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Questions and Answers
What is emphasized during the audit of property, plant, and equipment assets?
What is emphasized during the audit of property, plant, and equipment assets?
Why is accumulated depreciation tested during the equipment audit?
Why is accumulated depreciation tested during the equipment audit?
Which of the following is NOT a reason why auditors verify equipment differently from current asset accounts?
Which of the following is NOT a reason why auditors verify equipment differently from current asset accounts?
What triggers the need for an auditor to verify gain or loss entries?
What triggers the need for an auditor to verify gain or loss entries?
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What assertion is primarily checked regarding the existence of property, plant, and equipment during an audit?
What assertion is primarily checked regarding the existence of property, plant, and equipment during an audit?
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What is a primary objective when verifying accumulated depreciation?
What is a primary objective when verifying accumulated depreciation?
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What misstatement could occur when current year acquisitions are not properly capitalized?
What misstatement could occur when current year acquisitions are not properly capitalized?
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What common issue arises when disposing of equipment?
What common issue arises when disposing of equipment?
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What is the primary purpose of obtaining a cut-off bank statement during an audit?
What is the primary purpose of obtaining a cut-off bank statement during an audit?
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Which procedure is part of verifying depreciation expense?
Which procedure is part of verifying depreciation expense?
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Which account includes all cash receipts and disbursements in an organization?
Which account includes all cash receipts and disbursements in an organization?
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Which of the following best describes the concept of existence in the audit of accumulated depreciation?
Which of the following best describes the concept of existence in the audit of accumulated depreciation?
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What is the impact of failing to verify the ending balance in accumulated depreciation?
What is the impact of failing to verify the ending balance in accumulated depreciation?
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During the audit of General Cash Accounts, which phase revolves around assessing client business risks affecting cash?
During the audit of General Cash Accounts, which phase revolves around assessing client business risks affecting cash?
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What does the audit of current year disposals aim to ensure?
What does the audit of current year disposals aim to ensure?
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What is a key aspect of substantive tests during the audit of cash accounts?
What is a key aspect of substantive tests during the audit of cash accounts?
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What type of account is typically established to enhance internal control over payroll disbursements?
What type of account is typically established to enhance internal control over payroll disbursements?
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How can analytical procedures help in auditing accumulated depreciation?
How can analytical procedures help in auditing accumulated depreciation?
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Why is it important to test the bank reconciliation during an audit?
Why is it important to test the bank reconciliation during an audit?
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What is a common risk identified when assessing control risk in cash accounts?
What is a common risk identified when assessing control risk in cash accounts?
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What assertion is primarily tested through the receipt of a bank confirmation?
What assertion is primarily tested through the receipt of a bank confirmation?
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Study Notes
Audit Practice II & Procedures
- The focus is on auditing special accounts and cash balances
- The Acquisition & Payment cycle is examined
- Accounts involved include
- Property, plant, and equipment
- Other liabilities
- Prepaid expenses
- Income and expense accounts
Property, Plant, and Equipment (Classification)
- Assets with expected lives over one year
- Used in the business, not for resale
- Include
- Land and land improvements
- Buildings and building improvements
- Equipment
- Furniture and fixtures
- Autos and trucks
- Leasehold improvements
- Construction in process for property, plant, and equipment
Equipment and Related Accounts
- Equipment: Beginning balance
- Acquisitions
- Disposals
- Ending balance
- Accumulated depreciation: Beginning balance
- Disposals
- Current period depreciation
- Ending balance
- Gain or loss on disposal
- Depreciation expense
Auditors' Verification of Equipment
- Fewer current period acquisitions, especially large equipment for manufacturing.
- Acquisition amounts are often material.
- Equipment is often kept and maintained in records for years.
Audit of Equipment
- Verification of current period acquisitions is emphasized, rather than the prior year balance.
- Depreciation expense and accumulated depreciation accounts are verified.
- Equipment disposals may trigger gain or loss entries that need verification.
Equipment Tests Categories
- Perform analytical procedures
- Assess likelihood of material misstatements in depreciation expense and accumulated depreciation
- Verify current year acquisitions
- Failure to capitalize or recording at incorrect amount affects balance sheet or P&L
- Verify current year disposals
- Misstatements can occur due to lack of formal internal controls or transposition errors
- Verify depreciation expense
- Depreciation expense is often not part of controls and substantive tests of transactions
- Verify ending balance in accumulated depreciation
- Debits are tested for asset disposals. Credits are verified as part of depreciation expense.
Verify Balance in Asset Account
- Existence: all recorded equipment physically exists on the balance sheet date
- Completeness: all equipment owned is recorded
Cash Balance Cycle
- Cash is the only account in all cycles except inventory and warehousing
- Cash balance evidence depends on other cycle tests
Relationships of Cash
- Diagram shows the relationships between cycles (Capital Acquisition and Repayment, Acquisition and Payment, Sales and Collection, Payroll and Personnel) and cash in the bank.
Major Types of Cash Accounts
- General Cash Account
- Imprest Accounts
- Branch Bank Account
- Imprest Petty Cash Fund
- Cash Equivalents
General Cash Account
- All cash receipts and disbursements flow through this account.
- Acquisition and payment cycle disbursements come from this account
- Sales and collection cycle receipts are deposited here
Audit of General Cash Accounts - Phases
- Phase I: Identify client business risks affecting cash, set a tolerable misstatement, and assess inherent risk, and assess control risk.
- Phase II: Design and perform tests of controls and substantive tests of transactions.
- Phase III: Design and perform analytical procedures, and design tests of details of cash balance.
Imprest Accounts
- Many companies establish a separate imprest payroll account to improve internal control over payroll disbursements.
Receipt of Bank Confirmation
- Auditors obtain a direct confirmation from every bank used by the client.
Receipt of Cut-off Bank Statement
- Used to verify reconciling items on the year-end bank reconciliation with evidence not accessible to the client.
Tests of Bank Reconciliation
- Verify that client personnel carefully prepared the bank reconciliation.
Testing for Fraud (Cash Receipts)
- Confirmation of accounts receivable
- Tests to detect lapping
- Review of general ledger
- Comparison of customer orders and subsequent cash receipts
- Examination of approvals and documentation for bad debts and sales returns/allowances
Testing of Interbank Transfer
- Verify the accuracy of the information on the interbank transfer schedule.
- Ensure records are in both the receiving and disbursing banks
- Verify that dates are in the same fiscal year
- Ensure disbursements are included or excluded from year-end reconciliations as outstanding checks
- Ensure receipts are included or excluded as deposits in transit
Imprest Petty Cash
- Verified primarily due to potential for embezzlement and client's expectation of auditor examination, even for immaterial amounts.
- Crucial internal control: use of an imprest fund held by one individual.
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- Petty cash funds should not be mixed with other receipts and kept separate from other activities.
- Limits on expenditure amounts from the fund, and the total fund amount.
- Disbursements require responsible official's approval on a pre-numbered petty cash form.
- Actual cash, checks, and unreimbursed forms should equal the fund total in the general ledger.
- Audit emphasis is on control testing rather than the ending balance.
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Description
This quiz focuses on auditing special accounts, cash balances, and the Acquisition & Payment cycle. It covers essential topics like property, plant, and equipment, as well as the classification and verification of equipment and related accounts. Test your knowledge of acquisition, disposal, depreciation, and financial implications in auditing.
