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

17 - 2Copyright 2003 Pearson Education Canada Inc.

Theacquisition and

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

fects manyaccounts.

asse

tsliabilities expenses

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asse

tsHow are

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

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asse

ts

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

- assets are acquired for use or sale

property, plant, & equipment

inventory

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asse

ts

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

- prepaid expenses are incurred

prepaidinsurance

prepaidrent

prepaidtaxes

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asse

ts

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

- acquisitions even- tually require cash payment

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Howare liabilities

affected by theacquisition

and paymentcycle?

liabilities

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Howare liabilities

affected by theacquisition

and paymentcycle?

liabilities

Liabilities are affected whenassets or services are acquired

with a promise to pay ratherthan a payment.

17 - 9Copyright 2003 Pearson Education Canada Inc.

Howare expenses

affected by theacquisition and

paymentcycle?

expenses

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Howare expenses

affected by theacquisition and

paymentcycle?

expenses

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

17 - 11Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

17 - 12Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

17 - 13Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- perform analytical procedures- verify current-year acquisitions

17 - 14Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

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

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

17 - 15Copyright 2003 Pearson Education Canada Inc.

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

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

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.

17 - 16Copyright 2003 Pearson Education Canada Inc.

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

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

17 - 17Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

These 3 proceduresprimarily address the existence

of newly-acquired assets.

17 - 18Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions

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

What proceduresaddress the completenessof newly-acquired assets?

17 - 19Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment- verify current-year acquisitions

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

To addresscompleteness of newly-acquiredassets, reverse the direction of

these procedures.

17 - 20Copyright 2003 Pearson Education Canada Inc.

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

Big Machine Co.INVOICE

Thanks for buy-ing our BDY

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

~Select a sample of entries in the acqui- sitions journal and trace to vendor in- voices 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

17 - 21Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

17 - 22Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

17 - 23Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

ForSale

17 - 24Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify current-year disposals ~ review whether newly-acquired assets replace existing assets ~ analyze gains on the disposal of as- sets 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

17 - 25Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify current-year disposals ~ analyze gains on the disposal of as- sets 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

17 - 26Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

17 - 27Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

how?

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Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- 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.

17 - 29Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

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

17 - 30Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify amortization expense

What is the auditor’s

greatest concernregarding amort-

ization expense?

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Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify depreciation expenseWhat is the

auditor’s greatest concern re-garding amortization expense?

accuracy

17 - 32Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify amortization expense

What audit procedures addressthe auditor’s concern regarding accu-

racy of amortization expense?

17 - 33Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify amortization expense

What audit procedures addressthe auditor’s concern regarding accu-

racy of amortization expense?

- recalculate amortization expense

17 - 34Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify amortization expense

What audit procedures addressthe auditor’s concern regarding accu-

racy of amortization expense?

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

17 - 35Copyright 2003 Pearson Education Canada Inc.

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

17 - 36Copyright 2003 Pearson Education Canada Inc.

Auditing Manufacturing EquipmentAuditing Manufacturing Equipment

- verify ending accumulated amortization balances

What audit procedures addressthe auditor’s concern regarding accu-

racy of accumulated amortization ?

17 - 37Copyright 2003 Pearson Education Canada Inc.

What audit procedures addressthe auditor’s concern regarding accu-

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.

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What audit procedures addressthe auditor’s concern regarding accu-

racy of accumulated amortization?

recalculateaccumulatedamortization

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Auditing Prepaid Expenses and Auditing Prepaid Expenses and Other AssetsOther Assets

organizationcosts

prepaidrent

prepaidtaxes

prepaidinsurance

patents

trade-marks

deferredcharges

copy-rights

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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

17 - 41Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

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

17 - 42Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

a prepaid expense?

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

17 - 43Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

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

17 - 44Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

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

17 - 45Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

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

17 - 46Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

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

17 - 47Copyright 2003 Pearson Education Canada Inc.

Auditing Accrued LiabilitiesAuditing Accrued Liabilities

accruedbonuses

accruedcommis-

sions

accruedtaxes

accruedinterest

accruedpayroll

accruedpension

costs

accruedprofessional

fees

accruedrent

accruedwarranty

costs

17 - 48Copyright 2003 Pearson Education Canada Inc.

Auditing Accrued LiabilitiesAuditing Accrued Liabilities

accruedbonuses

accruedcommis-

sions

accruedtaxes

accruedinterest

accruedpayroll

accruedpension

costs

accruedprofessional

fees

accruedrent

accruedwarranty

costs

What audit proce-dures are appropriate for

an accrued liability?

17 - 49Copyright 2003 Pearson Education Canada Inc.

What audit proce-dures are appropriate for

an accrued liability?

The audit proceduresappropriate for accruedliabilities are similar to

those appropriate for pre-paid expenses, depending

on the client.

17 - 50Copyright 2003 Pearson Education Canada Inc.

Auditing OperationsAuditing Operations

17 - 51Copyright 2003 Pearson Education Canada Inc.

Auditing OperationsAuditing Operations- perform analytical procedures

17 - 52Copyright 2003 Pearson Education Canada Inc.

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

17 - 53Copyright 2003 Pearson Education Canada Inc.

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

17 - 54Copyright 2003 Pearson Education Canada Inc.

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

17 - 55Copyright 2003 Pearson Education Canada Inc.

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