Auditing and assurance services 14e by arens chapter 19

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Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts Chapter 19 http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Recognize the many accounts in the acquisition and payment cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Accounts Associated with the Acquisition and Payment Cycle Assets: ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Learning Objective Design and perform audit tests of property, plant, and equipment and related accounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Classifications of Property, Plant and Equipment ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Equipment and Related Accounts Manufacturing Equipment Beginning Disposals balance Acquisitions Ending balance Accumulated Depreciated Disposals Beginning balance Current period depreciation Ending balance Gain or Loss on Disposals ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Depreciation Expense 19 - Auditing Manufacturing Equipment and Related Accounts Perform analytical procedures Plus verify:  Current year acquisitions  Current year disposals  Ending balance in the asset account  Depreciation expense  Ending balance in accumulated depreciation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Analytical Procedures for Manufacturing Equipment ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Verify Current Year Acquisitions Current year additions have a long-term effect on the financial statements Seven of the eight balance-related audit objectives are used as a frame of reference ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - Balance-related Audit Objectives Detail tie-in: Current acquisitions agree with the master file Foot the acquisition schedule Trace the individual acquisitions to the master file Trace the total to the general ledger ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 10 Balance-related Audit Objectives Existence and completeness: Insurance policies in the prepaid insurance schedule exist and existing policies are listed Rights: The client has rights to all insurance policies in the prepaid insurance schedule ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 27 Balance-related Audit Objectives Accuracy and detail tie-in: Prepaid amounts are accurate and the total is correctly added and agrees with the general ledger Classification: Insurance expense is properly classified Cutoff: Insurance transactions are recorded in the proper period ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 28 Learning Objective Design and perform audit tests of accrued liabilities ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 29 Audit of Accrued Liabilities        Accrued Accrued Accrued Accrued Accrued Accrued Accrued payroll payroll taxes officers’ bonuses commissions professional fees rent interest ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 30 Accrued Property Taxes and Related Accounts Accrued Property Taxes Payments Beginning (property taxes) balance Property Tax Expense Current period property tax expense Ending balance ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 31 Learning Objective Design and perform audit tests of income and expense accounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 32 Approach to Auditing Income and Expense Accounts  Analytical procedures  Tests of controls and substantive tests of transactions  Tests of details of account balances ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 33 Analytical Procedures for Income and Expense Accounts Analytical procedure Possible misstatement Compare individual expenses Overstatement or with previous years understatement of a balance in an expense account Compare individual asset and Overstatement or liability balances with understatement of a previous years balance sheet account that will also affect an income statement account ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 34 Analytical Procedures for Income and Expense Accounts Analytical procedure Possible misstatement Compare individual expenses Misstatement of expenses with budgets and related balance sheet accounts Compare gross margin percentage with previous years Misstatement of cost of goods sold and inventory Compare inventory turnover ratio with previous years Misstatement of cost of goods sold and inventory ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 35 Analytical Procedures for Income and Expense Accounts Analytical procedure Possible misstatement Compare prepaid insurance expense with previous years Misstatement of insurance expense and prepaid insurance Compare commission expense divided by sales with previous years Compare individual manufacturing expenses divided by total mfg expenses with previous years Misstatement of commission expense and accrued commissions Misstatement of individual manufacturing expenses and related balance sheet accounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 36 Tests of Controls and Substantive Test of Transactions Both tests of controls and substantive tests of transactions have the effect of simultaneously verifying balance sheet and income statement accounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 37 Analysis of Legal Expense Expense account analysis:  Repairs and maintenance  Rent and lease  Legal expense ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 38 Analysis of Legal Expense Expense account analysis:  Repairs and maintenance  Rent and lease  Legal expense ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 39 Tests of Details of Account Balances – Allocation 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 19 - 40 End of Chapter 19 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... Publishing, Auditing 14/e, Arens/ Elder/Beasley 19 - Learning Objective Design and perform audit tests of property, plant, and equipment and related accounts ©2012 Prentice Hall Business Publishing, Auditing. .. Auditing 14/e, Arens/ Elder/Beasley 19 - Classifications of Property, Plant and Equipment ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 19 - Equipment and Related Accounts... Publishing, Auditing 14/e, Arens/ Elder/Beasley 19 - 20 Learning Objective Design and perform audit tests of prepaid expenses ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 19
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