Term
| primary purpose of the collection of evidence |
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Definition
| test relevant assertions about the transaction classes, balances, and disclosures in the F/S. The auditor uses these assertions as a basis for assessing RMMs and designing and performing further audit procedures. |
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Term
| testing in the inventory acquisition process is applied to which accounts with what focus? |
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Definition
| applied to A/P and inventory, w/a focus on the likelihood of understatement of A/P and overstatement of inventory. |
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Term
| Why are inventory and A/P the focus of PPI cycle testing? |
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Definition
| applied to A/P and inventory, w/a focus on the likelihood of understatement of A/P and overstatement of inventory. |
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Term
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Definition
| purchases-payables-inventory cycle |
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Term
| importance of substantive testing of A/P and Purchases |
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Definition
| Testing assertions about A/P provides evidence about Purchases and ultimately CoGS. |
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Term
| Why is inventory tested separately from purchases? |
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Definition
| B/c it is a significant B/S account. |
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Term
| The most significant current liability for most firms is... |
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Definition
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Term
| completeness of A/P and Purchases |
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Definition
| Do the balances contain all transactions for the period? This is typically the major detection risk for the auditor in testing payables. |
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Term
| Audit procedures for testing completeness of A/P and Purchases |
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Definition
Reconcile the A/P ledger w/G/L control account.
Analytical procedures.
Trace subsequent payments to recorded payables.
Search for unvouchered payables. |
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Term
| analytical procedures for testing completeness for A/P and Purchases |
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Definition
| The auditor should use appropriate sources of data to form expectations with which to compare management's presentations. Ratios may be calculated and used. Unexpected findings should be investigated. |
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Term
| trace subsequent payments to recorded payables |
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Definition
| A primary test is to match the payments (checks) issued after year end w/related payables. Checks should be issued only for recorded payables. Any checks that cannot be matched are likely unrecorded liabilities. This may occur because of window dressing- delay recording liabilities to improve current ratio. |
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Term
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Definition
| checks that cannot be matched with recorded liabilities |
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Term
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Definition
| delay recording liabilities to improve current ratio. |
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Term
| search for unvouchered payables |
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Definition
| The A/P function prepares and records a voucher (DR: Purchases, CR: A/P) when all supporting documentation is assembled. Auditor should search suspense files for unmatched documents to determine whether relevant documents have been lost, misplaced, or misfiled. |
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Term
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Definition
| contains transactions, the classification and treatment of which are in doubt, for example, b/c of missing documents |
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Term
| accuracy of A/P and Purchases |
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Definition
| Have the amounts been recorded appropriately? |
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Term
| Audit procedures for testing accuracy of A/P and Purchases |
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Definition
Obtain a management representation letter with assertions related to purchases and payables.
Compare the G/L balances to the balances on the F/S. |
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Term
| valuation/allocation of A/P and Purchases |
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Definition
| Are A/P valued in accordance w/GAAP? GAAP require that debts be stated at the amount necessary to satisfy the obligation. |
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Term
| How is detection risk for the valuation/allocation assertion reduced? |
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Definition
| Detection risk for this assertion is reduced if the other assertions are tested in accordance w/GAAS. This valuation or allocation assertion is interrelated w/those for existence and completeness. |
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Term
| existence of A/P and Purchases |
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Definition
| Do the recorded A/P represent valid liabilities at the B/S date? |
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Term
| audit procedures for existence of A/P and Purchases |
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Definition
Confirmation (of existence) not a GAAS (though confirmation of A/R is). Use evidence from the client.
If confirmation is undertaken, small and zero balances should be sampled as well as larger balances. The auditor should use the activity in the account as a basis for selection.
The blank form of positive confirmations should be used. It requests that the balance due be provided by the creditor/vendor. |
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Term
| cutoff of A/P and Purchases |
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Definition
| Have transactions been recorded in the proper period? |
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Term
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Definition
| Determine that all goods for which title has passed to the client at year end are recorded in inventory and A/P. |
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Term
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Definition
recorded in the period of shipment to the client.
Thus, receipts for several days after year end should be evaluated to determine whether the goods should be recorded in the current year. |
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Term
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Definition
recorded in the period received by the client.
Receiving documents are traced to the accounting records by the auditor for several days prior to and after year end to determine proper recognition of inventory and A/P. |
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Term
| cash disbursements cutoff test |
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Definition
Test the recording of cash disbursements and the associated reduction in A/P.
Inspecting the last check written and tracing it to the A/P S/L will provide evidence of proper recording. |
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Term
| rights and obligations of A/P and Purchases |
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Definition
| Does the balance of A/P reflect the liability of this entity? |
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Term
| audit procedures for rights and obligations of A/P and Purchases |
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Definition
| Use inquiries. Low risk of misstatement. |
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Term
| occurrence of A/P and Purchases |
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Definition
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Term
| audit procedures for occurrence of A/P and Purchases |
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Definition
| Vouch recorded payables to documentation. A sample of recorded payables should be reconciled w/documentary support. |
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Term
| classification and understandability of A/P and Purchases |
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Definition
| Are purchases and payables appropriately described and disclosures fairly and clearly expressed? |
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Term
| audit procedures for classification and understandability of A/P and Purchases |
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Definition
Inspect the F/S.
Evaluate note disclosures. |
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Term
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Definition
| A/P should be current liability on the B/S. Purchases should be used in the determination of CoGS for the I/S. |
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Term
| evaluate note disclosures |
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Definition
| Any unusual significant transactions or events should be described by management in the notes. |
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Term
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Definition
client knows more about its own business, particularly in the amount and value of inventory, than do auditors.
A significant risk for auditors. |
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Term
| primary purpose for testing inventory |
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Definition
| test management's assertions about the presentation of the balance and disclosures in the F/S. |
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Term
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Definition
| goods held for resale by the client and is presented as a current asset on the B/S |
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Term
| completeness of inventory |
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Definition
| Does the inventory balance contain all inventory owned by the entity at year end? |
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Term
| analytical procedures for completeness of inventory |
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Definition
| The auditor should use appropriate sources of data to form expectations with which to compare management's presentations. Ratios may be calculated and used. Unexpected findings should be investigated. |
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Term
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Definition
CoGS / Avg. Inventory.
Compare w/prior period and industry averages. |
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Term
| vertical analysis of inventory |
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Definition
Inventory / Total Assets.
Compare w/industry averages. |
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Term
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Definition
Information from the client's previously prepared budgets.
Nonfinancial information may provide expectations about the flow of inventory as well as sales and receivables. |
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Term
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Definition
| Have the amounts been recorded appropriately? |
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Term
| Audit procedures for testing accuracy of inventory |
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Definition
Obtain a management representation letter with assertions related to purchases and payables.
Compare the G/L balances to the balances on the F/S. |
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Term
| valaution/allocation of inventory |
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Definition
| Are A/P valued in accordance w/GAAP? GAAP require that debts be stated at the amount necessary to satisfy the obligation. |
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Term
| How is detection risk for the valuation/allocation assertion reduced? |
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Definition
| Detection risk for this assertion is reduced if the other assertions are tested in accordance w/GAAS. This valuation or allocation assertion is interrelated w/those for existence and completeness. |
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Term
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Definition
| Do the recorded A/P represent valid liabilities at the B/S date? |
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Term
| audit procedures for testing existence of inventory |
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Definition
Confirmation not a GAAS. Use evidence from the client.
If confirmation is undertaken, small and zero balances should be sampled as well as larger balances. The auditor should use the activity in the account as a basis for selection.
The blank form of positive confirmations should be used. It requests that the balance due be provided by the creditor/vendor. |
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Term
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Definition
| Have transactions been recorded in the proper period? |
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Term
| purchases cutoff test (inventory) |
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Definition
| Determine that all goods for which title has passed to the client at year end are recorded in inventory and A/P. |
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Term
| FOB shipping point (inventory) |
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Definition
recorded in the period of shipment to the client.
Thus, receipts for several days after year end should be evaluated to determine whether the goods should be recorded in the current year. |
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Term
| FOB destination (inventory) |
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Definition
recorded in the period received by the client.
Receiving documents are traced to the accounting records by the auditor for several days prior to and after year end to determine proper recognition of inventory and A/P. |
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Term
| cash disbursements cutoff test (inventory) |
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Definition
| Test the recording of cash disbursements and the associated reduction in A/P. Inspecting the last check written and tracing it to the A/P S/L will provide evidence of proper recording. |
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Term
| rights and obligations of inventory |
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Definition
| Does the balance of A/P reflect the liability of this entity? |
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Term
| audit procedures to test rights and obligations of inventory |
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Definition
| Use inquiries. Low risk of misstatement. |
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Term
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Definition
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Term
| audit procedures to test occurrence of inventory |
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Definition
| Vouch recorded payables to documentation. A sample of recorded payables should be reconciled w/documentary support. |
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Term
| classification and understandability of inventory |
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Definition
| Are purchases and payables appropriately described and disclosures fairly and clearly expressed? |
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Term
| audit procedures to test classification and understandability of inventory |
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Definition
Inspect the F/S.
Evaluate note disclosures. |
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