ACC421 - Ch 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

associated asset accounts

cash, inventory, supplies, PP&E, intangibles, prepaid rent/taxes/insurance

associated expense accounts

COGS, rent expense, property taxes, income tax expense, insurance expense, professional fees, retirement benefits, utilities

associated liability accounts

accounts payable, rent payable, accrued professional fees, accrued property taxes, other accrued expenses, income taxes payable

fixed asset master file

-primary accounting record for equipment and other property, plant, and equipment accounts
-includes a detailed record for each type of property owned

auditing manufacturing equipment and related accounts

analytical procedures plus verification of:
-current year acquisitions
-current year disposals
-ending balance in the asset account
-depreciation expense
-ending balance in accumulated depreciation

verifying current year acquisitions

-the proper recording of current year additions is important because the long-term effect the assets have on financial statements
-7/9 of balance-related audit objectives are therefore used as a frame of reference

balance-related audit objectives (equipment additions)

-detail tie-in

verifying current year disposals

-review whether newly acquired assets replace existing assets
-analyze gains and losses on disposal
-review documents for indications of deletion of equipment
-make inquiries about the possibility if the disposal of assets

verifying ending balance of asset accounts

1. all equipment owned is recorded (completeness)
2. all recorded equipment physically exists on the balance sheet date (existence)

verifying depreciation expense

the most important objective is accuracy
-consistent depreciation policy
- correct calculations

verifying ending balance in accumulated depreciation

1. accumulated depreciation as stated in the property master file agrees with the general ledger
2. accumulated depreciation in the master file is accurate

fixed assets fraud

-booking fictitious assets
-misrepresenting valuations of assets
-improperly capitalizing inventory and start-up costs

audit of prepaid expenses

-prepaid rent, prepaid taxes, patents, prepaid insurance, trademarks, deferred charges, copyrights

audit tests of prepaid expenses (insurance)

-compare total prepaids with previous years
-compute ratios of prepaids to expenses and compare to previous years
-compare individual insurance policy coverage on schedule of insurance obtained with the prior year's schedule
-compare computed prepaids on

insurance register

record of insurance policies in force and the expiration date of each policy

balance-related audit objectives for performing tests of details of balances

performed only when there is a special reason for doing so:
-existence and completeness
-accuracy and detail tie-in

audit of accrued liabilities

-accrued income taxes, accrued interest, accrued pension costs, accrued professional fees, accrued rent, accrued warranty costs

approach to auditing income and expense accounts

-analytical procedures
-tests of controls and substantive tests of transactions
-tests of details account balances

expense account analysis

involves auditor examination of underlying documentation of individual transactions and amounts making up the detail of an expense account

test details of account balance - allocation

-several expense accounts result from the allocation of accounting data rather than discrete transactions
-ie depreciation, depletion, and amortization of copyrights and catalog costs
-allocation of MOH between inventory and COGS