Audit of acquisition and

payment cycle
Lecture 6
 Accounts associated with the acquisition
and payment cycle
Audit of property, plant and equipment
Outline
Audit of prepaid expenses

Audit of acrrued liabilities

Audit of income and expense accounts

Accounts associated with the acquisition and payment cycle
Audit of property, plant and equipment
Equipment and related accounts
 Perform Perform substantive analytical procedures

Verify Verify current year acquisitions

Audit of
Verify
equipment
Verify current year disposals

and related Verify Verify the ending balance in the asset account

accounts
Verify Verify depreciation expense

Verify Verify the ending balance in accumulated depreciation

Substantive analytical procedures
 Detail tie in:
• Foot the acquisition schedule.
Current
• Trace the individual acquisitions to the
acquisitions agree master file.
with the master • Trace the total to the general ledger
file.
Balance-
related audit Existence: Current • Examine vendors’ invoices and receiving
acquisitions as reports
objectives listed exist. • Physically examine assets

Table 19.4
Completeness: • Examine vendors’ invoices of closely
Existing related accounts to uncover items that
acquisitions are should be manufacturing equipment.
recorded • Review lease and rental agreements
 Accuracy: Current
year acquisitions as • Examine vendors’ invoices
listed are accurate

• Examine vendors’ invoices in manufacturing

Classification: Current equipment account.

Balance- year acquisitions as

listed are correctly
• Examine vendors’ invoices of closely related
accounts.

related audit classified. • Examine rent and lease expense for capitalizable
leases

objectives Cutoff: Current year

acquisitions are • Review transactions near the balance sheet date for
recorded in the correct period
correct period

Rights: The client has

rights to current year • Examine vendors’ invoices
acquisitions
 Review Review whether newly acquired assets
replace existing assets

Analyze Analyze gains and losses on disposal

Verify
current year
disposals Review Review documents for indications of
deletion of equipment

Make inquiries about the possibility of the

Make disposal of assets
Verify ending All recorded equipment
balance of physically exists on the
asset balance sheet date (Existence)
accounts

All equipment owned is

recorded (Completeness)
 • The most important objective is
Verify accuracy.
depreciation • Consistent depreciation policy
• Correct calculations
expense
 Accumulated depreciation as
Verify ending stated in the property master file
agrees with the general ledger.
balance in
accumulated
depreciation Accumulated depreciation in the
master file is accurate.
Audit of prepaid expenses

Substantive analytical Some assets are

procedures are often significant and require
sufficient for prepaid complex judgement that
expenses, deferred need involvement of
charges, and intangibles specialist
 Controls over acquisition and
Prepaid recording of insurance
insurance – • Proper authorization is an important control
Internal
controls Insurance register

• auditor independently verifies terms and

amounts of insurance policies or contracts

Insurance expense
 Compare Compare total prepaid insurance and insurance expense with
previous years

Prepaid
insurance – Compute Compute the ratio of prepaid insurance to insurance expense and
compare it with previous years

Audit tests
Compare Compare the individual insurance policy coverage on the schedule of
insurance obtained with the preceding year’s schedule

Compare Compare the computed prepaid insurance balance for the current
year on a policy-by-policy basis with that of the preceding year.

Review Review the insurance coverage listed on the prepaid insurance

schedule with an appropriate client official or insurance broker
 Existence and completeness: Insurance policies in the
Prepaid prepaid insurance schedule exist and existing policies are
listed.
insurance – Rights: The client has rights to all insurance policies in the
Balance- prepaid insurance schedule

related Accuracy and detail tie-in: Prepaid amounts are accurate,

objectives and the total is correctly added and agrees with the general
ledger.
Classification: Insurance expense is properly classified.

Cutoff: Insurance transactions are recorded in the proper

period
 Completeness
Audit of
accrued
liabilities Accuracy: consistent treatment
of the accrual from year to year
Taxes accounts
Audit of income and expense accounts
 • Both tests of controls and
Tests of substantive tests of transactions
have the effect of simultaneously
Controls and verifying balance sheet and income
Substantive statement accounts

Test of
Transactions
 Repairs and maintenance
expense accounts

Expense
account Rent and lease expenses

analysis

Legal expense
 Several expense accounts result from the
Tests of allocation of accounting data rather than
Details of discrete transactions
Account
Balances – These include depreciation, depletion, and the
amortization of copyrights and catalog cost
Allocation

The allocation of manufacturing overhead

between inventory and cost of goods sold is an
example of a different type of allocation that
affects expenses
 The End!
Exercise:
19-20, 19-21, 19-22 (19-19 optional)
Reference: C510, D630, D730, D830, E530, E630