Copyright 2003 Pearson Education Canada Inc. CHAPTER 17 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts
Copyright 2003 Pearson Education Canada Inc. The acquisition and payment cycle even- tually affects most as- pects of an account- ing system and af- fects many accounts. assets liabilities expenses
Copyright 2003 Pearson Education Canada Inc. assets How are assets affected by the acquisi- tion and pay- ment cycle?
Copyright 2003 Pearson Education Canada Inc. assets How are assets affected by the acquisi- tion and pay- ment cycle? - assets are acquired for use or sale property, plant, & equipment inventory
Copyright 2003 Pearson Education Canada Inc. assets How are assets affected by the acquisi- tion and pay- ment cycle? - prepaid expenses are incurred prepaid insurance prepaid rent prepaid taxes
Copyright 2003 Pearson Education Canada Inc. assets How are assets affected by the acquisi- tion and pay- ment cycle? - acquisitions even- tually require cash payment
Copyright 2003 Pearson Education Canada Inc. How are liabilities affected by the acquisition and payment cycle? liabilities
Copyright 2003 Pearson Education Canada Inc. How are liabilities affected by the acquisition and payment cycle? liabilities Liabilities are affected when assets or services are acquired with a promise to pay rather than a payment.
Copyright 2003 Pearson Education Canada Inc. How are expenses affected by the acquisition and payment cycle? expenses
Copyright 2003 Pearson Education Canada Inc. How are expenses affected by the acquisition and payment cycle? expenses Expenses are affected when goods and services are acquired and prepaid expenses are used.
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures examples: depreciation expense / equipment manufacturing costs / production
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions
Copyright 2003 Pearson Education Canada Inc. Auditing 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 journal description _ $$ _ June 1, 2004 Factory Equipment 5289 capital asset master description _ $$ _ June 1, 2004 Factory Equipment 5289
Copyright 2003 Pearson Education Canada Inc. Auditing 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 journal description _ $$ _ June 1, 2004 Factory Equipment 5289 Ace Company RECEIVING REPORT Received one case (count 200) BDY #2 pencils on 6/1/x0. Condition: OK receiving employee Big Machine Co. INVOICE Thanks for buy- ing our BDY model. Please pay $5,289 by 6/15/04.
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acqui- sitions journal and physically examine the related assets. acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289
Copyright 2003 Pearson Education Canada Inc. Auditing 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 procedures primarily address the existence of newly-acquired assets.
Copyright 2003 Pearson Education Canada Inc. Auditing 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 procedures address the completeness of newly-acquired assets?
Copyright 2003 Pearson Education Canada Inc. Auditing 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 address completeness of newly-acquired assets, reverse the direction of these procedures.
Copyright 2003 Pearson Education Canada Inc. acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289 Big Machine Co. INVOICE Thanks for buy- ing our BDY model. Please pay $5289 by 6/15/03. ~Select a sample of entries in the acqui- sitions journal and trace to vendor in- voices and receiving reports. To address completeness of newly-acquired assets, reverse the direction of these procedures. Example: Select a sample of receiving reports and trace to vendor invoices and the acquisitions journal. Ace Company RECEIVING REPORT Received one BDY machine on 6/1/04. Condition: OK receiving employee
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify current-year disposals ~ review whether newly-acquired assets replace existing assets
Copyright 2003 Pearson Education Canada Inc. Auditing 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 For Sale
Copyright 2003 Pearson Education Canada Inc. Auditing 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
Copyright 2003 Pearson Education Canada Inc. Auditing 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
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances how?
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify ending asset balances general ledger account _ $$ _ Fixed Assets capital asset master description _ $$ _ Total Fixed Assets EXAMPLE PROCEDURE: Trace totals from capital asset master file to the general ledger.
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances - verify amortization expense
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify amortization expense What is the auditor’s greatest concern regarding amort- ization expense ?
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify depreciation expense What is the auditor’s greatest concern re- garding amortization expense? accuracy
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify amortization expense What audit procedures address the auditor’s concern regarding accu- racy of amortization expense?
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify amortization expense What audit procedures address the auditor’s concern regarding accu- racy of amortization expense? - recalculate amortization expense
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify amortization expense What audit procedures address the auditor’s concern regarding accu- racy of amortization expense? - recalculate amortization expense - determine whether the client’s amortiz- ation policy is consistent
Copyright 2003 Pearson Education Canada Inc. Auditing 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
Copyright 2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify ending accumulated amortization balances What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ?
Copyright 2003 Pearson Education Canada Inc. What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ? general ledger account _ $$ _ Accumulated Amortization capital asset master description _ $$ _ Total Accum. Amortization Trace totals from capital asset master file to the general ledger.
Copyright 2003 Pearson Education Canada Inc. What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization? recalculate accumulated amortization
Copyright 2003 Pearson Education Canada Inc. Auditing Prepaid Expenses and Other Assets organization costs prepaid rent prepaid taxes prepaid insurance patents trade- marks deferred charges copy- rights
Copyright 2003 Pearson Education Canada Inc. patents organization costs prepaid rent prepaid taxes prepaid insurance trade- marks deferred charges copy- rights What audit proce- dures are appropriate for a prepaid expense? Auditing Prepaid Expenses and Other Assets
Copyright 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
Copyright 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
Copyright 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
Copyright 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
Copyright 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
Copyright 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
Copyright 2003 Pearson Education Canada Inc. Auditing Accrued Liabilities accrued bonuses accrued commis- sions accrued taxes accrued interest accrued payroll accrued pension costs accrued professional fees accrued rent accrued warranty costs
Copyright 2003 Pearson Education Canada Inc. Auditing Accrued Liabilities accrued bonuses accrued commis- sions accrued taxes accrued interest accrued payroll accrued pension costs accrued professional fees accrued rent accrued warranty costs What audit proce- dures are appropriate for an accrued liability?
Copyright 2003 Pearson Education Canada Inc. What audit proce- dures are appropriate for an accrued liability? The audit procedures appropriate for accrued liabilities are similar to those appropriate for pre- paid expenses, depending on the client.
Copyright 2003 Pearson Education Canada Inc. Auditing Operations
Copyright 2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures
Copyright 2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures - perform tests of controls
Copyright 2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures - perform tests of controls - perform an analysis of account balances
Copyright 2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures - perform tests of controls - perform an analysis of account balances - perform tests of details of balance sheet accounts
Copyright 2003 Pearson Education Canada Inc. Auditing 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