auditing ch 14

In examining liabilities of a company, what is the auditors' primary concern? A) Completeness B) Presentation C) Rights D) Valuation

) Completeness

some can be done at interim

Accrued property taxes Amounts withheld from employees' pay

Which of the following audit procedures is LEAST likely to detect an unrecorded liability? A) Analysis and recomputation of interest expense B) Analysis and recompilation of depreciation expense C) Confirmation of accounts payable D) Reading the minutes of meetings of the board of directors

Analysis and recompilation of depreciation expense

Ordinarily, the most significant assertion relating to accounts payable is: Completeness. Existence. Presentation. Valuation.

Completeness. Because an understatement of liabilities overstates income, auditors are ordinarily most concerned with the completeness assertion for payables. Note, however, that in circumstances in which a client may be motivated to understate income (e.g., to minimize taxes), existence becomes a bigger concern.

customer deposits are

Deposits on returnable containers or to guarantee payment of bills

ways they can understate or omit liabilities

Exaggerates the financial strength of company Conceals fraud as effectively as overstatement of assets Accompanied by understatement of expenses and overstatement of net income

other evidence available for A/P

External evidence held by client ( ex. vendor's invoices and statements)

Amounts withheld from employees pay

FIT SIT VIT (w/hold and remit) FICA (7.65% ee 7.65% er) school district tax (w/hold and remit) 401k (match 3%... w/hold and remit) medical/dental (80/20 premium) FUTA SUTA WIC

controls against misstatements... key

Independent employee reconciles subledger to general ledger -- SOD

customer deposit procedures

Review procedures followed in accepting and returning deposits Verify list of individual deposits and compare to general ledger account Generally do not confirm

Accrued Liabilities Accounts Payable Short-Term Notes

high turnover accounts audit the balance

Income taxes withheld from employees' pay but not

remitted as of balance sheet date

Sources of Accrued Liabilities

salaries, interest, rent sometimes called accrued expenses Accumulate over time and management must make accounting estimate at period-end

required to collect sales tax imposed by

state and local governments

Test computations of taxes

withheld and accrued

analyze unclaimed wages to determine

Credit represents all unclaimed wages after each payroll distribution Debits represent authorized payments

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? Completeness. Existence. Valuation. Rights.

Existence. Vouching from the purchases journal to the supporting documents provides evidence with respect to the existence assertion for purchases.

The least likely approach in auditing management's estimate relating to an accrued liability is to: Independently develop an estimate of the amount to compare to management's estimate. Review and test management's process of developing the estimate. Review subsequent events or transactions bearing on the estimate. Send confirmations relating to the estimate.

Send confirmations relating to the estimate.

Determine that taxes have been deposited in accordance with

law

Understatement of which of the following is most likely to overstate net income? A) Accounts payable B) Accounts receivable C) Property, plant and equipment D) Cash

Accounts payable

to search for unrecorded AP .. examine which transactions that were recorded following year end

Compare cash payments after year-end to a/p trial balance Examine cash disbursements over specific dollar amounts during subsequent period

Which of the following procedures is least likely to alert the auditors to unrecorded accounts payable? A) Confirmation of accrued liabilities B) Reconcile recorded liabilities with monthly statements from creditors C) Examine disbursement transactions recorded following year-end D) Analytical procedures involving year-end accounts payable

Confirmation of accrued liabilities

what laws to consider with unclaimed wages..

Consider state escheat laws

An audit of the balance in the accounts payable account is ordinarily not designed to: Detect accounts payable that are substantially past due. Verify that accounts payable were properly authorized. Ascertain the reasonableness of recorded liabilities. Determine that all existing liabilities at the balance sheet date have been recorded.

Detect accounts payable that are substantially past due. The auditors do not have as an objective the determination of whether accounts payable are past due.

controls over acquisition cycle

Segregation of duties--purchases and disbursements (incl. VMF)

most common error

duplicate recording of purchases.... a purchase is recorded when an invoice is received from vendor and recorded again when a duplicate invoice is sent by the vendor

unclaimed wages are subject to

misappropriation

most common frauds

- inaccurate recording of purchase or disbursement -- a bookkeeper prepares a check to himself and records it as having been issued to a major supplier -late (early) recording of cost of purchases... "cutoff" problems --- purchases journal closed early with the periods purchases recorded as having occurred in subsequent period

how to search for unrecorded AP

1. match inventory dr to AP cr 2. look at open P/Os 3. BOL date: 12/28

4 capital lease criteria

1. title transfer 2. BPO 3. lease term.. < 75% of useful life 4. PV FML < 90% FMV asset

Which of the following best describes a voucher? A) A document prepared by Purchasing that indicates the amount to be purchased. B) A document prepared by Receiving that indicates the quantity received and approves payment. C) A document prepared by Accounts Payable authorizing a cash disbursement. D) A document received by Purchasing from a supplier, indicating quantity of goods purchased and amount due

A document prepared by Accounts Payable authorizing a cash disbursement.

list of different accrued liabilities

Accrued Property Taxes Accrued Payrolls Pension Plan Accruals Postemployment Benefits other than Pensions Accrued Vacation Pay Product Warranty Liabilities Accrued Commission and Bonuses Income Tax Payable Accrued Professional Fees

Accrued liabilities generally differ from accounts payable in that accrued liabilities: A) Accumulate over time. B) Are usually confirmed at year-end. C) Can be found by a review of unpaid invoices. D) Are never included in cost of goods sold

Accumulate over time.

The auditors' verification of rapidly changing payable accounts is ordinarily most effective when performed: A) Before the balance sheet date. B) At the balance sheet date in conjunction with inventory cutoff tests. C) After the balance sheet date. D) Simultaneously with the audit of accrued liabilities.

After the balance sheet date.

Which of the following best explains why accounts payable confirmation procedures are not always used? A) Inclusion of representations on accounts payable in the client representation letter eliminates the need in most situations. B) Accounts payable generally are immaterial and may be audited through using analytical procedures. C) Creditors will press for payment when they receive the confirmation. D) Confirmations are better at identifying overstatements than understatements, and overstatements are not typically the major concern with accounts payable.

Confirmations are better at identifying overstatements than understatements, and overstatements are not typically the major concern with accounts payable.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. Examine unusual relationships between monthly accounts payable balances and recorded purchases. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. Examine selected cash disbursements in the period subsequent to year-end.

Examine selected cash disbursements in the period subsequent to year-end. Examining selected cash disbursements in the period subsequent to the year-end is the best audit procedure for determining the existence of unrecorded liabilities. All liabilities must eventually be paid, and will therefore be reflected in the accounts when paid if not when incurred. By close study of payments made subsequent to the balance sheet date, the auditors may find items that should have appeared in the balance sheet.

Which of the following is MOST likely to be included in the auditors' search for unrecorded accounts payable? A) Examine invoices received and recorded prior to year-end. B) Examine unmatched sales orders issued prior to year-end. C) Examine vouchers payable entered into the voucher register subsequent to the balance sheet date. D) Examine shipping reports for items shipped to customers recorded subsequent to the balance sheet date.

Examine vouchers payable entered into the voucher register subsequent to the balance sheet date.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: Authorized members of the audit committee. Accounting department. Individual who signs the checks. Chief executive officer.

Individual who signs the checks. The individual who signs the checks should ordinarily be provided with supporting documents that provide support for the disbursement. That individual should then manually or electronically "cancel" the documents so that the amount isn't paid a second time.

primary concern

Possibility of understatement or omission of liabilities

Which of the following is not a responsibility of the receiving department? A) Preparing a receiving report. B) Counting the number of goods received. C) Preparing a purchase invoice. D) Checking the goods received for quality.

Preparing a purchase invoice.

For which of the following transactions would an auditor most likely propose an adjustment to the financial statements? A) Inventory is included on the balance sheet at year-end, but the check for payment has not been paid until January 12. B) An order for office supplies that has not been recorded because the goods have not yet been shipped to the company. C) Purchase of $5,000 of office furniture that was ordered on December 22 with a $1,000 deposit being made with an entry debiting "deposit on furniture" for $1,000 and a credit to cash for $1,000. The office furniture was received on January 5. D) Raw materials are included on the balance sheet at year-end, but the payable and subsequent cash disbursements are not recorded until after year-end.

Raw materials are included on the balance sheet at year-end, but the payable and subsequent cash disbursements are not recorded until after year-end.

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: Receiving report and the purchase order. Receiving report and the voucher. Vendor's packing slip and the purchase order. Vendor's packing slip and the voucher.

Receiving report and the purchase order. Each vendor's invoice should be compared with the receiving report (to determine that it was received) and the purchase order (to determine that it was ordered). Receiving report and the voucher is incomplete because of the omission of the purchase order. Vendor's packing slip and the purchase order and Vendor's packing slip and the voucher are incorrect because the receiving report, prepared by the company itself, provides better evidence of what has been received than the vendor's packing slip.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? Footing the purchases journal. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. Tracing totals from the purchases journal to the ledger accounts. Sending written quarterly confirmation to all vendors.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts. The most efficient way in which the duplicate recording of a purchase transaction may be detected is by reconciling the related payable accounts with vendors' statements.

Which of the following procedures is least likely to be completed before the balance sheet date? Confirmation of receivables. Search for unrecorded liabilities. Observation of inventory. Review of internal accounting control over cash disbursements.

Search for unrecorded liabilities. Because a significant portion of the search for unrecorded liabilities deals with transactions recorded after year-end, it is least likely to be completed before the balance sheet date.

Which of the following best describes the auditors' approach to the audit of accrued liabilities? A) Confirmation B) Observation C) Plan a low assessed level of control risk D) Test computations

Test computations

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: This is a duplication of cutoff tests. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. There is likely to be other reliable external evidence available to support the balances.

There is likely to be other reliable external evidence available to support the balances. Auditors will usually find in the client's possession externally created evidence such as vendors' invoices and statements that substantiate the accounts payable. No such external evidence is on hand to support accounts receivable.

potential sources of unrecorded AP

Unmatched invoices and unbilled receiving reports Vouchers payable entered in the voucher register subsequent to balance sheet date Invoices received after balance sheet date Consignments in which client acts as a consignee

unclaimed wages are concerned with

adequacy of internal control -should not be left for more than a few days - prompt deposit in special bank account

some fees that may go unrecorded...

attorney

suspense accounts

close a journal to process month end...

A/P substantive TEsts... two common ones for testing

confirm A/P by direct correspondence with vendors... search for unrecorded A/P

Dr. PPE 500k Cr. LT lease 500k -- what ratios does this impact

debt to equity - kills it put 500k more debt on books with no change to equity ROA goes down

materiality on entries

effect on net income need to consider cumulative effect on FS

time examination is most effective when performed

immediately after the BS date little value if done before because concern with understatements

mistatements and omissions are jusged based on

impact on the FS

confirmation generally required for AP?

no

sales tax payable

not an expense.. just collecting agent.. liabilities until remitted verify liability by reviewing tax return test reasonableness of amount test invoices for correct tax charge

operating lease

off balance sheet financing 5 !

Trace amounts withheld to

payroll summary sheets or tax filings

to search for unrecorded AP be alert during..

reconciliations, confirmations and analytical procedures for unrecorded liabilities