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1、19-1 Chapter 19 Completing the Tests in the Acquisition and Payment Cycle:Verification of Selected Accounts We try to cover the audit of two or three accounts in this cycle,if we cover the chapter at all.Our emphasis is on showing the relationship between tests of controls,substantive tests of trans
2、actions,and tests of details,and differences between various types of account balances.The following are the primary topical areas we cover:Chapter opening vignette Types of tests applied to acquisitions and cash disbursements Audit of income and expense accounts Audit of property,plant,and equipmen
3、t Related areas Chapter Opening Vignette “Incorrect Classifications Hide a Greater Net Loss”This vignette can be used to emphasize the importance of adequate internal controls and the importance of the auditor adequately understanding and testing of internal control.It is also useful to emphasize on
4、e of the reasons that auditors perform tests of account classifications and how these tests should be done.Finally,covering the vignette provides a good opportunity to remind students of the importance of obtaining independent evidence instead of relying solely on inquiry.Types of Tests Applied to A
5、cquisitions and Cash Disbursements Start by referring students to the list of accounts in Table 19-1(page 626)and identify the accounts you plan to discuss.As a review,then ask students to identify the relationship between analytical procedures,tests of controls,substantive tests of transactions,and
6、 tests of details of balances for accounts payable.At this point,you should expect fairly specific answers.You may want to use Figure 13-4(page 413)as a framework to guide the discussion about the audit approach to acquisitions and cash disbursements.(See Table 19-1;shown on Slide 19-5)(See Figure 1
7、3-4;shown on Slide 13-19)Audit of Income and Expense Accounts(page 638)We start with this area because it is reasonably easy,yet important.Three terms and phrases are defined before proceeding(see below and top of next page).Income statement account balances resulting from transactions(including a d
8、iscussion of how balances get into the general ledger)19-2 Income statement account balances resulting from allocations(including a discussion of how balances get into the general ledger)Analysis of account balances Figure 19-3(page 637)and Figure 19-4(page 641)may provide a useful basis for the dis
9、cussion of the relation between transactions and account balances.(See Figures 19-3 and 19-4;see also Slides 19-33 and 19-41)The following questions are then asked about the audit of income and expense accounts:1.Ask students to explain how cost of goods sold for a wholesale company can be verified
10、by each of the following tests:analytical procedures,tests of controls and substantive tests of transactions,analysis of account balances,and tests of details of balance sheet accounts.2.Assume all tests of controls and substantive tests of transactions and all analytical procedures for the audit ha
11、ve been completed.The audit of the sales and collection cycle,payroll,and all tests of accounts payable have also been completed.The auditor is now auditing utilities expense.How have the objectives on OH-19-1 already been partially or fully met?(See OH-19-1)3.What additional tests of utilities expe
12、nse would ordinarily be made?4.Assuming a significant likelihood of misstatements,what additional tests of utilities expense would be performed?Be specific.5.How do each of the following accounts differ somewhat from utilities expense in the audit approach or evidence requirements?Property tax expen
13、se Depreciation expense Legal expense(See Research Problem 19-1 for an example of a fraud involving unrecorded legal expenses)6.Use the quiz on OH-19-2.(See OH-19-2)7.Case 19-30 is excellent for deciding tests of income and expense accounts based on the results of analytical procedures.Audit of Prop
14、erty,Plant,and Equipment(page 626)The difficult aspect of this area is the need to be concerned with additions,disposals,the asset balance,accumulated depreciation,and depreciation expense.For this area,we emphasize the overall objectives of each segment rather than the balance-related audit objecti
15、ves.We start by describing the three accounts that concern the auditor and why they are audited simultaneously.Reference Figure 19-1(page 627)during this discussion.We emphasize that the discussion is meant to be representative of other audit areas.(See Figure 19-1;shown on Slide 19-8)19-3 We then d
16、eal with individual balances,starting with the asset account(property,plant,and equipment),and use questions such as the following:1.What are the most important differences in the audit of property,plant,and equipment and the following:Cash in bank?Accounts receivable?Patents?Inventory?2.On a contin
17、uing engagement,why is the audit of current period additions and disposals emphasized?3.For additions,which of the balance-related audit objectives in Table 19-4(page 629)are most important?(See Table 19-4)4.How does the audit of current period additions relate to tests of controls and substantive t
18、ests of transactions?5.What factors would determine sample size and items to select in tests of accounts of property,plant,and equipment?6.Why does the auditor have considerable flexibility in timing for tests of acquisitions of property,plant,and equipment?7.What are the purposes of each of the pro
19、cedures listed on OH-19-3?(See OH-19-3)For disposals we ask questions such as the following:1.What are the two most important objectives in auditing disposals?2.Identify procedures that are useful for uncovering unrecorded disposals.3.How is the audit of accumulated depreciation directly related to
20、the accuracy objective for disposals?For depreciation,we ask questions such as the following:1.When might analytical procedures be sufficient for auditing depreciation expense?2.Explain how detailed tests of depreciation might be done assuming that the client has a master file of fixed assets.For th
21、e balance in the fixed asset account we like to ask:1.Why are the presentation and disclosure-related audit objectives more important for fixed assets than most other asset balances?2.Why is a physical observation of fixed assets less common than for inventory or marketable securities?When should it
22、 be done?3.What audit problems in fixed assets are encountered when a CPA firm is a successor auditor?How can the problem be solved?19-4 Any of Problems 19-21 to 19-23 will help to reinforce the topic.A good way to finish the audit of fixed assets is to use Problem 19-24 or Case 19-28,which ties the
23、 material in Case 18-32 to fixed assets.Case 19-28 should only be used if Case 18-32 was covered.Related Areas If there is time left,we like Discussion Question 19-26,which addresses the search for unrecorded liabilities.CHAPTER 19 CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL LEARNING
24、 OBJECTIVES REVIEW QUESTIONS MULTIPLE CHOICE QUESTIONS DISCUSSION QUESTIONS AND PROBLEMS CASES 19-1 Recognize the many accounts in the acquisition and payment cycle.19-23 19-28 19-2 Design and perform audit tests of property,plant,and equipment and related accounts.19-1,19-2,19-3,19-4,19-5,19-15 19-
25、17,19-18,19-19,19-20 19-21,19-22,19-23,19-24 19-28,19-29 19-3 Design and perform audit tests of prepaid expenses.19-6,19-7,19-8,19-9 19-23 19-4 Design and perform audit tests of accrued liabilities.19-10,19-11,19-12 19-20 19-25,19-26 19-5 Design and perform audit tests of income and expense accounts
26、.19-13,19-14,19-15,19-16 19-18,19-20 19-23,19-27 19-28,19-30 19-5 OH-19-1 BALANCE-RELATED AUDIT OBJECTIVES:UTILITIES EXPENSE Recorded utilities expense transactions as listed exist Existing utilities services received are recorded Utilities expense transactions as listed are correctly stated Utiliti
27、es expense transactions as listed are properly classified Utilities expense transactions are recorded in the proper period The amounts in the general ledger are correctly totaled and the total agrees with the trial balance OH-19-2 QUIZ HOW EXPENSES ARE TESTED Match each of the following eight expens
28、e accounts,each one assumed to be material,into one of four categories.1.Will ordinarily be tested sufficiently by normal tests of controls and substantive tests of transactions,analytical procedures,and accounts payable tests.2.Frequently requires additional account analysis due to high expectation
29、 of misstatements.3.Typically audited as a part of an accrual or prepaid account.4.Not tested as a part of(1)except for normal analytical procedures.Bond discount Insurance expense Interest expense Raw material purchases Advertising expense Depletion expense Miscellaneous expense Repair and main.exp
30、ense OH-19-3 PARTIAL AUDIT PROGRAM FOR PROPERTY,PLANT,AND EQUIPMENT ADDITIONS Foot the client-prepared listing of current year additions and reconcile the total with debits to property,plant,and equipment in the general ledger.Trace individual additions included on the client-generated listing to th
31、e acquisitions journal.Examine rent and lease agreements for rented and leased property,plant,and equipment.Examine vendors invoices and receiving reports for additions included on the listing.Trace the total of individual additions to the related master files.Analyze repair and maintenance expense for large and unusual items.Examine loan agreements for equipment acquired by loans or contracts.