Audit - Chapter 11

What are the 4 assertions about account balances at the period end?

1 ) Existence 2) Rights and Obligations 3) Completeness 4) Valuation and Allocation

Why are A/P confirmations used less often than A/R confirmations?

Because the documents such as vendor invoices, monthly vendor statements, and payment reports that are re-examined are issued by the external parties. Therefore, the auditor considers it to be reliable and do not require accounts payable confirmations.

Completeness - Search for Unrecorded Liabilities (SFURL)

1. Testing Subsequent Payments (after year-end): ensuring all liabilities are recorded 2. Confirmations: asking management about control activities used to identify unrecorded liabilities and accruals at the end of an accounting period. 3. Analytical Review of Expense Accounts: vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end; examine the date on each receiving report or vendor invoice to determine if the liability relates to the current audit period 4. Reconcile Copies of Vendors' Monthly Statements: examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. Vendors with whom the entity has previously done business. b. Amounts recorded in the accounts payable subsidiary ledger. c. Payees of checks drawn in the month after year-end. d. Invoices filed in the entity's open invoice file.

A

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.

B

Purchase cutoff procedures should be designed to test whether all inventory a. Purchased and received before the end of the year was paid for. b. Ordered before the end of the year was received. c. Purchased and received before the end of the year was recorded. d. Owned by the entity is in the possession of the entity at the end of the year.

C

All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Determine whether recorded accounts payable are valid. (existence/occurrence)

Compare selected amounts from the accounts payable listing with the voucher and supporting documents.

Examples of Control Testing - Cutoff

Compare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal. The auditor's tests of controls include reviewing the reconciliation of cash disbursements with postings to the cash disbursements journal and accounts payable subsidiary records. The auditor also tests cash disbursements before and after year-end to ensure that transactions are recorded in the proper period.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. b. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. c. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. d. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

D

Examples of Control Testing - Authorization

Examine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process. Proper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. The individual who approves a purchase should not have direct access to the cash disbursement.

Tests of Details of Transactions, Account Balances, and Disclosures - Classification, Presentation, and Disclosure

Major classification issues include . . . 1. Identifying and reclassifying any material debits contained in accounts payable. 2. Segregating short-term and long-term payables. 3. Ensuring that different types of payables are properly classified.

Examples of Control Testing - Occurrence

Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation. The auditor is concerned with a misstatement caused by a cash disbursement being recorded in the entity's record when no payment was made. The primary control activities to prevent such misstatements include proper segregation of duties, independent reconciliation and review of vendor statements, and monthly bank reconciliations.

List the procedures an auditor might use to search for unrecorded liabilities

Procedures an auditor might use to search for unrecorded liabilities include: Obtaining the internal control procedure followed (recognizing the unrecorded liabilities and accruals at the end of the accounting period from the management) Collecting the copies of the vendor's monthly statements from management (matching these amounts with AP records) Sending confirmation to vendors (verifying accounts with small or zero balances) Examining the voucher packet (verifying cutoff assertions of the accounts payable records) Examining the exception report (shows the mismatched purchase orders, receiving reports, and vendor invoices to search if there are any unrecorded liabilities).

All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy

Review drafts of the financial statements.

Tests of Details of Transactions, Account Balances, and Disclosures - Completeness

The auditor first determines completeness by obtaining a listing of accounts payable, footing the listing, and agreeing it to the general ledger control account. Selected vouchers or vendor accounts are traced to the supporting documents or subsidiary accounts payable records to verify the accuracy of the details making up the listing. For example, the tick mark next to the balance for Aarhus Industries indicates that the auditor has verified the account by tracing the balance to the accounts payable subsidiary records. For accrued expense accounts, the auditor obtains a detailed account analysis schedule. The second major test of the completeness assertion for accounts payable and accruals is concerned with unrecorded liabilities. Other audit procedures the auditor might perform for testing completeness include confirming vendor accounts including accounts with small or zero balances and reconciling copies of vendors' monthly statements to the entity's accounts payable records.

List the key segregation of duties in the purchasing process. What errors or fraud can occur if such duties are not segregated?

The key segregation of duties in the purchasing process include (and errors or fraud that can occur attesting to why they should be segregated): Purchasing function (theft of goods and possible payment for unauthorized purchases) Invoice-processing function (overpayment of goods and services or theft of cash) Disbursement function (theft of cash) Accounts payable function (error in which something that would normally be detected by reconciling subsidiary records with the general ledger control account)

Tests of Details of Transactions, Account Balances, and Disclosures - Rights and Obligations

There is little risk related to this assertion because entities seldom have an incentive to record liabilities that are not obligations of the entity.

Tests of Details of Transactions, Account Balances, and Disclosures - Valuation

Accounts payable are recorded at either the gross amount of the invoice or net of cash discount amount. The valuation of accruals depends upon the type and nature of the accrued expense. Most accruals are relatively easy to value.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a. Vendor invoices. b. Purchase orders. c. Receiving reports. d. Canceled checks.

C

Which of the following procedures is least likely to be performed before the balance sheet date? a. Test of internal control over cash. b. Confirmation of receivables. c. Search for unrecorded liabilities. d. Observation of inventory

C

What are the differences between accounts receivable and accounts payable confirmations?

Difference between accounts receivable and accounts payable confirmations include: Usage of confirmations (accounts payable confirmations are rarely used compared to accounts receivable) Evidence of completeness and validity (accounts payable confirmation provides completeness and accounts receivable confirmation provides validity) Usage of positive and negative confirmations (accounts payable uses only positive confirmations while accounts receivable uses both) Times at which they were sent (accounts payable confirmations are sent at the end of the year while accounts receivable are sent at the end of the year as well as an interim date).

Briefly describe each of the following documents or records: purchase requisition, purchase order, receiving report, vendor invoice, and voucher. Why would an entity combine all documents related to a purchase transaction into a "voucher packet"?

Purchase requisition - request for goods and services by an authorized individual or department within the entity Purchase order - Contains the description, quality, quantity, and other information on the goods and services being purchased Receiving report - Used to record the receipt of goods Vendor Invoice - Bill from the vendor that includes the description and quantity of the goods shipped or services provided, the price including freight, the terms of trade including cash discounts, and the date billed Voucher - Document that is frequently used by entities to control the payment of acquired goods and services They would be combined into a voucher packet because it: Contains all the information regarding a purchase transaction into an easy and convenient access to all the relevant documents recorded in a single voucher packet.

Examples of Control Testing - Accuracy

Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report. One of the major audit concerns is that the payment amount is recorded incorrectly. To detect such an error, entity personnel should reconcile the total of the checks and EFTs issued each ay with the daily cash disbursements report.

Examples of Control Testing - Completeness

Review procedures for accounting for numerical sequence of purchase orders, receiving reports, and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal. The major audit concern is that a cash disbursement is made but not recorded in the records. In addition to the example control tests discussed for occurrence, the auditor should also account for the numerical sequence of checks and reconcile the daily cash disbursements with posting to the accounts payable subsidiary records.

Examples of Control Testing - Classification

Review purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification. Sometimes an entity pays for goods and services directly from the cash disbursements journal without recording the purchase transaction in the purchases journal. If an entity pays for goods and services directly from the cash disbursements journal, controls must be present to ensure proper classification. The use of a chart of accounts, as well as independent approval and review of the account code on the voucher packet, should provide an adequate control. The auditor can review the cash disbursements journal for reasonableness of account distribution as well as the account codes on a sample of voucher packets.

All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Verify that recorded accounts payable include all amounts owed to vendors. (completeness)

Search for unrecorded liabilities.

All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Verify that all accounts payable are recorded in the correct period. (cutoff)

Select a sample of receiving documents for a few days before and after year-end.

Tests of Details of Transactions, Account Balances, and Disclosures - Cutoff

The auditor attempts to determine if all purchase transactions are recorded in the proper period. On most audits, the purchase cutoff is coordinated with the entity's physical inventory count. Proper cutoff should also be determined for purchase return transactions.

Tests of Details of Transactions, Account Balances, and Disclosures - Existence

The auditor's major concern is whether the recorded liabilities are valid obligations of the entity. The auditor should vouch a sample of items on the listing of accounts payable to other supporting documents.

List the possible misstatements detected for the substantive analytical procedures - Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior years.

Under- or overstatement of liabilities and expenses.

List the possible misstatements detected for the substantive analytical procedures - Compare current-year balances in accounts payable and accruals with prior years' balances

Under- or overstatement of liabilities and expenses.

List the possible misstatements detected for the substantive analytical procedures - Compare payables turnover and days outstanding in accounts payable to previous years' and industry data.

Under- or overstatement of liabilities and expenses.

List the possible misstatements detected for the substantive analytical procedures - Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years' and industry data.

Under- or overstatement of purchase returns.

Substantive Testing & Tests of Details of Account Balances and Disclosures

Used to test accounts payable and accrued expenses. . In the purchasing process, substantive tests of transactions focus mainly on the purchases and cash disbursement transactions. Tests of details of account balances concentrate on the detailed amounts or estimates that make up the ending balance for accounts payable and accrued expenses. Tests of details of disclosures are concerned with the presentation and disclosures related to accounts payable and accrued expenses