Chapter 14
If _____________ is detected, it is much easier to pass it off as an accidental error.
Omission
_________ of an entry is less susceptible to detection than is a fictitious entry.
Omission
The _______-_________ of creditors constitutes an effective control in accounting for payables that is not present for receivables.
Self-Interest
In the audit of liabilities, the auditors are primarily concerned with the possibility of ________________, or omission of liabilities
Understatement
Auditors may prepare a listing of _____________ accounts payable discovered during the course of the audit.
Undiscovered
The term Accounts payable is often referred to as ____________ ___________.
Vouchers payable
Comparison of the Q listed on the invoice with those shown on the receiving report and PO prevents the payment of charges for goods in _____________of those ordered and received.
excess
Comparison of the prices, discounts, and terms of shipment as shown on the PO and on the vendor's invoice provides a safeguard against the payment of ___________prices.
excessive
The receiving dpt should be ____________ of te purchasing dpt.
independent
Vendors statements
received monthly, should be reconciled promptly with the A/P ledger or list of oper vouchers, and any discrepancies fully investigated.
Accounts Payable
short-term obligations arising from the purchase of goods and services in the ordinary course of business.
The principle working papers for A/P are?
-Lead schedule -trial balances at the balance sheet date -confirmation requests for A/P
Search for unrecorded A/P
1. Completeness 2. Cutoff
Issues with Managements Estimates:
1. highly subjective assumptions 2. manual computations
What are the two purposes of preparing a trial balance of A/P as of the balance sheet date and reconciling it with the general ledger?
1.) To determine that the liability figure appearing in the balance sheet is in agreement with the individual items comprising the detailed records. 2.) The second purpose is to provide a starting point for substantive procedures
Potential Sources of Unrecorded Payables
A) Unmatched invoices and unbilled receiving reports. B) Vouchers payable entered in the voucher register subsequent to the balance sheet date. C) Invoices received by the client after the balance sheet date. D) Consignments in which the client acts as a consignee.
A/P of one company are the ____ of another company
A/R
Current income tax laws prohibit the deduction of provisions for warranty liabilities, they are only permitted when _____________ Expenditures are incurred.
Actual
When auditing pension amounts, auditors will obtain representations from an __________ and confirm the activity in the plan with the trustee.
Actuary
The verification of a sample of postings to the A/P control account takes place on before what date?
Balance sheet date
To gain assurance as to the overall reasonableness of A/P, the auditor may compute ratios such as (purchases/Accounts payable) and (Accounts Payable/Current Liabilities). The ratios are ___________ with prior years to disclose trends that warrant ___________.
Compared, Investigation
Auditors may test purchase discounts by?
Computing the ratio of (Cash Discounts/Total Purchases) to prior periods. Any significant decrease in the ratio might indicate a change in terms of purchases, failure to take discounts, or fraudulent manipulation
Trade Accounts Payable
Current Liabilities arising from the purchase of goods and services from trade creditors. Generally evidenced by invoices or statements received from the creditors.
Within the A/P dpt, all forms should be stamped with the ______ ____________/
Date Received.
Confirmation
Direct communication with vendors or suppliers to determine the amount of A/P. Represents High-Quality evidence because it is a document created outside the client organization and transmitted directly to the auditors.
Voucher
Document authorizing a cash disbursement. Usually provides space for initials. Also means a group of supporting documents used as a basis for recording liabilities or making cash disbursements.
The list of amounts payable to individual vendors should be reviewed to identify any companies from which the client _____ _____ __________ acquire goods or services.
Does not ordinarily
Audits should verify that property tax bills have been received on all taxable property or that an __________ tax has been accrued.
Estimated
Understating a liability account is generally possible merely by ___________to make an _________for a transaction creating a liability
Failing, Entry
Invoices and statements from suppliers usually support A/P arising from the purchase of _________ or _________.
Goods or Services
An example of fraud related to the misappropriation of purchases
Goods that are ordered but delivered to an inappropriate address and stolen.
In situations in which there is a risk of ___________recording of transactions, the auditors should consider vouching selected creditors' balances to supporting vouchers, invoices, POs, and receiving reports.
Inaccurate
Review of the expense account for_______ Fees is always essential because ti may reveal damage suits, tax disputes, or other litigation warranting disclosure in the financial statements
Legal
An ______________ of liabilities will exaggerate the financial strength of a company and conceal fraud just as effectively as an ____________ of assets.
Liabilities, Assets
If purchasing, receiving, invoice verification, and cash disbursement are delegated to separate departments and controls appear adequate, the vouching of individual items from the ledgers to the original records may provide the auditors with sufficient evidence to assess control risk for certain assertions related to A/P as being at a __________ _________.
Low Level
When dealing with accrued liabilities, it is important to audit ______________ accounting _____________.
Managements, Estimates
Customers' deposits
Many companies require that customers make deposits on returnable containers. A review of the procedures followed in accepting and returning deposits should be made by the auditors with a view to disclosing any shortcomings in internal control. If deposits are interest-bearing, the amount of accrued interest should be tested for reasonableness.
Should Interest-bearing obligations be included in accounts payable.
NO
Auditing procedures for pension costs may begin with a review of the copy of the pension plan in the auditors' ____________ file.
Permanent
The primary audit objective of Performing procedures to identify A/P to related parties is?
Presentation and Disclosure
The primary audit objective of the evaluation of the financial statement presentation and disclosure is?
Presentation and Disclosure.
When the client has established effective IT application controls for purchase transactions, the auditors may find it more efficient to test these controls rather than a sample of __________ transactions.
Purchase
Three Way Match
Purchase Requisition (Copy) -From Receiving to Purchasing Purchase order- Created in purchasing Receiving order(Copy)- From receiving
Discussions of internal control applicable to A/P may logically be extended to the entire __________ or ____________ cycle
Purchase, Acquisition
Auditors should examine any prior year tax returns that have not been inspected by revenue agents to make sure there has not been a _____________ ___________of taxes that would warrant a liability.
Substantial Underpayment
The auditors determine the amount of deferred tax liabilities using schedules referred to as "Tax Accrual" Working papers, which is usually reviewed by one of the CPA firm's ____ specialists.
Tax
Verifying a sample of posting to the A/P control account is a?
Test of Controls
Vouching to supporting documents a sample of postings in selected accounts of the A/P subsidiary ledger is a?
Test of Controls
Verification of ____________ Accounts Payable is most effectively performed immediately after the balance sheet date because of the rapid nature of change for these liabilities.
Trade
Accrued Liabilities
accounting estimates for salaries, pensions, interest, rent, taxes, and similar items.
The auditors' verification of accrued vacation pay may begin with a review of the permanent file copy of the employment contract or agreement stipulating vacation terms. The computation of the accrual should then be verified both as to _____________ accuracy and for _____________ with the terms of the company's vacation policy.
arithmetical, agreement
When advances to vendors are in use, the auditors should?
ascertain that procedures are followed to assure that deductions from the invoices are made in accordance with the agreement.
Well-managed A/P departments generally perform a _________ balancing of the detailed records of A/P to the general ledger control account.
monthly
The most difficult type of fraud to detect is the _____________ of transactions
nonrecording
It should be ensured that vendors have _________ invoice numbering systems so that systems do not allow a duplicate invoice to be issued under a different invoice number.
unique
When verifying a sample of posting to the A/P ledger control account, the validity of the amount in the general ledger control account for accounts payable is established by tracing postings back to the ___________ register and cash _______________ journal.
voucher, disbursement
The most important payroll deductions are ___________ __________ Taxes and _____________ ____________ Taxes.
Social Security, Individual Income
The primary audit objective of obtaining a Trial balance of payables and reconciling it with the ledgers is?
Valuation and Accuracy
The primary audit objective of vouching balances payable to selected creditors by inspecting supporting documents is?
1. Existence, Occurrence, and Obligations. 2. Valuation and Accuracy 3. Cutoff
The understatement of liabilities is usually accompanied by the _____________of net income.
overstatement
Among the discrepancies often revealed by _____________ of vendors' statements are charges by the vendor for shipments not yet received or recorded by the client
reconciliation
Audit procedures for liabilities should have as a primary objective the determination of the __________________of recorded payables.
completeness
Other items classified as current liabilities include:
1) Amounts withheld from employees' pay 2)Sales Taxes Payable 3)Unclaimed Wages 4)Customers' Deposits 5) Accrued Liabilities
Auditors analyze unclaimed wages payable for:
1) The credits represent all unclaimed wages after each payroll distribution 2) The debits represent only authorized payments to employees
The primary audit objectives of all these procedures is? 1. Reconciling liabilities with creditor's monthly statements 2.Confirming A/P 3.Performing Analytical Procedures
1. Completeness 2. Existence, Occurrence, and obligations. 3. Valuation and accuracy 4. Cutoff
The purchasing department will determine upon receiving the purchase requisition will
1. Determine that the item should be ordered 2. Select the appropriate vendor, quality, and price. 3. Issue a serially numbered PO to the goods. 4. Send Copies of the PO to Stores, Receiving, A/P DPT. 5. The copy sent to receiving should be blind to encourage them to perform a count.
Control weaknesses that Increase RMM for the Inaccurate recording of a purchase or disbursement
1. Inadequate SOD of record keeping and preparing cash disbursements, or check signer does not review and cancel supporting documents. 2. Ineffective controls for matching invoices with receiving documents before disbursement are authorized.
Control weaknesses that increase RMM for the late/early recording of cost purchases, "CUTOFF PROBLEMS"
1. Ineffective board of directors, audit committee, or internal audit function. "Tone at the Top" not conducive to ethical conduct, undue pressure to meet earnings targets.
An example of fraud related to the inaccurate recording of a purchase or disbursement
A bookkeeper prepares a check to himself and records it as having been issued to a major supplier
An example of an error related to the inaccurate recording of a purchase or disbursement
A disbursement is made to pay an invoice for goods that have not been received
Voucher Register
A journal used in a voucher system to record liabilities requiring cash payment in the near future. Every liability recorded in a voucher register corresponds to a voucher authorizing future payment
An example of an error related to duplicate recording of purchases
A purchase is recorded when an invoice is received from a vendor and recorded again when a duplicate invoice is sent by the vendor.
All ____________ payable to related parties must be disclosed in the in the financial statements
Material
In-transit shipments on which title has passed should be listed and a decision reached as to whether they are sufficiently _______________ to warrant year-end adjustments.
Material
When the auditors discover unrecorded liabilities, the next question is whether the omissions are sufficiently __________ to warrant proposing an adjusting entry.
Material
Do sales taxes represent an expense for the business?
No, they are merely collecting the taxes for the government. Until the amounts collected are remitted to the government, they constitute a current liability to the business.
An example of fraud related to the late/early recording of cost of purchases - (Cutoff Problems).
Purchases journal "closed early" with this periods purchases recorded as having occurred in a subsequent period
In general auditors' should determine that the balance in the warranty liability account for service guarantees moves in a ________________ relationship with the trend of sales.
Reasonable
Batch processing controls might be tested by inspecting evidence of _____________ of batch control totals rather than by control group.
Reconciliations
When using an IT based system a control must be designed to prevent the duplicate payment of invoices, especially for the payment of services such as ____________ _____to attorneys
Retainer fees
In some companies, it is a regular practice each month to reconcile vendors' statements with the detailed records of payables. If auditors find that the client's staff regularly performs this recommendation, they may limit their review of vendors' statements to determining that the reconciliation work has been __________________.
Satisfactory
______________of the function of invoice verification and approval of the function of cash disbursement is another step to prevent errors and fraud.
Separation
______________ Procedures should be established for inputting vendor identification and invoice numbers
Standard
Payments made at the first payroll dates of the subsequent period are reviewed to determine that no significant ______________ payroll liability existed as of the balance sheet date.
Unrecorded
Accrued commissions to sales representatives and bonuses payable to managerial personnel also require ______________.
Verification
The official who signs checks should stamp or perforate the ____________ and ___________ documents so that they cannot be presented to support a payment a second time.
Voucher, Supporting
Before invoices are approved for payment, ______________evidence must be presented to show that all aspects of the transaction have been verified.
Written
Do Federal and State Governments require that records of amounts earned and withheld to be adequate to permit a determination of compliance with tax laws?
Yes
Do income taxes withheld from employees' pay and not remitted as of the balance sheet date constitute a liability to be verified by the auditors?
Yes
Basic Steps to auditing accrued liabilities
1. Examine any contracts or other documents on hand that provide the basis for the accrual. 2. Appraise the accuracy of the detailed accounting records maintained for this category of liability. 3. Identify and evaluate the reasonableness of the assumptions made that underlie the computation of the liability 4.Test the computations made by the client in setting up the accrual 5. Determine that accrued liabilities have been treated consistently 6. Consider the need for accrual of other accrued liabilities no presently considered (Completeness) 7. For Significant estimates, perform a retrospective analysis of the prior year's estimates for evidence of management bias
Control weaknesses that Increase RMM for the Misappropriation of purchases.
1. Ineffective controls for matching invoices with receiving documents before disbursements are authorized.
Control weaknesses that Increase RMM for the duplicate recording of purchases.
1. Ineffective controls for review and cancelation of supporting documents by the check signer