AUDITING II

GROUP 4
AUDIT OF THE FIXED ASSET,
PREPAID EXPENSE,
ACCRUED LIABILITIES,
REVENUE AND EXPENSE,
AND THE ACCOUNT
PAYABLE
Auditing and Service
Assurance
 FIXED
ASSETS

INTRODUCING Ayu Lestari

OUR TEAM 2110531004

Dinda Dwi Ananta

2110532037

Auditing II
Shabrina Atikah Sari
2110533026 Next
 AUDITING FOR
FIXED ASSETS

LIST OF CONTENTS

Types of Other Accounts in the Acquisition and Payment Cycle

Audit of Property, Plant, and Equiptment

Audit of Prepaid Expenses

Audit of Accrued Liabilities

Audit of Income and Expense Accounts

 AUDITING FOR
FIXED ASSETS

AUDIT FOR PROPERTY, PLAN,

AND EQUIPMENT

Characteristic of PPE :
The lives is more than 1 year
They are used for business (operational)
They are not acquired for resale.

Learn More
 GROUP 4

In auditing the property, plant, and equipment the first

things that we need to assess the equipment related
accounts, such as
1. Equipment
AUDIT OF 2. Accumulated Depreciation
3. Gain or loss in dispossal assets
PROPERTY 4. Depreciation expense
PLANT Auditor verify equipment different from current assets
EQUIPMENT for several reasons

1. There are fewer current period acquisition of equipment,

especially large equipment used in manufacture.
2. Amount of any given acquisition is often material.
3. equipment is likely to be kept and maintain in accounting
records for several years.
GROUP 4
 FIXED
ASSETS

Auditing of equipement, are emphasized on 3 things

CARRIED FORWARD
VERIFICATION OF FROM PRECEEDING
ACQUISITION
CURRENT PERIOD
YEAR
In Auditing equipment and its related accounts, it is helpful to separate
them into following categories

1. Perform subtantive test and analytical procedure

2. Verify current year acquisition
3. verify current year disposal
4. verify ending balance in the asset accounts
5. verify depreciation expenses
6. verify ebnding balance in accumulated depreciation
SUBTANTIVE TEST ANALYTICAL PROCEDURE
AUDIT FOR
FIXED ASSETS
VERIFY CURRENT YEAR ACQUISITION
AUDIT FOR
FIXED ASSETS

Auditors use seven of the eight balance-related audit objectives

as a frame of reference for tests of details of balances: existence,
completeness, accuracy, classification, cutoff, detail tie-in, and
rights and obligations.

The starting point for the verification of current year acquisitions

is normally a schedule obtained from the client of all acquisitions
recorded in the general ledger property, plant, and equipment
accounts during the year.

The most common audit test to verify additions is to examine

vendors’ invoices.

In testing acquisitions, the auditor must understand accounting

standards to make certain the client follows the related
requirements.

Auditors should also verify recorded transactions for correct

classification among various equipment accounts.

Auditors also need to examine whether the client has a right to

record equipment as an asset.
VERIFY CURRENT YEAR DISPOSSAL
AUDIT FOR
FIXED ASSETS

The auditor’s main objectives in the verification of the sale,

trade-in, or abandonment of equipment are to gather sufficient
appropriate evidence that all disposals are recorded and at the
correct amounts.

The following procedures are often used for verifying disposals:

1. Review whether newly acquired assets replace existing assets

2. Analyze gains and losses on the disposal of assets and
miscellaneous income for receipts from the disposal of assets.
3. Review plant modifications and changes in product line, and
changes in major,costly computer-related equipment; property
taxes; or insurance coverage for indications of deletions of
equipment.
4. Make inquiries of management and production personnel about
the possibilityof the disposal of assets.
VERIFY ENDING BALANCE OF ASSETS
ACCOUNT AUDIT FOR
FIXED ASSETS

Two of the auditor’s objectives when auditing the ending balance in the equipment
accounts include determining that:
1. All recorded equipment physically exists on the balance sheet date (existence)
2. All equipment owned is recorded (completeness)

When designing audit tests to meet these objectives, auditors first consider the nature
of internal controls over equipment.
Typically, the first audit step concerns the detail tie-in objective: Equipment, as listed
in the master file, agrees with the general ledger.
After assessing control risk for the existence objective, the auditor decides whether it
is necessary to verify the existence of individual items of equipment included in the
master file.
A major consideration in verifying disclosures related to fixed assets is the possibility
of legal encumbrances arising from use of fixed assets as collateral for a loan.
VERIFY DEPRECIATION EXPENSE
AUDIT FOR
FIXED ASSETS

The most important balance-related audit objective for depreciation expense is accuracy. Auditors focus on determining
whether the client followed a consistent depreciation policy from period to period and whether the client’s calculations are
correct.

THE USEFUL LIFE OF CURRENT PERIOD ACQUISITIONS

THE ESTIMATED SALVAGE VALUE

THE POLICY OF DEPRECIATING ASSETS IN THE YEAR OF

ACQUISITION AND DISPOSITION

THE METHOD OF DEPRECIATION

A useful method of auditing depreciation is a substantive analytical procedure performed by multiplying undepreciated fixed assets
by the depreciation rate for the year. When a substantive analytical procedure cannot be effectively performed more detailed tests are
usually needed by recompute depreciation expense for selected assets to determine whether the client is ollowing a proper and
consistent depreciation policy.
VERIFY ACCUMULATED EPRECIATION EXPENSE
AUDIT FOR
FIXED ASSETS

Two objectives are usually emphasized in the audit of the ending

balance in accumulated depreciation:

1. Accumulated depreciation as stated in the property master file

agrees with the general ledger. This objective can be satisfied by
test-footing the accumulated depreciation in the property
master file and tracing the total to the general ledger
2. Accumulated depreciation in the master file is
accurate.
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

Prepaid expenses is a assets that vary in life from several

months to several years.
These include:

AUDIT OF • Prepaid rent

• Organization costs
PREPAID • Prepaid taxes
EXPENSES • Patents
• Prepaid insurance
• Trademarks
• Deferred charges
• Copyrights
• Goodwill
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

AUDIT OF
PREPAID
EXPENSES
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

INTERNAL CONTROL
Controls over the acquisition and recording of insurance
part of the acquisition and payment cycle. Consistent with the procedures
discussed in that cycle, proper authorization for new insurance policies and

AUDIT OF payment of insurance premiums are important controls.

PREPAID Controls over the insurance register

Record of insurance policies in force and the expiration date of each policy.
EXPENSES Auditors use insurance registers to identify policies in force related to prepaid
insurance accounts.

Controls over the charge-off of insurance expense

Companies often have a standard monthly journal entry to reclassify prepaid
insurance as insurance expense.
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES
AUDIT TESTS
Insurance policies in the prepaid Insurance Schedule exist and
existing policies are Listed (existence and Completeness)

The Client has rights to all Insurance policies in the prepaid

AUDIT OF Insurance Schedule (rights)
Prepaid amounts on the Schedule are accurate and the total Is
PREPAID Correctly added and agrees with the General Ledger
EXPENSES (accuracy and Detail tie-in)

The Insurance expense related to prepaid Insurance Is

Correctly Classified (Classification)

Insurance transactions are recorded in the Correct period

(Cutoff)
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

Many accrued liabilities represent future obligations for unpaid

services resulting from the passage of time but are not payable at
the balance sheet date.

AUDIT OF Other similar liabilities include:

ACCRUED • Accrued payroll
• Accrued payroll taxes
LIABILITIES • Accrued officers’ bonuses
• Accrued commissions
• Accrued professional fees
• Accrued rent
• Accrued interest
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

( AUDITING ACCRUED PROPERTY TAXES )

AUDIT OF
ACCRUED
LIABILITIES
 AUDIT OF PREPAID
EXPENSES & AUDIT OF
ACCRUED LIABILITIES

The balance in the property tax burden is the residual

amount resulting from the initial and final balances in
accrued property taxes and the payment of property taxes.
AUDIT OF Therefore, the emphasis in the test should be on the end of
ACCRUED property tax liabilities and payments.

LIBILITIES The auditor uses two primary tests for the inclusion of all
accruals :
Compeleteness
Accuracy
 AUDIT FOR INCOME &
EXPENSE ACCOUNT

two concepts in the audit of income and expense accounts

AUDIT OF are essential when considering the purposes of the income
statement:
INCOME AND 1. The matching of periodic income and expense is
EXPENSE necessary for a correct determination of operating results.
2. The consistent application of accounting principles for
ACCOUNT different periods is necessary for comparability.
 AUDIT FOR INCOME &
EXPENSE ACCOUNT

APPROACH TO AUDITING INCOME

AND EXPENSE ACCOUNTS
The parts of the audit directly
affecting these accounts are:
• Substantive analytical
procedures
• Tests of controls and substantive
tests of transactions
• Tests of details of account
balances
SUBSTANTIVE ANALYTICAL PROCEDURES
AUDIT FOR INCOME &
EXPENSE ACCOUNT
 TESTS OF CONTROLS AND SUBSTANTIVE TESTS
OF TRANSACTIONS
AUDIT FOR INCOME &
EXPENSE ACCOUNT
Both tests of controls and substantive tests of transactions
have the effect of simultaneously verifying balance sheet
and income statement accounts. The most important means
of verifying many of the income statement accounts in each
transaction cycle are understanding internal control and
performing the related tests of controls and substantive tests
of transactions.
For example, if the auditor concludes after adequate tests that control
risk can be appropriately assessed as low for transactions in the
acquisition and payment cycle, the only additional verification of related
income statement accounts, such as utilities, advertising, and purchases,
will occur through the performance of substantive analytical procedures
and cutoff tests. However, certain income and expense accounts are not
verified at all by tests of controls and substantive tests of transactions,
and others must be tested more extensively by other substantive testing.
 TESTS OF DETAILS OF ACCOUNT BALANCES
EXPENSE ANALYSIS
AUDIT FOR INCOME &
EXPENSE ACCOUNT

Auditors must analyze the amounts included in certain

income statement accounts even though the previously
mentioned tests have been performed. Expense account
analysis involves auditor examination of underlying
documentation of individual transactions and amounts
making up the detail of the total of an expense account.
auditors often analyze:

Repairs and maintenance Rent and lease expenses to Legal expense to determine
expense accounts to determine determine the need to capitalize whether there are potential
whether they erroneously leases contingent liabilities, disputes,
include property, plant, and illegal acts, or other legal
equipment transactions issues that may affect the
financial statements
TESTS OF DETAILS OF ACCOUNT BALANCES
ALLOCATION AUDIT FOR INCOME &
EXPENSE ACCOUNT

1. The allocation of manufacturing overhead between

inventory and cost of goods sold is an example of a
different type of allocation that affects expenses.
2. Allocations are important because they determine
whether an expenditure is an asset or a current period
expense.
3. The allocation of expenses such as depreciation of
fixed assets and amortization of copyrights is required
because the life of the asset is greater than one year.
 TESTS OF DETAILS OF ACCOUNT BALANCES
ALLOCATION AUDIT FOR INCOME &
EXPENSE ACCOUNT

Auditors commonly perform these tests as part of the

audit of the related asset or liability accounts:
1. Verifying depreciation expense as part of the audit of
property, plant, and equipment;
2. Testing amortization of patents as part of verifying
new patents or the disposal of existing ones
3. Verifying allocations between inventory and cost of
goods sold as part of the audit of inventory.
 GROUP 4
AUDDITING II

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