17 - 1 copyright 2003 pearson education canada inc. chapter 17 completing the tests in the...

17 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 17Completing the Tests in

the Acquisition and Payment Cycle:

Verification of Selected Accounts


Theacquisition and

payment cycle even- tually affects most as- pects of an account-ing system and af-

fects manyaccounts.

asse

tsliabilities expenses


asse

tsHow are

assets affectedby the acquisi-tion and pay-ment cycle?


asse

ts

How areassets affectedby the acquisi-tion and pay-ment cycle?

- assets are acquired for use or sale

property, plant, & equipment

inventory


asse

ts


- prepaid expenses are incurred

prepaidinsurance

prepaidrent

prepaidtaxes


asse

ts


- acquisitions even- tually require cash payment


Howare liabilities

affected by theacquisition

and paymentcycle?

liabilities


Howare liabilities

affected by theacquisition

and paymentcycle?

liabilities

Liabilities are affected whenassets or services are acquired

with a promise to pay ratherthan a payment.


Howare expenses

affected by theacquisition and

paymentcycle?

expenses


Howare expenses

affected by theacquisition and

paymentcycle?

expenses

Expenses are affected whengoods and services are acquiredand prepaid expenses are used.


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment



- perform analytical procedures examples: depreciation expense / equipment manufacturing costs / production



- perform analytical procedures- verify current-year acquisitions



- verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acquisitions journal and trace to capital asset master file.

acquisitions journaldescription _ $$ _June 1, 2004Factory Equipment 5289

capital asset master description _ $$ _June 1, 2004Factory Equipment 5289


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.


Ace CompanyRECEIVING

REPORTReceived onecase (count 200)BDY #2 pencilson 6/1/x0.Condition: OK

receiving employee

Big Machine Co.INVOICE

Thanks for buy-ing our BDY

model. Pleasepay $5,289by 6/15/04.


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acquisitions journal and physically examine the related assets.




- verify current-year acquisitions~Select a sample of entries in the acquisitions journal and trace to capital asset master file.~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.~Select a sample of entries in the acquisitions journal and physically examine the related assets.

These 3 proceduresprimarily address the existence

of newly-acquired assets.


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions

~Select a sample of entries in the acquisitions journal and trace to capital asset master file.~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.~Select a sample of entries in the acquisitions journal and physically examine the related assets.

What proceduresaddress the completenessof newly-acquired assets?


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions

~Select a sample of entries in the acquisitions journal and trace to capital asset master file.~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.~Select a sample of entries in the acquisitions journal and physically examine the related assets.

To addresscompleteness of newly-acquiredassets, reverse the direction of

these procedures.



Big Machine Co.INVOICE

Thanks for buy-ing our BDY

model. Pleasepay $5289by 6/15/03.

~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.

To addresscompleteness of newly-acquiredassets, reverse the direction of

these procedures.Example: Select a sample of receiving reports andtrace to vendor invoices and the acquisitions journal.

Ace CompanyRECEIVING REPORT

Received one BDYmachine on 6/1/04.Condition: OK

receiving employee



- perform analytical procedures- verify current-year acquisitions- verify current-year disposals



- verify current-year disposals ~ review whether newly-acquired assets replace existing assets



- verify current-year disposals ~ review whether newly-acquired assets replace existing assets ~ analyze gains on the disposal of assets and miscellaneous income for receipts from asset disposals

ForSale



- verify current-year disposals ~ review whether newly-acquired assets replace existing assets ~ analyze gains on the disposal of assets and miscellaneous income for receipts from asset disposals ~ review plant modifications and changes in product line, taxes, or in- surance coverage for indications of deletions of equipment



- verify current-year disposals ~ analyze gains on the disposal of assets and miscellaneous income for receipts from asset disposals ~ review plant modifications and changes in product line, taxes, or in- surance coverage for indications of deletions of equipment ~ make enquiries of management and production personnel about disposals



- perform analytical procedures- verify current-year acquisitions- verify current-year disposals- verify ending asset balances



- perform analytical procedures- verify current-year acquisitions- verify current-year disposals- verify ending asset balances

how?



- verify ending asset balances

general ledger account _ $$ _Fixed Assets 875289

capital asset master description _ $$ _Total Fixed Assets 875289

EXAMPLE PROCEDURE: Trace totalsfrom capital asset master file to the general ledger.



- perform analytical procedures- verify current-year acquisitions- verify current-year disposals- verify ending asset balances- verify amortization expense



- verify amortization expense

What is the auditor’s

greatest concernregarding amort-

ization expense?



- verify depreciation expenseWhat is the

auditor’s greatest concern re-garding amortization expense?

accuracy




What audit procedures addressthe auditor’s concern regarding accu-

racy of amortization expense?






- recalculate amortization expense






- recalculate amortization expense- determine whether the client’s amortization policy is consistent


Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- perform analytical procedures- verify current-year acquisitions- verify current-year disposals- verify ending asset balances- verify amortization expense- verify ending accumulated amortization balances



- verify ending accumulated amortization balances


racy of accumulated amortization ?



racy of accumulated amortization ?

general ledger account _ $$ _Accumulated Amortization 75289

capital asset master description _ $$ _Total Accum. Amortization 75289

Trace totals from capital assetmaster file to the general

ledger.



racy of accumulated amortization?

recalculateaccumulatedamortization


Auditing Prepaid Expenses and Auditing Prepaid Expenses and Other AssetsOther Assets

organizationcosts

prepaidrent

prepaidtaxes

prepaidinsurance

patents

trade-marks

deferredcharges

copy-rights


patents

organizationcosts

prepaidrent

prepaidtaxes

prepaidinsurance

trade-marks

deferredcharges

copy-rights

What audit proce-dures are appropriate for

a prepaid expense?

Auditing Prepaid Expenses and Auditing Prepaid Expenses and Other AssetsOther Assets



a prepaid expense?

- perform analytical procedures EXAMPLES: ~ compare prepaid expense and the related expense account to prior years ~ compare prepaid expense / related expense account to prior years



a prepaid expense?

- perform analytical procedures- examine documentation and other evi- dence supporting the existence and completeness of prepaid expenses



a prepaid expense?

- perform analytical procedures- examine documentation and other evi- dence supporting the existence and completeness of prepaid expenses- recalculate prepaid expenses and trace to the general ledger



a prepaid expense?

- examine documentation and other evi- dence supporting the existence and completeness of prepaid expenses- recalculate prepaid expenses and trace to the general ledger - determine whether the expense related to the prepaid expense is properly classified



a prepaid expense?

- recalculate prepaid expenses and trace to the general ledger - determine whether the expense related to the prepaid expense is properly classified- determine whether prepaid expense transactions are recorded in the proper period



a prepaid expense?

- determine whether the expense related to the prepaid expense is properly classified- determine whether prepaid expense transactions are recorded in the proper period- determine whether prepaid expenses are properly presented and disclosed


Auditing Accrued LiabilitiesAuditing Accrued Liabilities

accruedbonuses

accruedcommis-

sions

accruedtaxes

accruedinterest

accruedpayroll

accruedpension

costs

accruedprofessional

fees

accruedrent

accruedwarranty

costs


Auditing Accrued LiabilitiesAuditing Accrued Liabilities

accruedbonuses

accruedcommis-

sions

accruedtaxes

accruedinterest

accruedpayroll

accruedpension

costs

accruedprofessional

fees

accruedrent

accruedwarranty

costs


an accrued liability?



an accrued liability?

The audit proceduresappropriate for accruedliabilities are similar to

those appropriate for pre-paid expenses, depending

on the client.


Auditing OperationsAuditing Operations


Auditing OperationsAuditing Operations- perform analytical procedures


Auditing OperationsAuditing Operations- perform analytical procedures- perform tests of controls


Auditing OperationsAuditing Operations- perform analytical procedures- perform tests of controls- perform an analysis of account balances


Auditing OperationsAuditing Operations- perform analytical procedures- perform tests of controls- perform an analysis of account balances- perform tests of details of balance sheet accounts


Auditing OperationsAuditing Operations- perform analytical procedures- perform tests of controls- perform an analysis of account balances- perform tests of details of balance sheet accounts- perform tests of allocations

17 - 1 copyright 2003 pearson education canada inc. chapter 17 completing the tests in the...

Documents

pearson education canada

payment cycle

equipment inventory

assets liabilities expenses

expenses expenses

cash payment slide

factory equipment

prepaid expenses