Substantive Audit Procedures-Accrued Liabilities

At December 31, 2007, Apple Blossom Cologne Company had several type of accrued liabilities. Each of them is
separately below. Study the 2006 working papers before you begin your audit work.

Accrued Payrolls and Payroll Taxes

An analysis of the Accrued Payroll Taxes accounts has been prepared by Donald McKenna. This schedule is refere
Salaried employees are paid on this day of every month for the previous month's work. Since January 1 is a holida
Friday, January 2. Hourly employees are paid each week on Friday for the previous week's work. The hourly emp
day week, Monday through Friday.
Gross wages and salaries for 2007 were $1.618.643. The company had between 35 and 41 employees througho
From the beginning of the fourth quarter through the end of the year, Apple Blossom had 38 employees. Duri
earning in excess of $76.200 annually. The total excess, which is not subject to F.I.C.A. taxes, amounted to $129
for Apple Blossom during 2007 exceeded the $7.000 maximum salary base for unemployment taxes.

Apple Blossom did not set up an accrual for payrolls and payroll taxes on either (1) the salaried employees for t
January, or (2) the hourly employees for the pay period ending December 26 (to be paid on January 2, 2008) a
through 31st This latter "stub period" is included in the hourly employees wages paid on January 9, 2008. For suc
to the Wages and Salaries Payable account. Withheld income tax, medicare, and F.I.C.A. tax, along with the e
medicare, are credited to Accrued Payroll Taxes. Unemployment taxes are also credited to the Accrued Payroll Tax

The following tax rates were applicable for 2003, the rates will remain the same in 2008:
State unemployment 3,8% of first $7.000 of wages
Federal unemployment 0,8% of first $7.000 of wages
F.I.C.A 6,2% of first $76.200 of wages
(employer matches the 6,2% withheld from employee)
Medicare 1,45% of wages (employer matches the 1,45% withheld)
Federal income tax withheld 15% (Income tax, withheld and F.I.C.A. Tax withheld are rounded to the
Apple Blossom Cologne Company makes quarterly payments for the accrued payroll tax liability by depositing
which is a depository for federal taxes. For the payments shown on schedule H-1, you may assume that yo
disbursements journal, (2) examined the paid vouchrs and supporting materials, and (3) vouched the amoun
Employer's Quarterly Federal Tax Return, and to federal and state unemployment tax forms. Apple Blossom files
close of each quarter.
You may assume that during the test of transaction work you checked the payroll register and the personel re
amounts due the salaried employees each month of 2007. All 24 of the salaried mployees listed were employed b
for the full year of 2007.

Administration Sales and Credit

President (Lancaster) 11,008 Sales manager (Jacobs) 7,133
Secretary (McWhorter) 3,450 Credit manager (Robertson) 4,333
Mail clerk (Klett) 1,492 Six salespersons (each) 4,675
15,950 Account receivable slerk (Swift) 2,067
Plant Operations 41,583
 Production superintendent (Brown) 7,525 Controller
Foreman (Freitag) 4,733 Controller (Shelton) 7,008
Purchasing agent (Palmer) 3,775 Bookkeeper (McKenna) 3,817
Receiving manager (Beauchamp) 3,775 Account payable clerk (Dull) 1,550
Repacking manager (Doyle) 4,725 12,375
Shipping manager (Evenshock) 4,525 Treasurer
Inventory clerk (Columbo) 2,008 Treasurer (Stockton) 7,217
31,066 Cashier (Lewis) 2,300
9,517
In computing the hourly employees wages payable at year-end, the gross aount for the week ended December 26
employees.

Dividends Payable
Dividens are declared by the Board of Directors and recorded in the minutes of the Board meetings. You have exa
and your documentation of those minustes is filed in the Permanent File section of this audit case. You may
payment to the cash disbursements journal in January 2008.
Property Taxes Payable
In the state of Illinois, city and county property taxes are levied against personal and real property (inventory and
of January 1 of each year. Both the city of Chicago and Cook County tax assessors mail out property tax bills in O
January 31. You have checked with the city and county tax assessors to determine the assessment bases and tax rat
For the city of Chicago , assessed value in 75% of the following property: inventory, land, and depreciated valu
rate is $1.40 per $100 of assessed value.
Cook County assessed value is 27% of the following property: inventory, land, and the depreciated value of dep
$1.01 per $100 of assessed value. You were able to trace the payment made during 2007 (voucher #1-14
disbursements journal.

Exercises
PART A-Control Risk Analysis
(Optional Exercises)
1 From the information provided in the Permanent File and the internal control questionnaire, prepare a flowchart o
System. Use form P-8 or software. Show the flow of documentation, the steps involved in the process, and note any
2 Describe the control procedures (strengths) related to payroll processing. For each strength, list a test of con
effectiveness of the control. Remember to think avout the six categories of control procedures. Using form CSF-
these six categories (see General Instructions and Preparations)
3 For each weakness you find, list the weakness, a potential error or irregularity that may occur because of the w
substantive test of transactions or balances to detect the error irregularity, assuming the necessary records and do
CWF-6. Classify the weakness according to the six categories of control procedures.
4 Prepare a formal program consisting of tests of controls and substantive tests of details of transactions for the payro
Your program may consist of dual-purpose tests having both test of controls and substantive aspects. Keep in mi
(Example: "Payroll transactions represent expenditures for bona fide services received by the company.") Use t
program: Tests of Controls, Dual-Purpose Tests, and Substantive Tests of Transaction. List the appropriate audit st
 PART B-Required Exercises:
Substantive Procedures
1 Prepare a substantive audit program to test accured liabilities. The construction of an audit program for accru
should begin with an explicit recognition of the fve financial statement assertions: (1) existence or occurren
obligations, (4) valuation or allocation, and (5) presentation and siclosure. You should derive your specific audit o
audit program should address the five financial statement assertions, as well as any weaknesses you have found i
keep in mind the six categories of control procedures. You may assume that you have satisfied yourself as to any
in the narrative.
As you write your program, remember the generalized evidence-gathering procedures of (1) recalculation, (2) ph
(4) verbal inquiry, (5) vouching of documents, (6) tracing, (7) scanning, and (8) analytical procedures. Use them to
gathering procedures in your program.
Use form AP-8. Use the financial statemnt assertions as your major captions. List the appropriate audit steps under
2 Study the prior year's working papers, schedules H-1 through H-3. Prepare a working paper similar to H-1 in the p
accrued payroll taxes and employer payroll tax expense.
Prepare a schedule similar to H-2 in the prior year's working papers. Employees federal income tax withheld b
employee. Remember that, sice the salaries and wages are paid in January, employess will be starting a new ta
pertaining there to should be accrued in Desember.
Study working paper H-3 in the prior period's working papers. Prepare a similar schedule for the current year, ref
Dividends Payable and Accrued Property Taxes.

https://www.accountingtools.com/articles/what-is-the-employer-fica-match.html#:~:text=The%20employer%20FIC
 abilities. Each of them is a different account and each is treated

na. This schedule is referenced H-1 in the working papers.

ince January 1 is a holiday, payday for salaried employees was
k's work. The hourly employees time is spread evenly over a 5-

d 41 employees throughout the first three quarters of the year.

had 38 employees. During the year there was one employee
. taxes, amounted to $129.500. All 41 employees who worked
ment taxes.

e salaried employees for the month of December, to be paid in

aid on January 2, 2008) and the "stub period" December 29th
n January 9, 2008. For such accruals, the net payroll is credited
C.A. tax, along with the employer portion of F.I.C.A. tax and
o the Accrued Payroll Taxes account.

ployee)
withheld)
ithheld are rounded to the nearest dollar on each employee.)
ax liability by depositing the accrued amount at a local bank,
you may assume that you have (1) traced them to the cash
(3) vouched the amounts to employer copies of Form 941,
rms. Apple Blossom files these froms within a month after the

gister and the personel records and noted the following gross
es listed were employed by Apple Blossom Cologne Company
week ended December 26,2007, was $7.938 for the 14 hourly

d meetings. You have examined the minutes of Board meetings

his audit case. You may assume that you traced the dividend

l property (inventory and fixed assets) owned by a company as

out property tax bills in October. They are due by the following
essment bases and tax rates.
and, and depreciated value of depreciable fixed assets. The tax

e depreciated value of depreciable fixed assets. The tax rate is

ng 2007 (voucher #1-14) and in January 2008, to the cash

ire, prepare a flowchart of Apple Blossom's Payroll Processing

n the process, and note any internal control features.
trength, list a test of controls you could perform to test the
cedures. Using form CSF-6, classify the strengths according to

ay occur because of the weakness, as well as a compensating

necessary records and documents are avaible to you. Use form

transactions for the payroll processing system. Use form SP-6.

ntive aspects. Keep in mind the financial statement assertions.
by the company.") Use the following major captions for your
ist the appropriate audit steps under each of these headings.
 audit program for accrued liability transactions and balances
1) existence or occurrence, (2) completeness, (3) rights and
erive your specific audit objectives from these assertions. Your
knesses you have found in the control structure. In this regard,
atisfied yourself as to any assertions not specifically mentioned

f (1) recalculation, (2) physical obseervation, (3) confirmation,

l procedures. Use them to help you write the specific evidence-

ropriate audit steps under each of these headings.

per similar to H-1 in the prior year's working papers to audit the

al income tax withheld by Apple Blossom averaged 15% per

will be starting a new tax year. The applicable payroll taxes

e for the current year, referenced H-3, to analyze the accounts.

=The%20employer%20FICA%20match%20is,is%20paying%20
 Apple Blossom Cologne Company
Payroll and Other Liabilities - Top Schedule
12-31-07
===========================================================================
==========================================================================
Per Audit Per Buku Penyesuaian
No. Account Ref
12-31-06 12-31-07 Debit
302 Pajak Penghasilan Akrual 113,846 86,253 -
303 Hutang Gaji 81,239 - -
304 Pajak Kekayaan Akrual 14,113 21,988 -
306 Hutang Dividen 17,575 23,125 -

Berdasarkan studi internal kontrol dan hasil audit terkait dengan akun Payroll and Other Liabilities, maka m
akun Payroll and Other Liabilities sudah sesuai dengan PSAK terkait.

Keterangan :
< Cross Footed
 H

======================================
=====================================
Penyesuaian Reklasifikasi Per Audit
Kredit Debit Kredit 12-31-07
37,327 - - 123,580 <
95,289 - - 95,289 <
- - - 21,988 <
- - - 23,125 <

d Other Liabilities, maka menurut auditor penyajian

 Apple Blossom Cologne Company H-1
Accrued Payroll Tax
12-31-07
===============================================================
===============================================================
============================================================
Balance 31/12/06 Addition Payments Balance 31/12/07
F.I.C.A. Tax 43,879 184,654 194,960 33,573
Medicare 10,553 46,941 48,958 8,536
State Unemployment 3,992 10,108 14,100 -
Federal Unemployment 840 2,128 2,968 -
Withholding Tax 54,582 242,796 253,233 44,145
Balance per book 113,846 486,626 514,219 86,253
Usulan Koreksi 37,327
Balance per audit 123,580
Total Beban Gaji 2007 1,618,643

Perhitungan FICA
Pengurang 129,500
Penghasilan Kena Pajak 1,489,143
Pajak Dibebankan ke Pegawai 92,327
Pajak Dibebankan ke Perusahaan 92,327
Total Pajak 184,654

Perhitungan Medicare
Pengurang
Penghasilan Kena Pajak 1,618,643
Pajak Dibebankan ke Pegawai 23,470
Pajak Dibebankan ke Perusahaan 23,470
Total Pajak 46,941

Perhitungan Federal Income Tax

Pengurang
Penghasilan Kena Pajak 1,618,643
Pajak Dibebankan ke Pegawai 242,796
Pajak Dibebankan ke Perusahaan
Total Pajak 242,796

Total Beban Pajak 128,033

Usulan Koreksi 9,424
Balance Per Audit 137,457

Total Beban Gaji 1,618,643

Usulan Koreksi 123,192
Balance Per Audit 1,741,835
 Perhitungan State Unemployment
Pengurang 1,352,643
Penghasilan Kena Pajak 266,000
Pajak Dibebankan ke Pegawai
Pajak Dibebankan ke Perusahaan 10,108
Total Pajak 10,108
\
Perhitungan Federal Unemployment
Pengurang 1,352,643
Penghasilan Kena Pajak 266,000
Pajak Dibebankan ke Pegawai
Pajak Dibebankan ke Perusahaan 2,128
Total Pajak 2,128
 Dibebankan ke Pegawai
Jenis Pendapatan Kotor Federal Income Tax FICA
Hourly employees 7,938 1,191 492
Stub Period 4,763 714 295
Administration 15,950 2,393 989
Plant operation 31,066 4,660 1,926
Sales 41,583 6,237 2,578
Controller 12,375 1,856 767
Treasurer 9,517 1,428 590

Dibebankan ke Perusahaan
Jenis Pendapatan Kotor State Unemployment FICA
Hourly employees 7,938 492
Stub Period 4,763 295
Administration 15,950 989
Plant operation 31,066 1,926
Sales 41,583 2,578
Controller 12,375 767
Treasurer 9,517 590
AJE#
Beban Upah dan Gaji 123,192
Beban Pajak 9,424
Pajak Penghasilan Akrual 37,327
Hutang Gaji 95,289
ai
Medicare Pendapatan Bersih Pegawai
115 6,140
69 3,684
231 12,337
450 24,030
603 32,164
179 9,572
138 7,361

aan
Medicare Federal Unemployment
115
69
231
450
603
179
138
 Apple Blossom Cologne Company H-3
Analytical Procedures Performed on Accrued Liabilities
12-31-07
================================================================
================================================================
==========================================================
Saldo Saldo
Nama Akun Ref Selisih Perubahan %
31-Dec-06 31-Dec-07
Hutang Dividen 17,575 23,125 5,550 31.58%
Pajak Kekayaan Akrual 14,113 21,988 7,875 55.80%
Persediaan 873,766 11,557 (862,209) -98.68%
Tanah + PPE 788,555 10,430 (778,125) -98.68%

tarif
chikago 0.0105
cook country 0.002727
0.013227