CHAPTER 17 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts. The acquisition and payment cycle even- tually affects most as- pects of an account- ing system and af- fects many accounts. assets. liabilities. expenses. assets. How are
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assets How are assets affected by the acquisi- tion and pay- ment cycle?
- assets are acquired for use or sale assets property, plant, & equipment How are assets affected by the acquisi- tion and pay- ment cycle? inventory
- prepaid expenses are incurred assets prepaid insurance prepaid taxes How are assets affected by the acquisi- tion and pay- ment cycle? prepaid rent
- acquisitions even- tually require cash payment assets How are assets affected by the acquisi- tion and pay- ment cycle?
How are liabilities affected by the acquisition and payment cycle? liabilities
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.
How are expenses affected by the acquisition and payment cycle? expenses
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.
acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289 capital asset master description _ $$ _ June 1, 2004 Factory Equipment 5289 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.
Ace Company RECEIVING REPORT Big Machine Co. INVOICE Received one case (count 200) BDY #2 pencils on 6/1/x0. Condition: OK Thanks for buy- ing our BDY model. Please pay $5,289 by 6/15/04. receiving employee - 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. Auditing Manufacturing Equipment acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289
Auditing Manufacturing Equipment - verify current-year acquisitions EXAMPLE PROCEDURES: Select a sample of entries in the acqui- sitions journal and physically examine the related assets. acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289
These 3 procedures primarily address the existence of newly-acquired assets. 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? 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. 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.
Big Machine Co. INVOICE Ace Company RECEIVING REPORT acquisitions journal description _ $$ _ June 1, 2004 Factory Equipment 5289 Thanks for buy- ing our BDY model. Please pay $5289 by 6/15/03. Received one BDY machine on 6/1/04. Condition: OK receiving employee ~Select a sample of entries in the acqui- sitions journal and trace to vendor in- voices and receiving reports. To address completeness of newly-acquired assets, reverse the direction of these procedures. Example: Select a sample of receiving reports and trace to vendor invoices and the acquisitions journal.
Auditing Manufacturing Equipment - verify current-year disposals ~ review whether newly-acquired assets replace existing assets ~ analyze gains on the disposal of as- sets and miscellaneous income for receipts from asset disposals For Sale
Auditing Manufacturing Equipment - verify current-year disposals ~ review whether newly-acquired assets replace existing assets ~ analyze gains on the disposal of as- sets and miscellaneous income for receipts from asset disposals ~ review plant modifications and changes in product line, taxes, or in- surance coverage for indications of deletions of equipment
Auditing Manufacturing Equipment - verify current-year disposals ~ analyze gains on the disposal of as- sets and miscellaneous income for receipts from asset disposals ~ review plant modifications and changes in product line, taxes, or in- surance coverage for indications of deletions of equipment ~ make enquiries of management and production personnel about disposals
capital asset master description _ $$ _ Total Fixed Assets 875289 general ledger account _ $$ _ Fixed Assets 875289 Auditing Manufacturing Equipment - verify ending asset balances EXAMPLE PROCEDURE: Trace totals from capital asset master file to the general ledger.
Auditing Manufacturing Equipment - verify ending accumulated amortization balances What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ?
What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ? capital asset master description _ $$ _ Total Accum. Amortization 75289 general ledger account _ $$ _ Accumulated Amortization 75289 Trace totals from capital asset master file to the general ledger.
What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization? recalculate accumulated amortization
copy- rights patents prepaid insurance organization costs Auditing Prepaid Expenses and Other Assets trade- marks prepaid rent deferred charges prepaid taxes
copy- rights patents What audit proce- dures are appropriate for a prepaid expense? prepaid insurance organization costs Auditing Prepaid Expenses and Other Assets trade- marks prepaid rent deferred charges prepaid taxes
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
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
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
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
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
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
Auditing Accrued Liabilities accrued professional fees accrued bonuses accrued interest What audit proce- dures are appropriate for an accrued liability? accrued rent accrued commis- sions accrued payroll accrued warranty costs accrued taxes accrued pension costs
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.
