The following questions concern the audit of liabilities or income and expense accounts. The auditor may note that annual depreciation expense is too low for a class of assets by noting(1) insured values greatly in excess of carrying amounts.(2) large numbers of fully depreciated assets are still in use.(3) continuous trade-ins of relatively new assets.(4) excessive recurring losses on assets retired.b. Which of the following best describes the independent auditor’s approach to obtaining satisfaction concerning depreciation expense in the income statement? You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls.
Assess Risks
Automated systems can help expedite the process by matching your organization’s internal data with a supplier’s data. In most cases, suppliers will upload their data onto a shared platform, while your organization enters its information into a similar system. Distinguish between the evaluation of the adequacy of insurance coverage and the verification of prepaid insurance.
Automate Invoice Matching Processes
In examining the sample for tests of controls and substantive tests of transactions, you observe that no sample items included any property, plant, and equipment or lease transactions. The following questions concern the audit of asset accounts in the acquisition and payment cycle. Analysis of which account is least likely to reveal evidence related to unrecorded retirement of equipment? (1) Accumulated depreciation.(2) Insurance expense.(3) Property, plant, and equipment.(4) Purchase returns and allowances.c. In connection with the audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor? (1) Recompute the portion of the premium that expired during the year.(2) Prepare excerpts of the insurance policies for audit documentation.(3) Confirm premium rates with an independent insurance broker.(4) Examine support for premium payments.
- But many organizations still rely on manual invoice matching processes, which can be an unnecessary deterrent to progress.
- Today’s increasingly digital world has transformed how businesses operate, buy and sell goods, and pay for services.
- Which of the following comparisons will be most useful to an auditor in auditing an entity’s income and expense accounts?
- List and briefly state the purpose of all audit procedures that might reasonably be applied by an auditor to determine that all property, plant, and equipment retirements have been recorded in the accounting system.
- Accordingly, you decide that the major emphasis in auditing the income statement accounts will be to use analytical procedures.
- This will help your customers quickly find what they need, which will help you turn orders around faster.
Assess Risks
This also impacts the entire procurement and payment cycle; after all, a company must first identify what they need before they can purchase it. And while business processes have been streamlined in nearly every department over the years, many are still unnecessarily complex—and in some cases even redundant. The acquisition and payment cycle is one such area that could benefit from greater simplicity.
Look at Accounts Payable and Related Expenses
With smart contracts, parties are able to agree on a set of conditions and a level of trust that allows for automatic fulfillment of the contract once those conditions are met. This means you can implement certain terms and conditions that will automatically be fulfilled once certain events occur, such as payment being received or goods being delivered. This will help make your contracts simpler, more accurate, and easier to enforce. Once you’ve initiated an acquisition, you can track its progress with real-time acquisitions and payments cycle visibility into items such as shipping information, service levels, and even payments. This will help you identify potential issues (or opportunities) with your suppliers, enabling you to make necessary adjustments.
Chapter 4 Audit of acquisition and payment cycle.pptx
With all these changes, businesses can expect shorter order turnaround times, better supplier relations, and more satisfied customers. In verifying accounts payable, it is common to restrict the audit sample to a small portion of the population items, whereas in auditing accrued property taxes, it is common to verify all transactions for the year. Since inventory is a significant asset, auditors want to ensure it’s not overstated. Auditors will observe a physical inventory count to ensure numbers add up, and they’ll also perform their own sample count. They’ll test inventory purchase transactions near a financial cutoff period to make sure transactions were recorded at the right time. They’ll pay special attention to older inventory that the company hasn’t been able to sell, since there’s a high chance it may have lost value over time.
- Explain the relationship between substantive tests of transactions for the acquisition and payment cycle and tests of details of balances for the verification of prepaid insurance.
- Analysis of which account is least likely to reveal evidence related to unrecorded retirement of equipment?
- Companies can overstate the value of the inventory they purchase, which makes assets look bigger than they actually are.
- The controller of Excello Manufacturing, Inc., wants to use analytical procedures to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off.
- Companies in a highly competitive industry that sell low-margin products have a strong incentive to fiddle with their margins through inventory and cost-of-goods-sold valuation.
Some of the new equipment was ineffective and returned; an allowance was received on others. Analytical procedures for property, plant, and equipment are inconclusive because of the large increases in acquisition and disposal activity.6. Analytical procedures show that repairs, maintenance, and small tools expenses have increased materially, both in absolute terms and as a percentage of sales. Two other expenses have also materially increased, and one has materially decreased.7.