SU 12: Evidence Purchases-Payables-Inventory Cycle Flashcards
To Determine AP is complete, The auditor performs test to verify that all merch received is recorded. Population of documents consist of?
Testing Completeness assertion - Receiving reports. The population to be tested. An AP record should be available for each receiving report.
Response to photocopies
Suspicion
How did the original get lost, where did they get the photocopy
Photocopy manipulatable
Photocopies are less credible and auditor should re-evaluate fraud risk
The population to determine that all merch that was billed to client was received is
Vendor invoices - the invoices describe what was purchased, amounts due, and payment terms. Trace vendor inv to rec reports
A/P Primary Assertiona
Completeness
The primary audit risk for A/P is understatement of liability. Thus, audit must be concerned with the completeness assertions
Greatest risk of Payables is
Unrecorded Liabilities - Omission of an entry to record a payable is an error or fraud, that is more difficult to detect than inaccurate or false entry. The search should include: (1) examining cash disbursements (2) sending confirmations to vendors (3) reconciling payables balance with vendor documentation.
Purpose of Reviewing NP renewal after BS date?
Events such as renewal of a note do not require adj of F/S but may require disclosure (AU 560). The auditor should confirm the renewal had the same terms. A significant change may affect the classification of NP the understandability of the statements and required dislosuress
Activity not likely to be performed before bal sht date
The most important assertion about AP is completeness. This is best tested at y/e. Example, the auditor may examine subsequent cash payments to determine whether related payables are not recorded. Although, confirmation is not a generally accepted audit procedure it may be useful in detecting unrecorded payables. If the auditor’s sample includes vendors where risk of understatement is HIGH e.g. regular vendors with 0 or low recorded balances.
Using confirmation for evidence about completeness what population do you use?
Vendors w/ whom the entity has done previous business. When sending confirmations for A/P the pop of accounts should include small and 0 balances, as well as, large balances. The auditor should use the activity in a large acct as a gauge for selection sample. That is, if orders are placed with a vendor on a consistent basis, a confirmation should be sent on a consistent basis, regardless of recorded balance
Internal Control narrative indicates voucher required for check to pay for merch. Which procedure would provided greatest assurance control is operating effectively
Payment vouchers being required for approvals s/b supported properly by authorized purch requisition, A PO executing trans, a rec rpt including all order product received in good condition, and vendor invoice confirming amt. To determine check is request is valid, the apprpriate audit procedures is therefore to compare check to approved vouchers. The direction of testing s/b from sample of checks to approved vouchers. If date of voucher is later than related check, the inference is check was issued w/o proper support
The element of audit planing most likely to be agreed upon prior to audit strategy
Timing of inventory observation procedures. The client is responsible for taking physical inventory the auditor is responsible for observing the process and performing test counts. The audit procedures are contingent on mgmt plans. Thus, the auditor must coordinate collection of evidence w/mgmt
When auditing inventories the auditor would least likely verify
That all inventory owned by the client is on hand at the time of the count. The auditor does not expect all inv to which the auditee has title to be on hand at the date of the count. Some may be in transit at that time. Also, some inventory may be on consignment or in public warehouses although properly included in the count.
If RMM for inventory is HIGH, the auditor would
Request inventory count to be performed at year-end this should provide the best of evidence of existence.
Tracing inventory test counts to client’s inventory listing applies to which assertions
Completeness
Tracing details of test counts to final Inv Sch assures auditor that items observed during physical inventory are included in inventory records. The auditor should compare Inv Tag Sequence numbers in final Inv Sch w/ those in their final test counts made during physical Inv.
If auditor from recorded tests counts notices certain test counts were higher than in client recorded quantites in perpetual inv this could mean the client failed to
Record sales returns, failure to record sales returns will lead to test counts being higher than quantity reported.
Most reliable procedure for evidence regarding assertion of rights and obiligations related to inveotry
Inspection of agreements to determine whether any inventory has been pledged as collateral subject to liens. Typically, the auditor examines paid vendors’ invoices, consignment agreements, and contracts.
An auditor would would analyze Inv Turnover Ratio to determine what assertion
Valuation and allocation - Assertions about allocation addresses whether (1) assets and liabilities and equity interest are included in f/s are appropriate (2) resulting ADJ are properly recorded. An examination of Inv Turnover pertains to identifying slow moving, excess, defective and obsolete items included in Inv (AU 326 & 318)
1.) Auditor determined that pledged inventory was identified
a. F, Rights and Obligations.
2.) The auditor confirmed goods held by the client in a public warehouse
a. D, Existence.
3.) The auditor performed a test at year end to assure all purchase transactions for the year were included in the proper period
a. E, Cutoff.
4.) The auditor accounted for the numerical sequence of POs
a. A, Completeness.
5.) The auditor vouched the transactions to record payables to receiving documents
a. G, Occurrence.
6.) The auditor determined that A/P was presented on the BS as a current liability
a. H, Classification and Understandability.
7.) The auditor observed the taking of physical inventory
a. D, Existence.
8.) The auditor performed an analytical procedure comparing the relationship of inventory balances with recent purchases, production, and sales
a. A, Completeness.
9.) The auditor obtained representations from management about the amounts included on the f/s for recorded transaction involving sales and purchases of inventory
a. B, Accuracy
9.) The auditor obtained representations from management about the amounts included on the f/s for recorded transaction involving sales and purchases of inventory
a. B, Accuracy
10.) The auditor compared recorded inventory costs with replacement costs
a. C, Valuation and Allocation.
1.) Audit ADJ & Accounts. The bank’s confirmation reply regarding the company’s line of credit indicated that the December Year 2 interest was unpaid at year-end. Accruals for monthly interest expense have been made for 11 months in year 2 by the company
a. K – Interest Expense, F – Accrued Liabilities. The interest expense accrual for December would require recording
2.) Audit ADJ, accounts Employee OT pay for hours worked before year end, but paid in following year, were not recorded in Year 2
a. J – Operating Expense, F – Accrued Liabilities. The wages accrued for December would require recording
3.) Audit ADJ, accounts In the last week of Year 2, the company recorded revenue for services rendered to some clients in Year 3.
a. H – Revenues, B – Accounts Receivable. The revenue recorded, but not earned, for December would be reversed.
4.) Audit ADJ, accounts During Year 2, a former client sued the company for inappropriate work. Legal counsel has advised its client it is “reasonably possible” that he company will be assessed damages. An amount can be estimated.
a. N – Disclosure but no entry required. Since the contingent amount was not “probable” it requires only note disclosure in the f/s
5.) Audit ADJ, accounts At the end of Year 2, a major customer filed for bankruptcy
a. I – Allowance for doubtful accounts, B – A/R. Since it is unlikely that the customer receivable will be collected, it would be written off to allowance for doubtful accounts.
