, good luck, and study hard for the exam.