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What is the significance of formally informing the accounting department about fixed asset disposals?
What is the significance of formally informing the accounting department about fixed asset disposals?
It ensures accuracy in the balance of assets carried forward and serves as a control mechanism.
Why is depreciation expense treated differently from other expense accounts during audits?
Why is depreciation expense treated differently from other expense accounts during audits?
Depreciation expense relies on internal allocations instead of transactions with external parties.
What are the four key considerations auditors assess regarding a client’s depreciation policy?
What are the four key considerations auditors assess regarding a client’s depreciation policy?
Useful life of acquisitions, method of depreciation, estimated salvage value, and depreciation policy in the year of acquisition and disposition.
How should auditors test the debits to accumulated depreciation during an audit?
How should auditors test the debits to accumulated depreciation during an audit?
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What is the primary objective when verifying the ending balance in accumulated depreciation?
What is the primary objective when verifying the ending balance in accumulated depreciation?
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What is involved in the test-footing process for accumulated depreciation?
What is involved in the test-footing process for accumulated depreciation?
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Why might more detailed tests of depreciation expense be required when the amounts are material?
Why might more detailed tests of depreciation expense be required when the amounts are material?
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What is one potential risk if the auditors don't verify accumulated depreciation thoroughly?
What is one potential risk if the auditors don't verify accumulated depreciation thoroughly?
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What are the potential effects of failing to capitalize a fixed asset correctly?
What are the potential effects of failing to capitalize a fixed asset correctly?
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What internal controls could help mitigate the misstatement of equipment disposals?
What internal controls could help mitigate the misstatement of equipment disposals?
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How can auditors verify the completeness of recorded equipment on the balance sheet?
How can auditors verify the completeness of recorded equipment on the balance sheet?
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What are the two key objectives of auditors when examining the ending balance in equipment accounts?
What are the two key objectives of auditors when examining the ending balance in equipment accounts?
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What role does a master file play in auditing equipment accounts?
What role does a master file play in auditing equipment accounts?
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What is the impact of misstatements related to disposals on the net book value of assets?
What is the impact of misstatements related to disposals on the net book value of assets?
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Why is the verification of depreciation expense critical during an equipment audit?
Why is the verification of depreciation expense critical during an equipment audit?
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How can periodic physical counts contribute to the audit process?
How can periodic physical counts contribute to the audit process?
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Why do auditors typically reduce the tolerable exception rate for the accuracy attribute?
Why do auditors typically reduce the tolerable exception rate for the accuracy attribute?
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What is the significance of segregating large and unusual items during an audit?
What is the significance of segregating large and unusual items during an audit?
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Under what circumstances might an auditor reduce tests of details of balances for accounts payable?
Under what circumstances might an auditor reduce tests of details of balances for accounts payable?
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What is the importance of out-of-period liability tests in auditing accounts payable?
What is the importance of out-of-period liability tests in auditing accounts payable?
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How do vendor statements and confirmations of accounts payable differ in terms of reliability?
How do vendor statements and confirmations of accounts payable differ in terms of reliability?
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What characteristics distinguish property, plant, and equipment from other asset classes?
What characteristics distinguish property, plant, and equipment from other asset classes?
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Why do auditors verify equipment differently from current asset accounts?
Why do auditors verify equipment differently from current asset accounts?
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What is the rationale behind the procedures used to uncover unrecorded payables during an audit?
What is the rationale behind the procedures used to uncover unrecorded payables during an audit?
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Study Notes
Audit Practice and Procedures II - Week Ten
- Topic: Auditing Capital Acquisition and Repayment, Cash Balances
- Objective: Evaluate if acquisition accounts and cash disbursements for goods and services are fairly presented according to accounting standards.
- Transaction Classes: Acquisitions of goods and services, cash disbursements, and purchase returns/allowances and purchase discounts.
Recap of Last Class
- No specific information available
Accounts and Classes of Transactions in the Acquisition and Payment Cycle
- Objective of the Audit: To determine if the accounts affected by acquisitions and cash disbursements are fairly presented
- Transaction Classes: Acquisitions of goods/services, cash disbursements, purchase returns and allowances, purchase discounts.
Business Functions in the Cycle and Related Documents and Records
- Cycle: Begins with a purchase requisition by an authorized employee, ends with payment on accounts payable.
- Key Documents and Records This includes; Purchase Requisition, Purchase Order, Receiving Report, Vendor's Invoice, Debit Memo, Voucher, Acquisitions Transaction file, Acquisitions journal or listing, Accounts payable master file, Accounts payable trial balance, Vendor's statement, Check or electronic payment, Cash disbursement transaction file, Cash disbursement journal or listing.
Table 18-1: Classes of Transactions, Accounts, Business Functions, and Related Documents and Records
- Detailed table connecting various transaction categories with accounts, business functions, and related documentation.
Request for Goods or Services
- The starting point is a request by client personnel
- Approval requirements vary by company policy
- Common related documents include Purchase Requisition, Purchase Order, Receiving Report, Vendor's invoice, Debit memo, Voucher, etc.
Business Function - Processing Purchase Orders
- Purchase requisition: Used by authorized employees to request goods/services (e.g., materials, repairs, insurance)
- Purchase order documents details for the goods/services to be purchased
- Electronic data interchange (EDI) is commonly used for submitting purchase orders electronically.
Receiving Goods and Services
- Critical point in the cycle as this is when most companies recognize acquisition.
- Receiving report is used to document quantity, description of goods, date received, and other details.
- Adequate control is needed to ensure accuracy and prevent error.
Business Function – Recognizing the Liability
- Vendor's Invoice: Document received from vendor showing amount owed for acquisition (details like description, quantity, price, billing date, discount terms, and total amount).
- Debit Memo: Document from vendor indicating a reduction in the amount owed (often similar to vendor's invoice but reflects reductions).
- Proper recording and accurate recording are critical as these affect financial statements.
Voucher
- Used by organizations for formal recording and control of each acquisition transaction
- Documents include cover sheet/folder, purchase order, packing slip, receiving report, and vendor's invoice.
Acquisitions Transaction File
- Computer-generated file that contains all transaction data, including vendor details, transactions dates, amounts, account classifications etc. for a period (e.g., day, week, month)
- Purchase returns and allowances or there can be a separate file for other transactions.
Acquisitions Journal or Listing
- Generated from the acquisitions transaction file and includes vendor name, date, amount, account classification for each transaction (e.g., repair, maintenance, inventory, utilities).
Accounts Payable Master File
- Records acquisitions, cash disbursements, and acquisition returns/allowances transactions.
- Totals of accounts in the master file are equal to the total balance of accounts payable in the general ledger.
- Includes beginning balance, acquisitions, return/allowances, cash disbursements, and ending balance for each vendor.
Accounts Payable Trial Balance
- Listing of amount owed to each vendor at a point in time
- Prepared directly from accounts payable master file
Vendor's Statement
- Monthly document prepared by the vendor indicating balances.
- Provides a client representation of transactions.
- The client's records should match vendor's statements if there are no differences.
Business Function: Processing and Recording Cash Disbursements
- Checks: Commonly used for payment for acquistion.
- Cash Disbursements Transaction File: Computer-generated file of all cash disbursement transactions
- Cash Disbursements Journal or Listing: Detailed listing/report generated from the cash disbursement transaction file (period-specific).
Methodology for Designing Tests of Controls and Substantive Tests of Transaction
- Tests of controls: Determine effectiveness of controls over acquisition and cash disbursement.
- Substantive tests of transactions: Obtain evidence of transactions' accuracy (processing purchase orders, receiving goods, and recognizing liability).
- Tests of payments: Focus on processing and recording cash disbursements.
Methodology for Designing Tests of Details of Balances
- Auditors identify client risks, set materiality, and assess inherent and control risk for accounts payable.
- They design substantive tests for transactions and analytical procedures for accounts payable.
- They design tests to verify balances for financial reporting.
Four Key Objectives for Acquisition Transaction Audit
- Existence: If recorded acquisitions are really for goods and services received.
- Completeness: If all acquisitions for the period are recorded.
- Accuracy: If the amounts for all acquisition transactions are correct.
- Cutoff: If acquisition transactions occurred at the correct point in time.
Audit of Property, Plant, and Equipment
- Definition of Property, Plant, and Equipment: Assets used in business operations, with expected life greater than a year, and not acquired for resale .
- Classifications: Land and land improvements, buildings, equipment, furniture/computers, vehicles, leasehold improvements, constructions in progress
Accounts Typically Associated with Acquisition and Payment Cycle Transactions
- Assets: Cash, Inventory, Supplies, Property/Plant, Patents
- Expenses: Cost of Goods Sold, Rent Expenses, Property Taxes, Insurance Expenses
- Liabilities: Accounts Payable, Rent Payable, Accrued Professional Fees, Income Taxes Payable
Auditors Verify Equipment Differently
- Fewer current period acquisitions (especially manufacturing equipment)
- Material amounts for equipment acquisitions
- Equipment records are maintained for extended periods in accounting records.
Verify Current Year Acquisitions, Disposals, Ending Balance, and Depreciation
- Current Year Acquisitions: Ensure that assets are properly capitalized (correct amount/date) and recorded.
- Current Year Disposals: Documents and methods for controlling sale or other disposal must be in place.
- Ending Balance: Ensure all assets are accurate by physical inspection and documentation.
- Depreciation: Policies, calculations, and rates must be accurate.
Out-of-Period Liability Tests
- Crucial due to understatements in liability accounts.
- Focus is finding unrecorded accounts payable
- Depends on assessed control risk and materiality.
- Appropriate procedures include auditing for unrecorded and out of period entries.
Difference Between Vendor Statements and Confirmations
- Vendor statements come from independent vendors and are available to the client at the time of audit.
- Vendor confirmations are from the client and used under certain circumstances.
Audit of Prepaid Expenses, Accrued Liabilities, and Income/Expense Accounts.
- See Chapter 19 for further information.
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