CHAPTER 18 The Acquisition and Payment Cycle: Verification of Selected Accounts

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CHAPTER 18The Acquisition and Payment Cycle
Verification of Selected Accounts
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Theacquisition andpayment cycle even- tually
affects most as- pects of an account-ing system
and af-fects manyaccounts.
assets
liabilities
expenses
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assets
How are assets affected by the acquisi- tion and
pay- ment cycle?
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- assets are acquired for use or sale
assets
property, plant, equipment
How are assets affected by the acquisi- tion and
pay- ment cycle?
inventory
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- prepaid expenses are incurred
assets
prepaid insurance
prepaid taxes
How are assets affected by the acquisi- tion and
pay- ment cycle?
prepaid rent
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- acquisitions even- tually require cash
payment
assets
How are assets affected by the acquisi- tion and
pay- ment cycle?
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liabilities
Liabilities are affected when assets or services
are acquired with a promise to pay rather than a
payment.
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Expenses are affected when goods and services are
acquired and prepaid expenses are used.
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Auditing Manufacturing Equipment
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Auditing Manufacturing Equipment
- perform analytical procedures examples
depreciation expense / equipment
manufacturing costs / production
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions
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Auditing Manufacturing Equipment
- verify current-year acquisitions EXAMPLE
PROCEDURES Select a sample of entries in the
acqui- sitions journal and trace to fixed
asset master file.
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Auditing Manufacturing Equipment
- verify current-year acquisitions EXAMPLE
PROCEDURES Select a sample of entries in the
acqui- sitions journal and trace to vendor in-
voices and receiving reports.
acquisitions journal description _ _ June 1,
19x0 Factory Equipment 5289
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Auditing Manufacturing Equipment
- verify current-year acquisitions EXAMPLE
PROCEDURES Select a sample of entries in the
acqui- sitions journal and physically examine
the related assets.
acquisitions journal description _ _ June 1,
19x0 Factory Equipment 5289
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Auditing Manufacturing Equipment
- verify current-year acquisitions
Select a sample of entries in the acqui-
sitions journal and trace to fixed asset master
file. Select a sample of entries in the acqui-
sitions journal and trace to vendor in- voices
and receiving reports. Select a sample of
entries in the acqui- sitions journal and
physically examine the related assets.
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Auditing Manufacturing Equipment
- verify current-year acquisitions
Select a sample of entries in the acqui-
sitions journal and trace to fixed asset master
file. Select a sample of entries in the acqui-
sitions journal and trace to vendor in- voices
and receiving reports. Select a sample of
entries in the acqui- sitions journal and
physically examine the related assets.
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Auditing Manufacturing Equipment
- verify current-year acquisitions
Select a sample of entries in the acqui-
sitions journal and trace to fixed asset master
file. Select a sample of entries in the acqui-
sitions journal and trace to vendor in- voices
and receiving reports. Select a sample of
entries in the acqui- sitions journal and
physically examine the related assets.
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Select a sample of entries in the acqui-
sitions journal and trace to vendor in- voices
and receiving reports.
To address completeness of newly-acquired assets,
reverse the direction of these procedures.
Example Select a sample of receiving reports
and trace to vendor invoices and the acquisitions
journal.
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions - verify current-year
disposals
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Auditing Manufacturing Equipment
- verify current-year disposals review
whether newly-acquired assets replace
existing assets
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Auditing Manufacturing Equipment
- verify current-year disposals review
whether newly-acquired assets replace
existing assets analyze gains on the disposal
of as- sets and miscellaneous income for
receipts from asset disposals
For Sale
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Auditing Manufacturing Equipment
- verify current-year disposals review
whether newly-acquired assets replace
existing assets analyze gains on the disposal
of as- sets and miscellaneous income for
receipts from asset disposals review plant
modifications and changes in product line,
taxes, or in- surance coverage for
indications of deletions of equipment
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Auditing Manufacturing Equipment
- verify current-year disposals analyze gains
on the disposal of as- sets and
miscellaneous income for receipts from asset
disposals review plant modifications and
changes in product line, taxes, or in-
surance coverage for indications of
deletions of equipment make inquiries of
management and production personnel about
disposals
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions - verify current-year
disposals - verify ending asset balances
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions - verify current-year
disposals - verify ending asset balances
how?
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Auditing Manufacturing Equipment
- verify ending asset balances
EXAMPLE PROCEDURE Trace totals from fixed asset
master file to the general ledger.
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions - verify current-year
disposals - verify ending asset balances - verify
depreciation expense
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Auditing Manufacturing Equipment
- verify depreciation expense
What is the auditors greatest
concern regarding depre- ciation expense?
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Auditing Manufacturing Equipment
- verify depreciation expense
accuracy
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Auditing Manufacturing Equipment
- verify depreciation expense
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Auditing Manufacturing Equipment
- verify depreciation expense
- recalculate depreciation expense
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Auditing Manufacturing Equipment
- verify depreciation expense
- recalculate depreciation expense - determine
whether the clients depreci- ation policy is
consistent
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Auditing Manufacturing Equipment
- perform analytical procedures - verify
current-year acquisitions - verify current-year
disposals - verify ending asset balances - verify
depreciation expense - verify ending accumulated
de- preciation balances
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Auditing Manufacturing Equipment
- verify ending accumulated de- preciation
balances
What audit procedures address the auditors
concern regarding accu- racy of accumulated
depreciation?
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Trace totals from fixed asset master file to the
general ledger.
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Auditing Prepaid Expenses and Other Assets
trade- marks
prepaid rent
deferred charges
prepaid taxes
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Auditing Prepaid Expenses and Other Assets
trade- marks
prepaid rent
deferred charges
prepaid taxes
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What audit proce- dures are appropriate for a
prepaid expense?
- perform analytical procedures EXAMPLES
compare prepaid expense and the related
expense account to prior years compare
prepaid expense / related expense account to
prior years
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What audit proce- dures are appropriate for a
prepaid expense?
- perform analytical procedures - examine
documentation and other evi- dence supporting
the existence and completeness of prepaid
expenses
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What audit proce- dures are appropriate for a
prepaid expense?
- perform analytical procedures - examine
documentation and other evi- dence supporting
the existence and completeness of prepaid
expenses - recalculate prepaid expenses and
trace to the general ledger
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What audit proce- dures are appropriate for a
prepaid expense?
- examine documentation and other evi- dence
supporting the existence and completeness of
prepaid expenses - recalculate prepaid expenses
and trace to the general ledger - determine
whether the expense related to the prepaid
expense is properly classified
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What audit proce- dures are appropriate for a
prepaid expense?
- recalculate prepaid expenses and trace to the
general ledger - determine whether the expense
related to the prepaid expense is properly
classified - determine whether prepaid expense
transactions are recorded in the proper period
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What audit proce- dures are appropriate for a
prepaid expense?
- determine whether the expense related to the
prepaid expense is properly classified -
determine whether prepaid expense transactions
are recorded in the proper period - determine
whether prepaid expenses are properly presented
and disclosed
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Auditing Accrued Liabilities
accrued professional fees
accrued bonuses
accrued interest
accrued rent
accrued commis- sions
accrued payroll
accrued warranty costs
accrued taxes
accrued pension costs
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Auditing Accrued Liabilities
accrued professional fees
accrued bonuses
accrued interest
What audit proce- dures are appropriate for an
accrued liability?
accrued rent
accrued commis- sions
accrued payroll
accrued warranty costs
accrued taxes
accrued pension costs
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What audit proce- dures are appropriate for an
accrued liability?
The audit procedures appropriate for
accrued liabilities are similar to those
appropriate for pre- paid expenses, depending on
the client.
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Auditing Operations
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Auditing Operations
- perform analytical procedures
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Auditing Operations
- perform analytical procedures - perform tests
of controls and substantive tests of
transactions
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Auditing Operations
- perform analytical procedures - perform tests
of controls and substantive tests of
transactions - perform an analysis of account
balances
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Auditing Operations
- perform analytical procedures - perform tests
of controls and substantive tests of
transactions - perform an analysis of account
balances - perform tests of details of balance
sheet accounts
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Auditing Operations
- perform analytical procedures - perform tests
of controls and substantive tests of
transactions - perform an analysis of account
balances - perform tests of details of balance
sheet accounts - perform tests of allocations