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17 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 17 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts.

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Presentation on theme: "17 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 17 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts."— Presentation transcript:

1 17 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 17 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

2 17 - 2 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

3 17 - 3 Copyright  2003 Pearson Education Canada Inc. assets How are assets affected by the acquisi- tion and pay- ment cycle?

4 17 - 4 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

5 17 - 5 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

6 17 - 6 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

7 17 - 7 Copyright  2003 Pearson Education Canada Inc. How are liabilities affected by the acquisition and payment cycle? liabilities

8 17 - 8 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.

9 17 - 9 Copyright  2003 Pearson Education Canada Inc. How are expenses affected by the acquisition and payment cycle? expenses

10 17 - 10 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.

11 17 - 11 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment

12 17 - 12 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures examples: depreciation expense / equipment manufacturing costs / production

13 17 - 13 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions

14 17 - 14 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

15 17 - 15 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.

16 17 - 16 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

17 17 - 17 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.

18 17 - 18 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?

19 17 - 19 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.

20 17 - 20 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

21 17 - 21 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals

22 17 - 22 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify current-year disposals ~ review whether newly-acquired assets replace existing assets

23 17 - 23 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

24 17 - 24 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

25 17 - 25 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

26 17 - 26 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances

27 17 - 27 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?

28 17 - 28 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify ending asset balances general ledger account _ $$ _ Fixed Assets 875289 capital asset master description _ $$ _ Total Fixed Assets 875289 EXAMPLE PROCEDURE: Trace totals from capital asset master file to the general ledger.

29 17 - 29 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

30 17 - 30 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify amortization expense What is the auditor’s greatest concern regarding amort- ization expense ?

31 17 - 31 Copyright  2003 Pearson Education Canada Inc. Auditing Manufacturing Equipment - verify depreciation expense What is the auditor’s greatest concern re- garding amortization expense? accuracy

32 17 - 32 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?

33 17 - 33 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

34 17 - 34 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

35 17 - 35 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

36 17 - 36 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 ?

37 17 - 37 Copyright  2003 Pearson Education Canada Inc. What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ? general ledger account _ $$ _ Accumulated Amortization 75289 capital asset master description _ $$ _ Total Accum. Amortization 75289 Trace totals from capital asset master file to the general ledger.

38 17 - 38 Copyright  2003 Pearson Education Canada Inc. What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization? recalculate accumulated amortization

39 17 - 39 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

40 17 - 40 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

41 17 - 41 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

42 17 - 42 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

43 17 - 43 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

44 17 - 44 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

45 17 - 45 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

46 17 - 46 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

47 17 - 47 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

48 17 - 48 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?

49 17 - 49 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.

50 17 - 50 Copyright  2003 Pearson Education Canada Inc. Auditing Operations

51 17 - 51 Copyright  2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures

52 17 - 52 Copyright  2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures - perform tests of controls

53 17 - 53 Copyright  2003 Pearson Education Canada Inc. Auditing Operations - perform analytical procedures - perform tests of controls - perform an analysis of account balances

54 17 - 54 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

55 17 - 55 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


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