Copyright © 2014 Pearson Education Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts.

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Copyright © 2014 Pearson Education Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Copyright © 2014 Pearson Education 19-2 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.

Copyright © 2014 Pearson Education 19-3 Design and perform audit tests of accrued liabilities. Design and perform audit tests of income and expense accounts.

Copyright © 2014 Pearson Education Recognize the many accounts in the acquisition and payment cycle

Copyright © 2014 Pearson Education 19-5

Copyright © 2014 Pearson Education Design and perform audit tests of property, plant, and equipment and related accounts

Copyright © 2014 Pearson Education 19-7

Copyright © 2014 Pearson Education 19-8

Copyright © 2014 Pearson Education 19-9 Perform analytical procedures Plus verify:  Current year acquisitions  Current year disposals  Ending balance in the asset account  Depreciation expense  Ending balance in accumulated depreciation

Copyright © 2014 Pearson Education 19-10

Copyright © 2014 Pearson Education Current year additions have a long-term effect on the financial statements. Seven of the eight balance-related audit objectives are used as a frame of reference.

Copyright © 2014 Pearson Education Detail tie-in: Current acquisitions agree with 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.

Copyright © 2014 Pearson Education Existence: Current acquisitions as listed exist. 1.Examine vendors’ invoices and receiving reports 2.Physically examine assets.

Copyright © 2014 Pearson Education Completeness: Existing acquisitions are recorded. 1.Examine vendors’ invoices of closely relatedaccounts to uncover items that should be manufacturing equipment. 2.Review lease and rental agreements.

Copyright © 2014 Pearson Education Accuracy: Current year acquisitions as listed are accurate. Examine vendors’ invoices.

Copyright © 2014 Pearson Education Classification: Current year acquisitions as listed are correctly classified. 1. Examine vendors’ invoices in manufacturing equipment account. 2. Examine vendors’ invoices of closely related accounts. 3. Examine rent and lease expense for capitalizable leases.

Copyright © 2014 Pearson Education Cutoff: Current year acquisitions are recorded in the correct period. Review transactions near the balance sheet date for correct period.

Copyright © 2014 Pearson Education Rights: The client has rights to current year acquisitions. Examine vendors’ invoices.

Copyright © 2014 Pearson Education  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

Copyright © 2014 Pearson Education  All recorded equipment physically exists on the balance sheet date  All equipment owned is recorded

Copyright © 2014 Pearson Education The most important objective is accuracy.  Consistent depreciation policy  Correct calculations

Copyright © 2014 Pearson Education Accumulated depreciation as stated in the property master file agrees with the general ledger. Accumulated depreciation in the master file is accurate.

Copyright © 2014 Pearson Education Design and perform audit tests of prepaid expenses

Copyright © 2014 Pearson Education  Prepaid rent  Organization costs  Prepaid taxes  Patents  Prepaid insurance  Trademarks  Deferred charges  Copyrights

Copyright © 2014 Pearson Education 19-25

Copyright © 2014 Pearson Education  Acquisition and recording of insurance  Insurance register  Insurance expense

Copyright © 2014 Pearson Education  Compare total prepaid insurance and insurance expense with previous years  Compute the ratio of prepaid insurance to insurance expense and compare it with previous years  Compare the individual insurance policy coverage on the schedule of insurance obtained with the preceding year’s schedule

Copyright © 2014 Pearson Education  Compare the computed prepaid insurance balance for the current year on a policy-by- policy basis with that of the preceding year.  Review the insurance coverage listed on the prepaid insurance schedule with an appropriate client official or insurance broker.

Copyright © 2014 Pearson Education Existence and completeness: Insurance policies in the prepaid insurance schedule exist and existing policies are listed. Rights: The client has rights to all insurance policies in the prepaid insurance schedule.

Copyright © 2014 Pearson Education Accuracy and detail tie-in: Prepaid amounts are accurate and the total is correctly added and agrees with the general ledger. Classification: Insurance expense is properly classified. Cutoff: Insurance transactions are recorded in the proper period.

Copyright © 2014 Pearson Education Design and perform audit tests of accrued liabilities

Copyright © 2014 Pearson Education  Accrued payroll  Accrued payroll taxes  Accrued officers’ bonuses  Accrued commissions  Accrued professional fees  Accrued rent  Accrued interest

Copyright © 2014 Pearson Education 19-33

Copyright © 2014 Pearson Education Design and perform audit tests of income and expense accounts

Copyright © 2014 Pearson Education  Analytical procedures  Tests of controls and substantive tests of transactions  Tests of details of account balances

Copyright © 2014 Pearson Education Analytical procedure Compare individual expenses with previous years Compare individual asset and liability balances with previous years Possible misstatement Overstatement or understatement of a balance in an expense account Overstatement or understatement of a balance sheet account that will also affect an income statement account

Copyright © 2014 Pearson Education Analytical procedure Compare individual expenses with budgets Compare gross margin percentage with previous years Compare inventory turnover ratio with previous years Possible misstatement Misstatement of Expenses and related Balance sheet accounts Misstatement of cost of goods sold and inventory Misstatement of cost of goods sold and inventory

Copyright © 2014 Pearson Education Analytical procedurePossible misstatement Compare prepaid insurance expense with previous years Compare commission expense divided by sales with previous years Compare individual manufacturing expenses divided by total mfg. expenses with previous years Misstatement of insurance expense and prepaid insurance Misstatement of commission expense and accrued commissions Misstatement of individual manufacturing expenses and related balance sheet accounts

Copyright © 2014 Pearson Education Both tests of controls and substantive tests of transactions have the effect of simultaneously verifying balance sheet and income statement accounts.

Copyright © 2014 Pearson Education Expense account analysis:  Repairs and maintenance  Rent and lease  Legal expense

Copyright © 2014 Pearson Education 19-41

Copyright © 2014 Pearson Education Several expense accounts result from the allocation of accounting data rather than discrete transactions. These include depreciation, depletion, and the amortization of copyrights and catalog cost. The allocation of manufacturing overhead between inventory and cost of goods sold is an example of a different type of allocation that affects expenses.

Copyright © 2014 Pearson Education 19-43

Copyright © 2014 Pearson Education Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.