assets

1. CHAPTER 17Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

2. Theacquisition andpayment cycle even- tually affects most as- pects of an account-ing system and af-fects manyaccounts. assets liabilities expenses

3. assets How are assets affected by the acquisi- tion and pay- ment cycle?

4. - assets are acquired for use or sale assets property, plant, & equipment How are assets affected by the acquisi- tion and pay- ment cycle? inventory

5. - prepaid expenses are incurred assets prepaid insurance prepaid taxes How are assets affected by the acquisi- tion and pay- ment cycle? prepaid rent

6. - acquisitions even- tually require cash payment assets How are assets affected by the acquisi- tion and pay- ment cycle?

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. 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.

15. 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

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, 2004 Factory Equipment 5289

17. 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.

18. 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.

19. 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.

20. 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.

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 enquiries 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. 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.

29. Auditing Manufacturing Equipment - perform analytical procedures - verify current-year acquisitions - verify current-year disposals - verify ending asset balances - verify amortization expense

30. Auditing Manufacturing Equipment - verify amortization expense What is the auditor’s greatest concern regarding amort- ization expense?

31. What is the auditor’s greatest concern re- garding amortization expense? Auditing Manufacturing Equipment - verify depreciation expense accuracy

32. What audit procedures address the auditor’s concern regarding accu- racy of amortization expense? Auditing Manufacturing Equipment - verify amortization expense

33. What audit procedures address the auditor’s concern regarding accu- racy of amortization expense? Auditing Manufacturing Equipment - verify amortization expense - recalculate amortization expense

34. What audit procedures address the auditor’s concern regarding accu- racy of amortization expense? Auditing Manufacturing Equipment - verify amortization expense - recalculate amortization expense - determine whether the client’s amortiz- ation policy is consistent

35. 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. Auditing Manufacturing Equipment - verify ending accumulated amortization balances What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization ?

37. 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.

38. What audit procedures address the auditor’s concern regarding accu- racy of accumulated amortization? recalculate accumulated amortization

39. copy- rights patents prepaid insurance organization costs Auditing Prepaid Expenses and Other Assets trade- marks prepaid rent deferred charges prepaid taxes

40. 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

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 professional fees accrued bonuses accrued interest accrued rent accrued commis- sions accrued payroll accrued warranty costs accrued taxes accrued pension costs

48. 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

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