CHAPTER 17
Completing the Tests in the
Acquisition and Payment
Cycle: Verification of
Selected Accounts
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assets
liabilities
The
acquisition and
payment cycle eventually affects most aspects of an accounting system and affects many
accounts.
expenses
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assets
How are
assets affected
by the acquisition and payment cycle?
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assets
How are
assets affected
by the acquisition and payment cycle?
- assets are acquired
for use or sale
property, plant, & equipment
inventory
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assets
How are
assets affected
by the acquisition and payment cycle?
- prepaid expenses
are incurred
prepaid
insurance
prepaid
taxes
prepaid
rent
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assets
- acquisitions eventually require cash
payment
How are
assets affected
by the acquisition and payment cycle?
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How
are liabilities
affected by the
liabilities
acquisition
and payment
cycle?
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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.
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How
are expenses
affected by the
acquisition and expenses
payment
cycle?
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How
are expenses
affected by the
acquisition and expenses
payment
cycle?
Expenses are affected when
goods and services are acquired
and prepaid expenses are used.
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Auditing Manufacturing Equipment
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Auditing Manufacturing Equipment
- perform analytical procedures
examples: depreciation expense / equipment
manufacturing costs / production
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Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
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Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions journal and trace to capital asset
master file.
acquisitions journal
description
_ $$ _
June 1, 2004
Factory
Equipment
5289
capital asset master
description
_ $$ _
June 1, 2004
Factory
Equipment
5289
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Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions journal and trace to vendor inAce Company
voices and receiving
RECEIVING
REPORT
Big
Machine Co.
reports.
acquisitions journal
description
_ $$ _
June 1, 2004
Factory
Equipment
5289
ReceivedINVOICE
one
case (count 200)
Thanks for buyBDY #2 pencils
ing our BDY
on 6/1/x0.
model.
Condition:
OKPlease
pay
$5,289
receiving
employee
by 6/15/04.
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Auditing Manufacturing Equipment
- verify current-year acquisitions
EXAMPLE PROCEDURES:
Select a sample of entries in the acquisitions journal and physically examine
the related assets.
acquisitions journal
description
_ $$ _
June 1, 2004
Factory
Equipment
5289
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Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to capital 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.
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Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to capital 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?
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Auditing Manufacturing Equipment
- verify current-year acquisitions
~Select a sample of entries in the acquisitions journal and trace to capital 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.
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~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
Received one BDY
machine on 6/1/04.
Condition: OK
receiving employee
Thanks for buying our BDY
model. Please
pay $5289
by 6/15/03.
acquisitions journal
description
_ $$ _
June 1, 2004
Factory
Equipment
5289
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Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
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Auditing Manufacturing Equipment
- verify current-year disposals
~ review whether newly-acquired assets
replace existing assets
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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
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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
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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 enquiries of management and
production personnel about disposals
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Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
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Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
how?
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Auditing Manufacturing Equipment
- verify ending asset balances
EXAMPLE PROCEDURE: Trace totals
from capital asset master file to the
general ledger.
capital asset master
description
_ $$ _
Total Fixed
Assets
875289
general ledger
account
_ $$ _
Fixed Assets 875289
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Auditing Manufacturing Equipment
- perform analytical procedures
- verify current-year acquisitions
- verify current-year disposals
- verify ending asset balances
- verify amortization expense
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Auditing Manufacturing Equipment
- verify amortization expense
What is
the auditor’s
greatest concern
regarding amortization expense?
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Auditing Manufacturing Equipment
- verify depreciation expense
What is the
auditor’s greatest concern regarding amortization expense?
accuracy
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Auditing Manufacturing Equipment
- verify amortization expense
What audit procedures address
the auditor’s concern regarding accuracy of amortization expense?
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Auditing Manufacturing Equipment
- verify amortization expense
What audit procedures address
the auditor’s concern regarding accuracy of amortization expense?
- recalculate amortization
expense
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Auditing Manufacturing Equipment
- verify amortization expense
What audit procedures address
the auditor’s concern regarding accuracy of amortization expense?
- recalculate amortization expense
- determine whether the client’s amortization policy is consistent
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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
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Auditing Manufacturing Equipment
- verify ending accumulated
amortization balances
What audit procedures address
the auditor’s concern regarding accuracy of accumulated amortization ?
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What audit procedures address
the auditor’s concern regarding accuracy of accumulated amortization ?
Trace totals from capital asset
master file to the general
ledger.
capital asset master
description
_ $$ _
Total Accum.
Amortization 75289
general ledger
account
_ $$ _
Accumulated
Amortization 75289
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What audit procedures address
the auditor’s concern regarding accuracy of accumulated amortization?
recalculate
accumulated
amortization
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Auditing Prepaid Expenses and
Other Assets
copyrights
patents
prepaid
rent
prepaid
trademarks
insurance
prepaid
taxes
deferred
charges
organization
costs
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Auditing Prepaid Expenses and
Other Assets
copypatents
rights
What audit tradeproceprepaid
dures are appropriate
for
marks
rent
prepaid
a prepaid
expense?
deferred
insurance
prepaid
taxes
charges
organization
costs
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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
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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
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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
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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
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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
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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
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Auditing Accrued Liabilities
accrued
professional
fees
accrued
rent
accrued
warranty
costs
accrued
interest
accrued
payroll
accrued
pension
costs
accrued
bonuses
accrued
commissions
accrued
taxes
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Auditing Accrued Liabilities
accrued
professional
fees
accrued
interest
accrued
bonuses
What
audit
proceaccrued
accrued
dures
for
commisrent are appropriate
accrued
sions
an accruedpayroll
liability?
accrued
warranty
costs
accrued
pension
costs
accrued
taxes
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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.
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Auditing Operations
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Auditing Operations
- perform analytical procedures
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Auditing Operations
- perform analytical procedures
- perform tests of controls
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Auditing Operations
- perform analytical procedures
- perform tests of controls
- perform an analysis of account
balances
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Auditing Operations
- perform analytical procedures
- perform tests of controls
- perform an analysis of account
balances
- perform tests of details of balance
sheet accounts
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Auditing Operations
- perform analytical procedures
- perform tests of controls
- perform an analysis of account
balances
- perform tests of details of balance
sheet accounts
- perform tests of allocations
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