Addthis Arens Chapter19

(1)

Completing the Tests in the Acquisition

and Payment Cycle: Verification of

Selected Accounts

Chapter 19

(2)

Learning Objective 1

Recognize the many accounts

in the acquisition and

(3)

Accounts Associated with the

Acquisition and Payment Cycle

 Cash

 Inventory  Supplies

 Property, plant, and equipment

 Patents, trademarks, and copyrights  Prepaid rent

 Prepaid taxes

(4)

Accounts Associated with the

Acquisition and Payment Cycle

 Cost of goods sold  Rent expense

 Property taxes

 Income tax expense  Insurance expense  Professional fees  Retirement benefits  Utilities

(5)

Accounts Associated with the

Acquisition and Payment Cycle

 Accounts payable  Rent payable

 Accrued professional fees  Accrued property taxes

 Other accrued expenses  Income taxes payable

(6)

Identify client business risks affecting

other accounts

Methodology for Designing

Tests of Details of Balances

Set tolerable misstatement and assess inherent

risk for accounts

Assess control risk for accounts

Phase I

(7)

Methodology for Designing

Tests of Details of Balances

Design and perform tests of controls and

substantive tests of transactions for the acquisition and payment cycle

(8)

Timing

Items to select Sample size Audit procedures

Methodology for Designing

Tests of Details of Balances

Design and perform analytical procedures

for the acquisition and payment cycle

Design tests of details of account balances

to satisfy

balance-related audit objectives

(9)

Learning Objective 2

Design and perform audit tests of

property, plant, and equipment

(10)

Classifications of Property, Plant,

and Equipment Accounts

 Land and land improvements

 Buildings and building improvements  Manufacturing equipment

 Furniture and fixtures  Autos and trucks

 Leasehold improvements

 Construction-in-process for property,

(11)

Manufacturing Equipment

and Related Accounts

Manufacturing

Equipment AccumulatedDepreciated Beginning

balance Beginningbalance

Depreciation Expense Gain or Loss

on Disposals

Current period depreciation Ending balance Disposals

Disposals

Acquisitions Ending

(12)

Auditing Manufacturing Equipment

and Related Accounts

Perform analytical procedures

 Current year acquisitions  Current year disposals

 Ending balance in the asset account  Depreciation expense

 Ending balance in accumulated depreciation

 Current year acquisitions  Current year disposals

 Ending balance in the asset account  Depreciation expense

 Ending balance in accumulated depreciation

Plus verify:

(13)

Analytical Procedures for

Manufacturing Equipment

Compare accumulated

depreciation divided by gross manufacturing equipment cost with previous years

Misstatement in

accumulated depreciation Analytical procedure

Compare depreciation expense divided by gross manufacturing equipment cost with previous years

Misstatement in

(14)

Analytical Procedures for

Manufacturing Equipment

Analytical procedure

Compare monthly or annual repairs and maintenance,

supplies expense, small tools expense, and similar accounts with previous years

Expensing accounts that should be capitalized

Possible misstatement

Compare gross manufacturing cost divided by some measure of production with previous years

(15)

Verify Current Year Acquisitions

The correct recording of current year additions is important because of the long-term effect

the assets have on the financial statements.

Because of the importance of current period

(16)

Balance-Related Audit

Objectives

Current acquisitions agree with the master file.

Detail tie-in:

1. Foot the acquisition schedule. 2. Trace the individual acquisitions to the master file.

(17)

Balance-Related Audit

Objectives

Current acquisitions as listed exist. Existence:

1. Examine vendors’ invoices and receiving reports

(18)

Balance-Related Audit

Objectives

Existing acquisitions are recorded. Completeness:

(19)

Balance-Related Audit

Objectives

Current year acquisitions as listed are accurate.

Accuracy:

(20)

Balance-Related Audit

Objectives

Current year acquisitions as listed are correctly classified.

Classification:

1. Examine vendors’ invoices in

manufacturing equipment account. 2. Examine vendors’ invoices of closely

related accounts.

(21)

Current year acquisitions are recorded in the correct period.

Balance-Related Audit

Objectives

Cutoff:

(22)

The client has rights to current year acquisitions.

Major Balance-Related

Audit Objectives

Rights:

(23)

Verify Current Year Disposals

_{Review whether newly acquired assets}

replace existing assets

_{Analyze gains and losses on disposal} _{Review documents for indications of}

deletion of equipment

_{Make inquiries about the possibility of}

(24)

Verify Ending Balance

of Asset Accounts

2. All equipment owned is recorded. 1. All recorded equipment physically

(25)

Verify Depreciation Expense

The most important objective is accuracy.

 _{Consistent depreciation policy}

(26)

Verify Ending Balance in

Accumulated Depreciation

1. Accumulated depreciation as stated in the property master file agrees

with the general ledger.

(27)

Learning Objective 3

Design and perform audit tests

(28)

Audit of Prepaid Expenses

 Prepaid rent

 Organization costs  Prepaid taxes

 Patents

 Prepaid insurance  Trademarks

(29)

Prepaid Insurance and Related

Accounts

Prepaid Insurance Beginning

balance

Acquisitions

Ending balance

Current period insurance

expense

(30)

Internal Controls

_{Acquisition and recording of insurance}

_{Insurance register}

(31)

Audit Tests

_{Compare total prepaid insurance and}

insurance expense with previous years

_{Compute the ratio of prepaid insurance}

to insurance expense and compare it with previous years

_{Compare the individual insurance policy}

coverage on the schedule of insurance

(32)

Audit Tests

_{Compare the computed prepaid insurance}

balance for the current year on a policy-by-policy basis with that of the preceding year.

_{Review the}_{insurance coverage}_{listed on}

the prepaid insurance schedule with an

(33)

Balance-related Audit

Objectives

Existence and completeness:

Insurance policies in the prepaid insurance

schedule exist and existing policies are listed.

Rights:

(34)

Balance-related Audit

Objectives

Accuracy and detail tie-in:

Prepaid amounts are accurate and the total is correctly added and agrees with the

general ledger. Classification:

Insurance expense is properly classified. Cutoff:

(35)

Learning Objective 4

Design and perform audit tests

(36)

Audit of Accrued Liabilities

 Accrued payroll

 Accrued payroll taxes

 Accrued officers’ bonuses  Accrued commissions

 Accrued professional fees  Accrued rent

(37)

Accrued Property Taxes

and Related Accounts

Accrued Property Taxes Beginning balance

Current period property tax expense

Ending balance

Property Tax Expense Payments

(38)

Learning Objective 5

Design and perform audit tests of

(39)

Approach to Auditing Income

and Expense Accounts

_{Analytical procedures}

_{Tests of controls and substantive}

tests of transactions

(40)

Analytical Procedures for Income

and Expense Accounts

Compare individual asset and liability balances with previous years

Overstatement or understatement of a

balance sheet account that will also affect an income statement account

Compare individual expenses

with previous years Overstatement orunderstatement of a balance in an expense account

(41)

Analytical Procedures for Income

and Expense Accounts

Compare individual expenses

with budgets Misstatement of expensesand related balance sheet accounts

Compare gross margin percentage with previous years

Misstatement of cost of goods sold and inventory

Compare inventory turnover

(42)

Analytical Procedures for Income

and Expense Accounts

Compare prepaid insurance

expense with previous years Misstatement of insuranceexpense and prepaid insurance

Compare commission expense divided by sales with

previous years

Misstatement of

commission expense and accrued commissions

Compare individual

manufacturing expenses

divided by total manufacturing

(43)

Tests of Controls and Substantive

Test of Transactions

(44)

Tests of Details of Account

Balances – Expense Analysis

Expense account analysis:

_{Repairs and maintenance} _{Rent and lease}

(45)

Tests of Details of Account

Balances – Allocation

Several expense accounts result from the allocation of accounting data rather than discrete transactions.

These include depreciation, depletion, and the amortization of copyrights and catalog cost.

(46)