Auditing and assurance services 14e by arens chapter 19

Completing the Tests in the
Acquisition and Payment Cycle:
Verification of Selected Accounts
Chapter 19
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Learning Objective 1
Recognize the many accounts in the
acquisition and payment cycle.

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Accounts Associated with the
Acquisition and Payment Cycle
Assets:

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Learning Objective 2
Design and perform audit tests of property,

plant, and equipment and related
accounts.

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Classifications of Property, Plant
and Equipment

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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

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Depreciation
Expense

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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

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Analytical Procedures for
Manufacturing Equipment

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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.

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Balance-related Audit Objectives
Detail tie-in:
Current acquisitions agree
with the master file.
1.
2.
3.

Foot the acquisition schedule.
Trace the individual acquisitions

to the master file.
Trace the total to the general ledger.

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Balance-related Audit Objectives
Existence:
Current acquisitions as listed exist.
1. Examine vendors’ invoices and
receiving reports
2. Physically examine assets.

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Balance-related Audit Objectives
Completeness:
Existing acquisitions are recorded.
1. Examine vendors’ invoices of closely
related accounts to uncover items that
should be manufacturing equipment.
2. Review lease and rental agreements.

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Balance-related Audit Objectives
Accuracy:
Current year acquisitions as listed
are accurate.
1. Examine vendors’ invoices.

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Balance-related Audit Objectives
Classification:
Current year acquisitions as listed
are correctly classified.
1. Examine vendors’ invoices in
manufacturing equipment account.
2. Examine vendors’ invoices of closely
related accounts.
3. Examine rent and lease expense
for capitalizable leases.
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Balance-related Audit Objectives

Cutoff:
Current year acquisitions are recorded
in the correct period.
1.

Review transactions near the balance
sheet date for correct period.

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Major Balance-related
Audit Objectives
Rights:
The client has rights to current year
acquisitions.
1. Examine vendors’ invoices.

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Verify 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 of
the disposal of assets
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Verify Ending Balance
of Asset Accounts


All recorded equipment physically
exists on the balance sheet date



All equipment owned is recorded

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Verify Depreciation Expense
The most important objective is accuracy.
Consistent depreciation policy
Correct calculations

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Verify Ending Balance in
Accumulated Depreciation
Accumulated depreciation as stated
in the property master file agrees
with the general ledger.
Accumulated depreciation in the
master file is accurate.

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Learning Objective 3
Design and perform audit tests of prepaid
expenses.

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Audit of Prepaid Expenses
Prepaid rent
 Organization costs
 Prepaid taxes

 Patents
 Prepaid insurance
 Trademarks
 Deferred charges
 Copyrights


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Prepaid Insurance and Related
Accounts
Prepaid Insurance
Beginning
balance

Insurance Expense

Current period
insurance
expense

Acquisitions
Ending
balance

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Internal Controls
 Acquisition and recording of insurance
 Insurance register
 Insurance expense

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Audit Tests
 Compare total prepaid insurance and
insurance expense with previous years
 Compute the ratio of prepaid insurance
to insurance expense and compare
it with previous years
 Compare the individual insurance policy
coverage on the schedule of insurance
obtained with the preceding year’s schedule
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