Auditing Prepaid Expenses and Intangible Assets

Prepaid Expenses

Current assets providing economic benefit for less than a year.

Examples of Prepaid Expenses

Include prepaid insurance, rent, and interest.

Inherent Risk Assessment

Low risk due to simple accounting issues.

Control Risk Assessment

Ensures proper authorization and recording in purchasing.

Substantive Procedures

Detailed testing of prepaid insurance account required.

Existence and Completeness

Confirm policy with broker and examine documents.

Intangible Assets

Assets providing long-term benefit without physical substance.

Categories of Intangible Assets

Includes trademarks, customer lists, and technology.

Goodwill

Value from acquiring another company.

High Inherent Risk

Complex accounting and difficult transactions increase risk.

Valuation Specialists

Experts determining fair value of intangible assets.

Substantive Evidence

Required for significant accounts in intangible assets.

Four Assertions

Existence, completeness, valuation, rights, and classification.

Property, Plant, and Equipment (PP&E)

Material assets on financial statements requiring audit.

Types of PP&E Transactions

Include acquisition, depreciation, leasing, and disposition.

Physical Plant Department

Responsible for managing PP&E transactions and records.

Inherent Risk Factors

Complex issues, difficult transactions, prior misstatements.

Complex Accounting Issues

Lease accounting and interest capitalization challenges.

Difficult-to-Audit Transactions

Donated assets and nonmonetary exchanges complicate audits.

Tests of Details

Necessary for valuation and impairment of intangible assets.

Rights and Obligations

Confirm ownership and rights associated with assets.

Valuation

Assessing fair value and impairment of assets.

Classification

Properly categorizing expenses and assets in accounting.

Recurring Engagement

Focus on current period additions and retirements.

New Engagement

Verify beginning balance of PP&E assets.

PP&E Transaction File

Records of all property, plant, and equipment transactions.

General Ledger

Master record of all financial transactions.

Occurrence and Authorization

Control procedures for approving capital asset transactions.

Authorization Table

Document for approving capital asset transactions.

Completeness

Ensures all capital assets are recorded accurately.

Subsidiary Ledger

Detailed record of property, plant, and equipment.

Depreciation Methods

Methods used for asset value reduction over time.

Useful Life

Estimated duration an asset is expected to be used.

Substantive Analytical Procedures

Analytical methods to assess financial statement accuracy.

Ratio Comparisons

Compare current ratios to prior years for analysis.

Lead Schedule

Summary document for asset additions and dispositions.

Cutoff

Ensures transactions are recorded in correct period.

Existence

Verifying that recorded assets actually exist.

Accuracy, Valuation, and Allocation

Ensures asset values are correctly calculated and reported.

Impairment Testing

Evaluates if asset value is recoverable based on cash flows.

Presentation and Disclosure

Review of financial statement disclosures for completeness.

Tolerable Misstatement

Maximum misstatement allowed without affecting audit opinion.

Qualified Audit Report

Report issued when financial statements are materially misstated.

Vendor Invoices

Documents used to verify asset ownership and transactions.

Capital Budgets

Plans comparing actual spending against budgeted amounts.

Supporting Documentation

Evidence backing transactions, such as receipts.

Depreciation Expense

Expense reflecting asset value reduction over time.

Major Additions

Significant increases to property, plant, and equipment.

Material Lease Agreements

Contracts requiring review for proper accounting treatment.

Nonoperating Assets

Assets not used in primary business operations.