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

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Presentation on theme: "Copyright © 2014 Pearson Education Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts."— Presentation transcript:

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

2 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.

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

4 Copyright © 2014 Pearson Education Recognize the many accounts in the acquisition and payment cycle. 19-4 1 1

5 Copyright © 2014 Pearson Education 19-5

6 Copyright © 2014 Pearson Education Design and perform audit tests of property, plant, and equipment and related accounts. 19-6 2

7 Copyright © 2014 Pearson Education 19-7

8 Copyright © 2014 Pearson Education 19-8

9 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

10 Copyright © 2014 Pearson Education 19-10

11 Copyright © 2014 Pearson Education 19-11 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.

12 Copyright © 2014 Pearson Education 19-12 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.

13 Copyright © 2014 Pearson Education 19-13 Existence: Current acquisitions as listed exist. 1.Examine vendors’ invoices and receiving reports 2.Physically examine assets.

14 Copyright © 2014 Pearson Education 19-14 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.

15 Copyright © 2014 Pearson Education 19-15 Accuracy: Current year acquisitions as listed are accurate. Examine vendors’ invoices.

16 Copyright © 2014 Pearson Education 19-16 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.

17 Copyright © 2014 Pearson Education 19-17 Cutoff: Current year acquisitions are recorded in the correct period. Review transactions near the balance sheet date for correct period.

18 Copyright © 2014 Pearson Education 19-18 Rights: The client has rights to current year acquisitions. Examine vendors’ invoices.

19 Copyright © 2014 Pearson Education 19-19  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

20 Copyright © 2014 Pearson Education 19-20  All recorded equipment physically exists on the balance sheet date  All equipment owned is recorded

21 Copyright © 2014 Pearson Education 19-21 The most important objective is accuracy.  Consistent depreciation policy  Correct calculations

22 Copyright © 2014 Pearson Education 19-22 Accumulated depreciation as stated in the property master file agrees with the general ledger. Accumulated depreciation in the master file is accurate.

23 Copyright © 2014 Pearson Education Design and perform audit tests of prepaid expenses. 19-23 3

24 Copyright © 2014 Pearson Education 19-24  Prepaid rent  Organization costs  Prepaid taxes  Patents  Prepaid insurance  Trademarks  Deferred charges  Copyrights

25 Copyright © 2014 Pearson Education 19-25

26 Copyright © 2014 Pearson Education 19-26  Acquisition and recording of insurance  Insurance register  Insurance expense

27 Copyright © 2014 Pearson Education 19-27  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

28 Copyright © 2014 Pearson Education 19-28  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.

29 Copyright © 2014 Pearson Education 19-29 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.

30 Copyright © 2014 Pearson Education 19-30 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.

31 Copyright © 2014 Pearson Education Design and perform audit tests of accrued liabilities. 19-31 4

32 Copyright © 2014 Pearson Education 19-32  Accrued payroll  Accrued payroll taxes  Accrued officers’ bonuses  Accrued commissions  Accrued professional fees  Accrued rent  Accrued interest

33 Copyright © 2014 Pearson Education 19-33

34 Copyright © 2014 Pearson Education Design and perform audit tests of income and expense accounts. 19-34 5

35 Copyright © 2014 Pearson Education 19-35  Analytical procedures  Tests of controls and substantive tests of transactions  Tests of details of account balances

36 Copyright © 2014 Pearson Education 19-36 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

37 Copyright © 2014 Pearson Education 19-37 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

38 Copyright © 2014 Pearson Education 19-38 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

39 Copyright © 2014 Pearson Education 19-39 Both tests of controls and substantive tests of transactions have the effect of simultaneously verifying balance sheet and income statement accounts.

40 Copyright © 2014 Pearson Education 19-40 Expense account analysis:  Repairs and maintenance  Rent and lease  Legal expense

41 Copyright © 2014 Pearson Education 19-41

42 Copyright © 2014 Pearson Education 19-42 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.

43 Copyright © 2014 Pearson Education 19-43

44 Copyright © 2014 Pearson Education 19-44 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.

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