Chapter 8/Class 16 -- Acquisitions and Expenditures

Search for Unrecorded Liabilities

– Inquire about procedures for identifying and recording liabilities

– Scan open purchase order file

– Examine unmatched vendor statements or invoices

– Examine unmatched receiving reports occurring near year- end

– Trace unpaid vouchers in A/P ledger to receiving reports

– Confirm A/P with normal suppliers (even those with zero balances)

– Review cash disbursements occurring after year-end

Purchase Cutoffs

Examine Receiving Reports and Vendor Sales Invoices occurring around year-end to ensure inventory received is included in the appropriate period.

Auditing PPE

What characteristics are these in reference to?:
– Small number of transactions. —> Relatively high dollar transactions.

– Authorization of Transactions (Board of Directors or approved capital budget) takes on added importance.

– Less concern for access to assets.

– More concerned with unrecorded disposals.

What to do with Purchases of PPE

• Vouch to invoice or cost records.

• Inspect title.

• Vouch to board minutes

What to do with Disposal of PPE

• Vouch from Property, Plant, and Equipment board minutes.

• Vouch to cash receipts journal and validated deposit slip.

• Recalculate gain/loss.

• Trace from board minutes to Property, Plant, and Equipment for disposals (completeness).

Depreciation expense for PPE

• Recalculate using useful life, salvage value, cost, and method.

• Evaluate reasonableness of useful life, salvage value, etcetera.

• Is depreciation consistent with company policy (half year conventions)?

Lease Agreements for PPE

• Verify proper treatment (capitalized or operating).

• Ensure disclosure in footnotes is appropriate.

Auditing Accrued Liabilities and Prepaid Expenses

• Agree balances to prior year workpapers

• Verify payments

• Examine underlying agreements

• Recalculate amounts

– Agree expense accounts to trial balance

• Search for unrecorded accruals

– Review cash disbursements at year-end

• Analytical procedures

• Make sure you have 12 months, and only 12

months of expense recorded!

Income Taxes Payable

• Extremely complex area

– Client may operate in multiple tax jurisdictions

• Vouch payments

• Examine correspondence with government

agencies

• Follow standards for auditing estimates

– Complex estimate usually examined by a tax specialist

• Usually finalized towards very end of audit

Typical Activities of Acquisition and Expenditure Cycle

1. Purchase Goods and Services

– Department requesting purchase of item(s) prepares a Purchase Order, subject to approval (level of approver depends on $ amt)

– Bidding may be required on high dollar purchases

2. Receiving the Goods or Services

– After vendor approval, goods are received by company and evidenced by preparing a Receiving Report

3. Recording the Asset or Expense and Related Liability

– Vendor bills company for goods using a Vendor’s Invoice

4. Paying the invoice through the cash disbursement process

Completeness, Cutoff, Presentation, Valuation, Existence

What relevant assertions go with AP?

Completeness, Cutoff, Accuracy, Classification

What relevant assertions go with Various Expenses?

Purchase order —> Vendor Invoice —> Receiving Report

What makes up the three way test for dual direction test?