Study Unit 12 - Evidence — The Purchases, Inventory, Payroll And Other Cycles Flashcards
How can the completeness assertion be tested for account payables and purchases?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures (e.g., comparing accounts payable turnover with previous year)
- Tracing subsequent payments to recorded payables
- Searching for unvouchered (unsupported) payables
How can the accuracy, valuation, and allocation assertion be tested for accounts payables and purchases?
- Obtaining management representation letters
- Comparing general ledger balances and financial statement balances
Is sending external confirmation an effective audit procedure for accounts payables and purchases?
Accounts payables and purchases are subject to higher risks of understatement. External confirmations are not effective in disclosing unrecorded payables.
If confirmations are to be made, the blank form of positive confirmation should be used.
How can the cutoff assertion be tested for accounts payables and purchases?
- Purchases cutoff - Determining whether accounts payables are recorded at year end for goods whose titles are obtained
- FOB shipping point: titles obtained when shipped
- FOB destination: title obtained when received
- Cash disbursement cutoff test - Testing the recording of cash disbursement and accounts payables reduction
- Tracing the last check written to the accounting records
How can the rights and obligations assertion be tested for accounts payables and purchases?
Inquiring of management about the nature of recorded liabilities.
How can the occurrence assertion be tested for accounts payables and purchases?
Vouching recorded payables to requisitions, purchase orders, receiving reports, and approved invoices.
How can the classification assertion be tested for accounts payables and purchases?
Evaluating classification of accounts payables as current liabilities.
How can the completeness assertion be tested for inventory?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures, including
* Comparing inventory turnover ratio with previous year’s
* Comparing percentage of inventory to total assets with industry average
* Reviewing client’s sales and production budgets
* Using nonfinancial information
How can the accuracy, valuation, and allocation assertion be tested for inventory?
- Obtaining management representation letters
- Comparing general ledger balances with financial statement balances
- Comparing recorded costs with current replacement costs (potential write-down)
- Performing analytical procedures (e.g., excessive inventory results in small inventory turnover)
- Testing cost of manufactured items (e.g., reasonableness of overhead allocation rate)
How can the existence assertion be tested for inventory?
- Observing the client counting inventories
- Performing tests of the count
- Investigating prenumbered inventory tags and summary sheets
- Sending external confirmations to public warehouses and consignees
How can the cutoff assertion be tested for inventory?
Testing recording of inventory transactions subject to terms (e.g., FOB shipping point and FOB destination)
How can the rights and obligations assertion be tested for inventory?
- Vouching recorded purchases to requisitions, purchase orders, receiving reports, and vendor invoices
- Testing goods on consignment
How can the occurrence assertion be tested for inventory?
Vouching recorded purchases and costs of sales to requisitions, purchase orders receiving reports, and vendor invoices.
How can the classification assertion be tested for inventory?
- Evaluating classification of inventory as current assets
- Making inquiries of management
- Obtaining a management representation letter
How can the presentation assertion be tested for inventory?
Evaluating disclosures of
* Consigned goods
* Pledging of inventory
* Major purchase commitments
How can the completeness assertion be tested for property, plant, and equipment?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures (e.g., comparing return on plant assets to previous year’s)
- Analyzing repair and maintenance (i.e., capitalized or expensed)
How can the accuracy, valuation, and allocation assertion be tested for property, plant and equipment?
- Comparing general ledger balances with financial statement balances
- Inspecting records of purchases and payments
- Vouching additions and disposals
- Testing depreciation
How can the existence assertion be tested for property, plant, and equipment?
Vouching a sample of recorded plant additions to the physical assets
How can the cutoff assertion be tested for property, plant, and equipment?
Testing whether additions and disposals near year end are recorded in the proper period
How can the rights and obligations assertion be tested for property, plant, and equipment?
- Examining certificates of title and lease contracts
- Inspecting insuranec policies
- Inspecting property tax records
- Inspecting loan agreements for collateralized PPE
How can the occurrence assertion be tested for property, plant, and equipment?
Testing aspects of transactions, such as
* Custody
* Authorization
* Recording
* Execution
How can the classification assertion be tested for property, plant, and equipment?
Evaluating classification of PPE as non current assets
How can the presentation assertion be tested for property, plant, and equipment?
Evaluating disclosures of
* Lease agreements
* Depreciation methods
* PPE used as collateral for loans
What are the three factors considered in classifying a firm’s investment?
- Management’s intent in purchasing and holding the investment
- The entity’s actual investment activities
- The entity’s ability to hold certain debt securities to maturity
EXAMPLE: Debt securities are classified as held-to-maturity if an entity has both the positive intent and ability to hold them to maturity.
How can the completeness assertion be tested for investments?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures (e.g., comparing expected to actual return on investment)
- Evaluating contracts and agreements
How can the accuracy, valuation, and allocation assertion be tested for investments?
- Comparing general ledger balances with financial statement balances
- Recalculating interest revenue
- Vouching recorded amounts of investments to market quotations or fair-value estimates from third-party sources
- Testing the recognition of unrealized gains or losses (i.e., in earnings or in OCI)
- Inspecting relevant records and documents for impairment (e.g., writing off goodwill)
- Obtaining audited financial statements from invested for equity-method investments
How can the existence assertion be tested for investments?
- Inspecting and counting securities in the client’s possession
- Sending external confirmations to issuer’s, custodians, counterparties, and brokers
How can the cutoff assertion be tested for investments?
Testing whether investment transactions near year end are recorded in the proper period
How can the rights and obligations assertion be tested for investments?
Tracing dividend and interest revenue
How can the occurrence assertion be tested for investments?
Vouching recorded costs to broker invoices, canceled checks, and other evidence of purchase
How can the classification assertion be tested for investments?
- Evaluating classification of investments as current or noncurrent assets based on maturities
- Inquiring of management about the intention to dispose of investments
How can the presentation assertion be tested for investments?
Evaluating disclosures of
* Fair value estimates
* Valuation models
* Hedges
How can the completeness assertion be tested for noncurrent debt?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures (e.g., comparing recorded interest expense and interest based on recorded debt)
How can the accuracy, valuation, and allocation assertion be tested for noncurrent debt?
- Inquiring of management about sources and uses of debt
- Comparing general ledger balances to financial statement balances
- Recalculating the face amount, premium, or discount of debts
- Testing amortization
How can the existence assertion be tested for noncurrent debt?
- Sending external confirmation to lenders
- Vouching recorded debts to supporting documents (e.g., contracts)
How can the cutoff assertion be tested for noncurrent debt?
Testing whether debt transactions near year end are recorded in the proper period
How can the rights and obligations assertion be tested for noncurrent debt?
- Evaluating existing agreements
- Examining bond trust indentures
How can the occurrence assertion be tested for noncurrent debt?
Reviewing contracts and agreements for terms of debts
How can the classification assertion be tested for noncurrent debt?
Evaluating classification of debts as current or noncurrent liabilities based on due date
How can the presentation assertion be tested for noncurrent debt?
Evaluating disclosures of
* Terms of the debt
* Collateral securing the debt
How can the completeness assertion be tested for equity?
- Reconciling total amounts in subsidiary ledgers with the general ledger
- Performing analytical procedures (e.g., comparing prior-period equity with current amounts)
How can the accuracy, valuation, and allocation assertion be tested for equity?
- Inquiring of management
- Comparing general ledger balances to financial statement balances
- Tracing entries to equity accounts (e.g., tracing retained earnings)
- Testing sales of treasury stocks
How can the existence assertion be tested for equity?
- Sending external confirmations to the registrar and transfer agent
- Inspecting stock certificates held in treasury
- Inspecting the stock certificate book
How can the cutoff assertion be tested for equity?
Testing whether equity transactions near year end are recorded in the proper period
How can the rights and obligations assertion be tested for equity?
Inspecting the articles of incorporation and bylaws
How can the occurrence assertion be tested for equity?
Vouching entries to supporting documents (e.g., stock subscription records)
How can the classification assertion be tested for equity?
Reading minutes of meetings of the board of directors about actions related to equity
How can the presentation assertion be tested for equity?
- Inspecting disclosures about treasury stock and reporting method used
- Searching for restrictions on retained earnings
How can the completeness assertion be tested for payroll?
- Reconciling payroll tax expense with payroll tax returns
- Performing analytical procedures (e.g., comparing budgets with recorded expenses)
How can the accuracy, valuation, and allocation assertion be tested for payroll?
- Inquiring of management
- Comparing general ledger balances with financial statement balances
- Tracing costs to inventories (for manufacturing firms)
- Recalculating pension costs
How can the existence assertion be tested for payroll?
Observing the distribution of paychecks (i.e., distributed to bona fide employees)
How can the cutoff assertion be tested for payroll?
- Recalculating amounts to be accrued
- Testing whether payroll expenses are recorded in the proper period
How can the rights and obligations assertion be tested for payroll?
Inspecting canceled checks to verify payments
How can the occurrence assertion be tested for payroll?
Vouching payroll-related balance to supporting documents (e.g., approved time cards and time tickets)
How can the classification assertion be tested for payroll?
Evaluating classification of payroll liabilities as current or noncurrent liabilities
How can the presentation assertion be tested for payroll?
Evaluate disclosures of
* Accounting policies
* Pension-related transactions
