1 CHAPTER 18 The Acquisition and Payment Cycle: Verification of Selected Accounts
2 The acquisition and payment cycle even- tually affects most as- pects of an account- ing system and af- fects many accounts. assets liabilitiesexpenses
3 assets How are assets affected by the acquisi- tion and pay- ment cycle?
4 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 assets How are assets affected by the acquisi- tion and pay- ment cycle? - prepaid expenses are incurred prepaid insurance prepaid rent prepaid taxes
6 assets How are assets affected by the acquisi- tion and pay- ment cycle? - acquisitions even- tually require cash payment
7 How are liabilities affected by the acquisition and payment cycle? liabilities
8 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 How are expenses affected by the acquisition and payment cycle? expenses
10 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 Auditing Manufacturing Equipment
12 Auditing Manufacturing Equipment - perform analytical procedures examples: depreciation expense / equipment manufacturing costs / production
13 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions
14 Auditing Manufacturing Equipment - verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acqui- sitions journal and trace to fixed asset master file. acquisitions journal description _ $$ _ June 1, 19x0 Factory Equipment 5289 fixed asset master description _ $$ _ June 1, 19x0 Factory Equipment 5289
15 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 _ $$ _ June 1, 19x0 Factory Equipment 5289 Ace Company RECEIVING REPORT Received one case (count 200) BDY #2 pencils on 6/1/x0. Condition: OK receiving employee Big Machine Co. INVOICE Thanks for buy- ing our BDY model. Please pay $5289 by 6/15/x0.
16 Auditing Manufacturing Equipment - verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acqui- sitions journal and physically examine the related assets. acquisitions journal description _ $$ _ June 1, 19x0 Factory Equipment 5289
17 Auditing Manufacturing Equipment - verify current-year acquisitions ~Select a sample of entries in the acqui- sitions journal and trace to fixed 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 Auditing Manufacturing Equipment - verify current-year acquisitions ~Select a sample of entries in the acqui- sitions journal and trace to fixed 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 Auditing Manufacturing Equipment - verify current-year acquisitions ~Select a sample of entries in the acqui- sitions journal and trace to fixed 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 acquisitions journal description _ $$ _ June 1, 19x0 Factory Equipment 5289 Big Machine Co. INVOICE Thanks for buy- ing our BDY model. Please pay $5289 by 6/15/x0. ~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/x0. Condition: OK receiving employee
21 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals
22 Auditing Manufacturing Equipment - verify current-year disposals ~ review whether newly-acquired assets replace existing assets
23 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 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 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 inquiries of management and production personnel about disposals
26 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances
27 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances how?
28 Auditing Manufacturing Equipment - verify ending asset balances general ledger account _ $$ _ Fixed Assets fixed asset master description _ $$ _ Total Fixed Assets EXAMPLE PROCEDURE: Trace totals from fixed asset master file to the general ledger.
29 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances - verify depreciation expense
30 Auditing Manufacturing Equipment - verify depreciation expense What is the auditor’s greatest concern regarding depre- ciation expense?
31 Auditing Manufacturing Equipment - verify depreciation expense What is the auditor’s greatest concern re- garding depreciation expense? accuracy
32 Auditing Manufacturing Equipment - verify depreciation expense What audit procedures address the auditor’s concern regarding accu- racy of depreciation expense?
33 Auditing Manufacturing Equipment - verify depreciation expense What audit procedures address the auditor’s concern regarding accu- racy of depreciation expense? - recalculate depreciation expense
34 Auditing Manufacturing Equipment - verify depreciation expense What audit procedures address the auditor’s concern regarding accu- racy of depreciation expense? - recalculate depreciation expense - determine whether the client’s depreci- ation policy is consistent
35 Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances - verify depreciation expense - verify ending accumulated de- preciation balances
36 Auditing Manufacturing Equipment - verify ending accumulated de- preciation balances What audit procedures address the auditor’s concern regarding accu- racy of accumulated depreciation?
37 What audit procedures address the auditor’s concern regarding accu- racy of accumulated depreciation? general ledger account _ $$ _ Accumulated Depreciation fixed asset master description _ $$ _ Total Accum. Depreciation Trace totals from fixed asset master file to the general ledger.
38 What audit procedures address the auditor’s concern regarding accu- racy of accumulated depreciation? recalculate accumulated depreciation
39 Auditing Prepaid Expenses and Other Assets organization costs prepaid rent prepaid taxes prepaid insurance patents trade- marks deferred charges copy- rights
40 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 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 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 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 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 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 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 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 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 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 Auditing Operations
51 Auditing Operations - perform analytical procedures
52 Auditing Operations - perform analytical procedures - perform tests of controls and substantive tests of transactions
53 Auditing Operations - perform analytical procedures - perform tests of controls and substantive tests of transactions - perform an analysis of account balances
54 Auditing Operations - perform analytical procedures - perform tests of controls and substantive tests of transactions - perform an analysis of account balances - perform tests of details of balance sheet accounts
55 Auditing Operations - perform analytical procedures - perform tests of controls and substantive tests of transactions - perform an analysis of account balances - perform tests of details of balance sheet accounts - perform tests of allocations