CH 8 and 9 Notes

What are the four basic acquisition and expenditure activities?

Purchase
Receive goods
Recording asset/exp and related liab
Pay vendor

What are the significant accounts in the expenditure cycle?

AP
Exp

What are the relevant assertions for AP?

C
Cutoff
V

What are the relevant assertions for Exp?

C
Cutoff
Classification

What are the internal control activities related to periodic reconciliation that should be considered in AP?

AP trial balance and AP control acct
AP records to vendor monthly statements
Unmatched PO, RR, and Invoices
Physical inv count
Inspect FA(comp to fixed asset reports)

What is the best way to ensure completeness in the purchasing cycle?

Prenumbered documents

What is the most relevant assertion when it comes to expenses and liabilites?

completeness

What are the MOST relevant assertions for Inventory? (2)

Existence
valuation

What are the MOST relevant assertions for COGS? (2)

Completeness
Accuracy

Information about the production cycle controls often is gathered initially by completing an:

Internal Control Questionaire

Inv =

Beg Inv + Purchases + product costs - purchase returns - purchase discounts - valuation

AP =

Beg AP + Product costs - Cash disbursements + inv Purchases - Inv purchase discounts

What are the relevant assertions for inv

Existence
Valuation/Accuracy
Cutoff
Present/Disclose
Rights
Completeness

What are the relevant assertions for AP?

Completeness
Cutoff
Existence
Present/disclose/classification
Valuation/A

What is the MOST relevant assertion for liabilities?

Completeness

What are the relevant assertions for product costs? (same for period costs)

Completeness
Valuation/A
Cutoff
Present/Disclose

What are the relevant assertions for COGS

Completeness
Valuation/A

What are some controls that are in place for purchases that are made but are not recorded, or are not recorded on a timely basis (wrong period)

Prenumber Purch invoices
Copy of all approved invoices sent to AP for timely recording
Approval at each stage of purchase process

What is the test of Internal controls to ensure Completeness of AP? (2)

Trace sample of purchases from vendor invoice to purchase journal and look for approval at each stage

What are some controls that are in place for period expense payables that are made but are not recorded, or are not recorded on a timely basis (wrong period)

Prenumber timesheets and supplies requests
Copy of approved docs sent to AP for timely recording

What are some controls that are in place for: Credit purchases (payables) have been recorded in incorrect period

Manual gives instructions on dating Purchase/Payable entries on date of receipt

You owe money when you:

receive the goods

To test for AP completeness, what two documents should you pull from? (tracing)

Invoices and Shipping documents
(also confirm with vendors)

alt procedures for non response confirmations; see if the company actually paid after year end; sample these and see if it was for a purchase before year end that was paid before year end (but need it to be a payable as of YE)

subsequent cash disbursements testing

subsequent cash disbursement testing (search for unrecorded liabilities) is used to test the assertion of:

completeness

For cutoff testing, test:

invoices before and after YE (BOTH, not just after)

Using approved vendor list can be a test of controls for ___ and a substantive test for ___ (confirmations)

existence
completeness

floor to sheet counts (inv counts) is: (vouching or tracing)

Tracing (completeness)

sheet to floor counts (inv counts) is: (vouching or tracing)

Vouching (existence)

One type of confirmation that confirms AP existence because vendors send us these documents with all transactions with the company

customer statements

What are some controls that are in place for: Capitalized product costs are recorded in the wrong period

Manual instructions on date cost entries on date of receipt of good
Accounting supervisor reviews M/Q/YE cost accruals

What assertion do these controls support?
Manual instructions on date cost entries on date of receipt of good
Accounting supervisor reviews M/Q/YE cost accruals

Cutoff

What are some controls that are in place for: fictitious purchases (and eventual documents) are made (4)

Purch, AR, and shipping dept are independent from each other
RR prepared for each item received and are sent to each dept
Vendor invoices reconciled before Liab recorded
Invoices approved by auth

What assertion do these controls support?
Purch, AR, and shipping dept are independent from each other
RR prepared for each item received and are sent to each dept
Vendor invoices reconciled before Liab recorded
Invoices approved by auth

Existence and occurence

What are some controls that are in place for: liabs might not represent actual obligations to company

Voucher packets for pmt to vendors include PO and RR
3 way match performed
Vendors on approved vendor list
Rec of AG&A exp reviewed and reconciled

What assertion do these controls support?
Voucher packets for pmt to vendors include PO and RR
3 way match performed
Vendors on approved vendor list
Rec of AG&A exp reviewed and reconciled

Existence

What are some controls that are in place for: purchases are recorded for the wrong amount (accuracy)

3 way match

What are some controls that are in place for: Purchase Returns/ allowances/discounts recorded for incorrect amount (accuracy and valuation AND existence)

Purch R/A initiated by shipping dept and approved by Purch dept

What are some controls that are in place for: Items purported to be held on consignment do not exist; items held are in clients listing

Consigned inv is properly segregated

What assertion do these controls support?
Consigned inv is properly segregated

Existence/Occurance

What are some controls that are in place for: purchases are recorded in wrong period

RR dated on day inv received and copy sent to AP for timely recording
Inv Receiving and related recording is restricted at CO date

What are some controls that are in place for: not all product costs are capitalized

All production docs prenumbered
Open production cost reports reconciled to WIP Inv cost report
RR and material usage posted to perpetual inv
Job cost sheets posted to weekly, and summary JE of WIP completed monthly

What are some controls that are in place for: inv or capitalized costs are improperly classified

Summary entries revied and approved by cost accounting super
Manual gives info on proper classification

What are some controls that are in place for: Inv valued using standard costs is not carried at the correct cost; labor and material costs wrong (VALUATION- could go up or down)

Standard costs used and reviewed periodically
Dif between inv issue forms and materials used reported to cost accounting super

What are some controls that are in place for: Inv is included in the F/S at incorrect amounts and any valuation adjustments are not properly recorded

Inv listing periodically reconciled with GL account
Monthly statements reviewed by senior officials

What are some controls that are in place for: Items held on consignment are included in inv listing (supporting rights and obligations this time)

Consign inv segregated
Consign listing reviewed and approved by inv manager
Documentation for inv items clearly state ownership of items
Separate account number used to track consign inv

What are some controls that are in place for: flow of inv through production is not updated in inv accounts or COGS (Completeness)

Ship docs dated on ship date and sent to Acct dept on timely basis
Changes in FG Inv reconciled with COGS