CHAPTER 18
The Acquisition and
Payment Cycle:
Verification of
Selected Accounts
1
assets
liabilities
The
acquisition and
payment cycle eventually affects most aspects of an accounting system and affects many
accounts.
expenses
2
assets
How are
assets affected
by the acquisition and payment cycle?
3
assets
How are
assets affected
by the acquisition and payment cycle?
- assets are acquired
for use or sale
property, plant, & equipment
inventory
4
assets
How are
assets affected
by the acquisition and payment cycle?
- prepaid expenses
are incurred
prepaid
insurance
prepaid
taxes
prepaid
rent
5
assets
- acquisitions eventually require cash
payment
How are
assets affected
by the acquisition and payment cycle?
6
How
are liabilities
affected
by
the
liabilities
acquisition
and payment
cycle?
7
How
are liabilities
affected by the
liabilities
acquisition
and payment
cycle?
Liabilities are affected when
assets or services are acquired
with a promise to pay rather
than a payment.
8
How
are expenses
affected by the
expenses
acquisition and
payment
cycle?
9
How
are expenses
affected by the
expenses
acquisition and
payment
cycle?
Expenses are affected when
goods and services are acquired
and prepaid expenses are used.
10
Auditing Manufacturing Equipment
11
Auditing Manufacturing Equipment
- perform analytical procedures
examples: depreciation expense / equipment
manufacturing costs / production
12
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
13
Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions 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
14
Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving Ace Company
RECEIVING
reports.
REPORT
Big
Machine Co.
acquisitions journal
description
_ $$ _
June 1, 19x0
Factory
Equipment
5289
ReceivedINVOICE
one
case (count 200)
Thanks for buyBDY #2 pencils
ing our BDY
on 6/1/x0.
model.
Condition:
OKPlease
pay
$5289
receiving
employee
by 6/15/x0.
15
Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions journal and physically examine
the related assets.
acquisitions journal
description
_ $$ _
June 1, 19x0
Factory
Equipment
5289
16
Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to fixed asset
master file.
~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.
~Select a sample of entries in the acquisitions journal and physically examine
the related assets.
These 3 procedures
primarily address the existence
of newly-acquired assets.
17
Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to fixed asset
master file.
~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.
~Select a sample of entries in the acquisitions journal and physically examine
the related assets.
What procedures
address the completeness
of newly-acquired assets?
18
Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to fixed asset
master file.
~Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports.
~Select a sample of entries in the acquisitions journal and physically examine
the related assets.
To address
completeness of newly-acquired
assets, reverse the direction of
these procedures.
19
~Select a sample of entries in the acquisitions journal and trace to vendor invoices 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.
Big Machine Co.
Ace Company
INVOICE
RECEIVING REPORT
acquisitions journal
Thanks for buy- description
_ $$ _
Received one BDY
June 1, 19x0
ing our BDY
machine on 6/1/x0.
Condition: OK
model. Please Factory
Equipment
5289
receiving employee
pay $5289
by 6/15/x0.
20
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
21
Auditing Manufacturing Equipment
- verify current-year disposals
~ review whether newly-acquired assets
replace existing assets
22
Auditing Manufacturing Equipment
- verify current-year disposals
~ review whether newly-acquired assets
replace existing assets
~ analyze gains on the disposal of assets and miscellaneous income for
receipts from asset disposals
For
Sale
23
Auditing Manufacturing Equipment
- verify current-year disposals
~ review whether newly-acquired assets
replace existing assets
~ analyze gains on the disposal of assets and miscellaneous income for
receipts from asset disposals
~ review plant modifications and
changes in product line, taxes, or insurance coverage for indications of
deletions of equipment
24
Auditing Manufacturing Equipment
- verify current-year disposals
~ analyze gains on the disposal of assets and miscellaneous income for
receipts from asset disposals
~ review plant modifications and
changes in product line, taxes, or insurance coverage for indications of
deletions of equipment
~ make inquiries of management and
production personnel about disposals
25
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
26
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
how?
27
Auditing Manufacturing Equipment
- verify ending asset balances
EXAMPLE PROCEDURE: Trace totals
from fixed asset master file to the
general ledger.
fixed asset master
description
_ $$ _
Total Fixed
Assets
875289
general ledger
account
_ $$ _
Fixed Assets 875289
28
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
- verify depreciation expense
29
Auditing Manufacturing Equipment
- verify depreciation expense
What is
the auditor’s
greatest concern
regarding depreciation expense?
30
Auditing Manufacturing Equipment
- verify depreciation expense
What is the
auditor’s greatest concern regarding depreciation expense?
accuracy
31
Auditing Manufacturing Equipment
- verify depreciation expense
What audit procedures address
the auditor’s concern regarding accuracy of depreciation expense?
32
Auditing Manufacturing Equipment
- verify depreciation expense
What audit procedures address
the auditor’s concern regarding accuracy of depreciation expense?
- recalculate depreciation
expense
33
Auditing Manufacturing Equipment
- verify depreciation expense
What audit procedures address
the auditor’s concern regarding accuracy of depreciation expense?
- recalculate depreciation expense
- determine whether the client’s depreciation policy is consistent
34
Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
- verify depreciation expense
- verify ending accumulated depreciation balances
35
Auditing Manufacturing Equipment
- verify ending accumulated depreciation balances
What audit procedures address
the auditor’s concern regarding accuracy of accumulated depreciation?
36
What audit procedures address
the auditor’s concern regarding accuracy of accumulated depreciation?
Trace totals from fixed asset
master file to the general
ledger.
fixed asset master
description
_ $$ _
Total Accum.
Depreciation 75289
general ledger
account
_ $$ _
Accumulated
Depreciation 75289
37
What audit procedures address
the auditor’s concern regarding accuracy of accumulated depreciation?
recalculate
accumulated
depreciation
38
Auditing Prepaid Expenses and
Other Assets
copyrights
patents
prepaid
rent
prepaid
trademarks
insurance
prepaid
taxes
deferred
charges
organization
costs
39
Auditing Prepaid Expenses and
Other Assets
copyrights
patents
What audit tradeproceprepaid
marks
dures
are
appropriate
for
rent
prepaid
deferred
a prepaid
expense?
insurance
prepaid
taxes
charges
organization
costs
40
What audit procedures 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
41
What audit procedures are appropriate for
a prepaid expense?
- perform analytical procedures
- examine documentation and other evidence supporting the existence and
completeness of prepaid expenses
42
What audit procedures are appropriate for
a prepaid expense?
- perform analytical procedures
- examine documentation and other evidence supporting the existence and
completeness of prepaid expenses
- recalculate prepaid expenses and trace
to the general ledger
43
What audit procedures are appropriate for
a prepaid expense?
- examine documentation and other evidence 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
44
What audit procedures 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
45
What audit procedures 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 46
Auditing Accrued Liabilities
accrued
professional
fees
accrued
rent
accrued
warranty
costs
accrued
interest
accrued
payroll
accrued
pension
costs
accrued
bonuses
accrued
commissions
accrued
taxes
47
Auditing Accrued Liabilities
accrued
professional
fees
accrued
interest
accrued
bonuses
What
audit
proceaccrued
accrued
commisrent are appropriate
dures
for
accrued
sions
an accruedpayroll
liability?
accrued
warranty
costs
accrued
pension
costs
accrued
taxes
48
What audit procedures are appropriate for
an accrued liability?
The audit procedures
appropriate for accrued
liabilities are similar to
those appropriate for prepaid expenses, depending
on the client.
49
Auditing Operations
50
Auditing Operations
- perform analytical procedures
51
Auditing Operations
- perform analytical procedures
- perform tests of controls and
substantive tests of transactions
52
Auditing Operations
- perform analytical procedures
- perform tests of controls and
substantive tests of transactions
- perform an analysis of account
balances
53
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
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
- perform tests of allocations
55