AEB14-SM-CH19-v1-GE

19-1Chapter19CompletingtheTestsintheAcquisitionsandPaymentCycle:VerificationofSelectedAccountsReviewQuestions19-1Becausethesourceofthedebitsintheassetaccountistheacquisitionsjournal(orsimilarrecord),thecurrentperiodacquisitionsofproperty,plantandequipmenthavealreadybeenpartiallyverifiedaspartoftheacquisitionandpaymentcycle.Inthattesting,theoccurrence,completeness,accuracy,cutoff,andclassificationofacquisitionsofproperty,plant,andequipmentwouldhavebeenexamined.Thedisposalofassets,depreciationandaccumulateddepreciationarenottestedasapartoftheacquisitionandpaymentcycle.19-2Thereasonfortheemphasisoncurrentperiodacquisitionsinauditingproperty,plant,andequipmentisthatthereisanexpectationthatpermanentassetswillbekeptandmaintainedontherecordsforseveralyears.Theassetscarriedoverfromtheprecedingyearscanbeassumedtohavebeenverifiedintheprioryears'audits.Iftestsofcontrolsandsubstantivetestsoftransactionsdonotshowthatalldisposalshavebeenrecorded,additionaltestingofthepriorbalancecouldberequired.Afirstyearauditalsonecessitatestestsofthebeginningbalance.19-3Manyclientsmayaccidentallyorintentionallyrecordpurchasesofassetsintherepairandmaintenanceaccount.Themisstatementiscausedbyalackofunderstandingofaccountingstandardsandsomeclients'desiretoavoidincometaxes.Repairandmaintenanceaccountsareverifiedprimarilytouncoverunrecordedpropertypurchases.Inothercases,however,managementhasfraudulentlycapitalizedrepairandmaintenanceexpensestoboostprofitabilityandassets.Theauditortypicallyvouchesthelargeramountsdebitedtothoseexpenseaccountsatthesametimethatpropertyaccountsarebeingaudited.19-4Theauditproceduresthatmaybeappliedtodeterminethatallproperty,plantandequipmentretirementshavebeenrecordedareasfollows:1.Reviewwhethernewlyacquiredassetsreplaceexistingassetsandinquireastowhethertheoldassethasbeenremovedfromthebooks.2.Analyzegainsonthedisposalofassetsandmiscellaneousincomeforreceiptsfromthedisposalofassets.Comparethesetoproperty,plantandequipmentaccountstoseewhethertheassethasbeenremovedfromthebooks.19-219-4(continued)3.Reviewplannedmodificationandchangesinproductlines,taxes,orinsurancecoverageforindicationsofdeletionsofequipment.4.Makeinquiriesofmanagementandproductionpersonnelaboutthedisposalofassets.19-5Thetwoconsiderationstobekeptinmindinauditingdepreciationexpenseare:1.Whethertheclientisfollowingaconsistentdepreciationpolicyfromperiodtoperiod.2.Theaccuracyoftheclient'scalculations.Anoverallreasonablenesstestcanbemadebycalculatingthedepreciationratefortheyeartimestheundepreciatedfixedassets.Inaddition,itisdesirabletochecktheaccuracyofthedepreciationcalculation.Theextentoftheaccuracytestswillvarydependingontheengagementcircumstances.19-6Sincethesourceofthedebitstoprepaidinsuranceistheacquisitionsjournalorsimilarrecord(assumingallinsurancepremiumsarechargedtoprepaidinsuranceratherthaninsuranceexpense),thecurrentperiodpremiumshavealreadybeenpartiallyverifiedasapartoftheacquisitionandpaymentcycle.Theallocationofthepremiumbetweenprepaidinsuranceisnottestedasapartoftheacquisitionandpaymentcycle.19-7Theauditofprepaidinsuranceshouldordinarilytakearelativelysmallamountofaudittimebecause:1.Thebalanceinprepaidinsuranceisnormallyimmaterial;2.Thereareordinarilyfewtransactionsduringtheyearandmosttransactionsareimmaterial;3.Thetransactionsareordinarilynotcomplex.19-8Theevaluationoftheadequacyofinsuranceisatestofreasonableprotectionagainstthelossofexistingassets.Theverificationofprepaidinsuranceisperformedtodeterminewhether:1.Thebalancesrepresentproperchargesagainstfutureoperations.2.Theadditionsrepresentchargestotheseaccountsandarereflectedatactualcost.3.Amortizationorwrite-offisreasonableunderthecircumstances.Theevaluationofadequacyofinsurancecoverageismoreimportantbecauseofthepotentiallossduetounder-insurance.Verificationofprepaidinsuranceusuallyinvolvesanimmaterialamountandisnotemphasizedinmostaudits.19-319-9Theauditofprepaidexpensesdiffersfromtheauditofotherassetaccounts,suchasaccountsreceivableorproperty,plant,andequipment,becauseprepaidexpensesareoftenimmaterial.Analyticalproceduresareoftensufficientforauditingprepaidexpenses,whiletestsofdetailsofbalancesareusuallyrequiredforotheraccountssuchasaccountsreceivableandproperty,plant,andequipment.19-10Debitstoaccruedrentarisefromthecashdisbursementsjournal,whichisverifiedasapartoftestsofcontrolsandsubstantivetestsoftransactionsforcashdisbursements.Thecreditstypicallyarisefromthegeneraljournalandmaynothavebeenverifiedasapartofthesetests.Furthermore,testsofcontrolsandsubstantivetestsoftransactionsdonotincludeverificationoftheinclusionofaccrualsonallexistingpropertyandverificationoftheconsistenttreatmentoftheaccrualsfromyeartoyear.19-11Propertytaxaccrualstakelittleaudittimeformostaudits,andsincetherearerelativelyfewtransactionstotestandtheyaretypicallymaterialinamount,itiscommontoverifytheaccounts100percent.Ontheotherhand,accountspayabletakesquiteabitofaudittimeandsincethereareusuallyalargenumberoftransactionstotestandtheyaretypicallyvariedinamount,itiscommontoverifytheaccountonatestbasis.19-12Thefo