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
