copyright © 2014 pearson education chapter 19 completing the tests in the acquisition and payment...

Copyright © 2014 Pearson Education

Chapter 19

Completing the Tests in the

Acquisition and Payment Cycle: Verification of

Selected Accounts

Chapter 19

Completing the Tests in the

Acquisition and Payment Cycle: Verification of

Selected Accounts

Copyright © 2014 Pearson Education19-2

Recognize the many accounts in the acquisition and payment cycle.

Design and perform audit tests of property, plant, and equipment and related accounts.

Design and perform audit tests of prepaid expenses.


Design and perform audit tests of accrued liabilities.

Design and perform audit tests of income and expense accounts.


Recognize the many accounts in the acquisition and payment cycle.

19-4

11


Design and perform audit tests of property, plant, and equipment and related accounts.

19-6

2


Perform analytical proceduresPerform analytical procedures

Plus verify:Plus verify:

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


Current year additions have a long-term effect on the financial statements.

Seven of the eight balance-relatedaudit objectives are used as a frame of reference.


Detail tie-in:

Current acquisitions agreewith the master file.

1. Foot the acquisition schedule.2. Trace the individual acquisitions to the master file.3. Trace the total to the general ledger.


Existence:

Current acquisitions as listed exist.

1. Examine vendors’ invoices andreceiving reports

2. Physically examine assets.


Completeness:

Existing acquisitions are recorded.

1. Examine vendors’ invoices of closelyrelated accounts to uncover items thatshould be manufacturing equipment.

2. Review lease and rental agreements.


Accuracy:

Current year acquisitions as listedare accurate.

Examine vendors’ invoices.


Classification:

Current year acquisitions as listedare correctly classified.

1. Examine vendors’ invoices inmanufacturing equipment account.

2. Examine vendors’ invoices of closelyrelated accounts.

3. Examine rent and lease expensefor capitalizable leases.


Cutoff:

Current year acquisitions are recordedin the correct period.

Review transactions near the balancesheet date for correct period.


Rights:

The client has rights to current yearacquisitions.

Examine vendors’ invoices.


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 the disposal of assets


All recorded equipment physically exists on the balance sheet date

All equipment owned is recorded


The most important objective is accuracy.

Consistent depreciation policy

Correct calculations


Accumulated depreciation as statedin the property master file agreeswith the general ledger.

Accumulated depreciation in themaster file is accurate.


Design and perform audit tests of prepaid expenses.

19-23

3


Prepaid rent Organization costs Prepaid taxes Patents Prepaid insurance Trademarks Deferred charges Copyrights


Acquisition and recording of insurance

Insurance register

Insurance expense


Compare total prepaid insurance andinsurance expense with previous years

Compute the ratio of prepaid insuranceto insurance expense and compareit with previous years

Compare the individual insurance policycoverage on the schedule of insuranceobtained with the preceding year’s schedule


Compare the computed prepaid insurancebalance for the current year on a policy-by-policy basis with that of the preceding year.

Review the insurance coverage listed onthe prepaid insurance schedule with anappropriate client official or insurance broker.


Existence and completeness:Insurance policies in the prepaid insuranceschedule exist and existing policies are listed.

Rights:The client has rights to all insurance policiesin the prepaid insurance schedule.


Accuracy and detail tie-in:Prepaid amounts are accurate and the totalis correctly added and agrees with thegeneral ledger.

Classification:Insurance expense is properly classified.

Cutoff:Insurance transactions are recorded in theproper period.


Design and perform audit tests of accrued liabilities.

19-31

4


Accrued payroll Accrued payroll taxes Accrued officers’ bonuses Accrued commissions Accrued professional fees Accrued rent Accrued interest


Design and perform audit tests of income and expense accounts.

19-34

5


Analytical procedures

Tests of controls and substantivetests of transactions

Tests of details of account balances


Analytical procedure

Compare individual expenseswith previous years

Compare individual asset andliability balances with previous years

Possible misstatement

Overstatement orunderstatement of abalance in an expenseaccount

Overstatement orunderstatement of abalance sheet account thatwill also affect an incomestatement account


Analytical procedure

Compare individual expenseswith budgets

Compare gross marginpercentage with previousyears

Compare inventory turnoverratio with previous years

Possible misstatement

Misstatement of Expenses and related Balance sheet accounts

Misstatement of cost ofgoods sold and inventory

Misstatement of cost ofgoods sold and inventory


Analytical procedure Possible misstatement

Compare prepaid insuranceexpense with previous years

Compare commission expense divided by sales with previous years

Compare individualmanufacturing expensesdivided by total mfg.expenses with previous years

Misstatement of insurance expense and prepaid insurance

Misstatement ofcommission expense andaccrued commissions

Misstatement of individual manufacturing expenses and related balance sheet accounts


Both tests of controls and substantivetests of transactions have the effect ofsimultaneously verifying balance sheet and income statement accounts.


Expense account analysis:

Repairs and maintenance

Rent and lease

Legal expense


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

These include depreciation, depletion, and theamortization of copyrights and catalog cost.

The allocation of manufacturing overhead betweeninventory and cost of goods sold is an example ofa different type of allocation that affects expenses.


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