C h a p t e r 1 9

COMPLETING THE TE
ST IN THE ACQUISIT
PAYMENT CYCLE: VE ION AND
RIFICATION OF SELE
CTED
ACCOUNTS

group 1
o v e r v ie w
11.. audit of ppe
2 . audit of prepaid
2.
expenses
3 . audit of accrued
3.
liabilities
4 . audit of income &
4.
expense account
 U D I T O F
A
PPE
 Typ es of Oth er Acc oun ts in the
Acq uis itio n of An d Pay me nt Cyc le

Learning Objective:
Recognize the many accounts in the acquisition
and payment cycle.
acc ou nt s typ ica lly ass oci at ed wit h
acq uis iti on an d pay me nt cyc le
tr an sac tio ns
 d i t o f
Au
Property, Plant, and
Equipment

Learning Objectives: Design and

Perform Audit Tests of Property,
Plant, Equipment, and related
accounts.
 d i t o f
Au
Property, Plant, and
Equipment

Property, Plant and Equipment

are assets that have expected
lives of more than one year, are
used in the business, and are not
acquired for resale.
 cl as si fic at io ns of pr op er ty ,
pl an t, an d eq ui pm en t ac co un ts
EQUIPM
ENT &
related accounts
 Au dit in g Ma nu fa ct ur in g Eq uip me nt
an d Re la te d Ac co un ts

In the audit of equipment and related accounts, it is

helpful to separate the tests into the following
categories:
Perform analytical procedures
Verify the following:
Verify current-year acquisitions
Verify current year disposals
Verify the ending balance in the
asset account
Verify depreciation expense
Verify the ending balance in
accumulated depreciation
 ANALY
TICAL
PROCED
URES
fo r
M a n u fa c t u r in g Eq u ip m en t
 Ve ri fy Cu rr en t Ye ar
Ac qu is it io n

Current year additions have long-term

effects on the financial statements.

Seven balance-related audit objectives

are used as a frame of reference.
 d A u d i t
R e l a t e
l a n c e -
Ba t i v e s
Objec

1. Detailed tie-in
Current acquisition agree with the master file.
2. Existence
Current acquisition as listed exist.
3. Completeness
Existing acquisition are recorded.
4. Accuracy
Current year acquisition as listed are accurate.
5. Classification
Current year acquisition as listed are correctly classified.
6. Cut-off
Current year acquisition are recorded in the correct period.
Major Balance-Related Audit
Objectives

1. Right
The client has rights to
the current year's
acquisition.
 Ve ri fy in g Cu rr en t Ye ar
Di sp os al s

Review whether newly acquired assets

replace existing assets
Analyze gains and losses on the disposal
Review documents of indications of
deletions of equipment
Make inquiries about the possibility of
the disposal of assets
 Ve ri fy in g th e En di ng
Ba la nc e of As se t Ac co un ts

All recorded equipment physically exists

on the balance sheet date (existence)
All equipment owned is recorded
(completeness)
 Ve ri fy in g De pr ec ia ti on
Ex pe ns e

Most important objective is accuracy

Consistent depreciation policy
Correct calculation
Ve ri fy in g th e En di ng Ba la nc e
in Ac cu m ul at ed De pr ec ia ti on

Accumulated depreciation as stated in

the property master file agrees with the
general ledger
Accumulated depreciation in the
property master file is accurate
 U D I T O F
A
prepaid expenses
 P R E P A I D
I T O F
AUD S E S
E X P E N

OBJECTIVE 19-3 | Design

and perform audit
tests of prepaid
expenses.
 a t I s a
W h
Prepaid Expense?
A prepaid expense is an expense that has been paid
for in advance but not yet incurred. In business, a
prepaid expense is recorded as an asset on the
balance sheet that results from a business making
advanced payments for goods or services to be
received in the future.

Audit of Prepaid
Expenses (Examples): 5. Prepaid Insurances
1. Prepaid Rents 6. Trademarks
2. Organization Costs 7. Deferred Charges
3. Prepaid Taxes 8. Copyrights
4. Patents 9.Goodwill
 a t I s a
W h
Prepaid Expense?
Additional Information:
PAS 1 — Presentation of Financial Statements
PAS 38 — Intangible Assets

Risk Based-Approach
enables the internal auditors to identify risks
correctly and allows management to put the right
internal controls in place for the best
performance. This provides you with a better
understanding of the risks and enables your
organization to better manage them.
 Overview of Prepaid Insurance
Prepaid Insurance and Related Accounts

Figure 19-2 - Illustrates the accounts typically used for prepaid insurance and
the relationship between prepaid insurance and the acquisition and payment
cycle through the debits to the prepaid insurance account.
 Internal Controls
Note: Companies often have a standard monthly journal entry to reclassify prepaid
insurance as insurance expense. If a significant entry is required to adjust the balance in
prepaid insurance at the end of the year, it indicates a potential misstatement in the
recording of the acquisition of insurance throughout the year or in the calculation of
the year-end balance in prepaid insurance.

ACQUISITION
AND
INSURANCE
RECORDING
EXPENSE
OF
INSURANCE INSURANCE
REGISTER
 u r a n c e
p a i d I ns
o f Pr e
A u d i t

Policy information, including policy number, amount

of coverage, and annual premium.
Beginning prepaid insurance balance
Payment of policy premiums
Amount charged to insurance expense
Ending prepaid insurance balance
 Tests of balances
Insurance expense
analytical procedures and a test to be sure that all
charges to insurance expenses arose from credits to
prepaid insurance.

Insurance premiums
tested as part of the tests of controls and
substantive tests of transactions and analytical
procedures.

Prepaid Insurance
·tests of details of balances.
 Analytical Procedures for Prepaid
Insurance and Insurance Expenses

Compare total prepaid insurance and insurance expenses

with previous years.

Compute the ratio of prepaid insurance to insurance

expense and compare it with previous years.

Compare the individual insurance policy coverage on the

schedule of insurance obtained from the client with the
preceding year’s schedule as a test of the elimination of
certain policies or a change in insurance coverage.

Compare the computed prepaid insurance balance for the

current year on a policy-by-policy basis with that of the
preceding year as a test of an error in calculation.

Review the insurance coverage listed on the prepaid

insurance schedule with an appropriate client official or
insurance broker for adequacy of coverage.
 Balance-related Audit
Objectives

Existence and Completeness

Insurance policies in the prepaid insurance schedule
exist and existing policies are listed.
1. Examine a sample of insurance invoices and
policies in force for comparison to the schedule.
2. Obtain a confirmation of insurance information
from the company’s insurance agent.

Rights
The client has rights to all insurance policies in the
prepaid insurance schedule.
 Balance-related Audit
Objectives

Accuracy and Detail Tie-in Cutoff

Prepaid amounts on the schedule are accurate and Insurance transactions
the total is correctly added and agrees with the are recorded in the
general ledger. correct period.
Audit tests to verify the accuracy of prepaid
insurance involve verifying the following:
1. Amount of the insurance premium,
2. Length of the policy period, and;
3. Allocation of the premium to unexpired
insurance.

Classification
The insurance expense related to prepaid insurance
is correctly classified.
 U D I T O F
A
accrued liabilities
Au dit of Ac cr ue d
Lia bil iti es
Accrued payroll
Accrued interest
Accrued commissions
Accrued professional fees
Accrued payroll taxes
Accrued rent
Accrued officers’ bonuses
 U D I T O F
A
income & expense account
 I N C O M E
O F
AUDIT
EXPENSE ACCOUNTS

19-5 Design and Perform Audit Test of

Income and Expense Accounts

Users of Financial Statements The following two concepts in the audit of

Equity investors
Long-term creditors
Union representatives
Short-term creditors
income and expense accounts are essential
when considering the purposes of the
income statement:
1. The matching of periodic income and
expense is necessary for a correct
determination of operating results.
2. The consistent application of
accounting principles for different
periods is necessary for comparability.
 e a n d
i t i n g Incom
t o A u d
r o a c h t s
App A c c o u n
x p e n s e
E
Analytical procedures
Tests of controls and
substantive tests of
transactions
Tests of details of
account balances
Tests of Controls and Substantive Test of
Transactionsy
Both tests of controls and substantive tests of transactions have the
effect of simultaneously verifying balance sheet and income
statement accounts.

Expense account analysis:

Repairs and maintenance
Rent and lease
Legal expense
 ex pe ns e
an al ys is
fo r le ga l
ex pe ns e
 Te st s of De ta ils of
Ac co un t Ba la nc es —
Al lo ca tio n
Several expense accounts result from the allocation
of accounting data rather than discrete transactions.
These include depreciation, depletion, and the
amortization of copyrights and catalog cost.
The allocation of manufacturing overhead between
inventory and cost of goods sold is an example of a
different type of allocation that affects expenses.
 thank you
for listening!

quizzis:
link