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AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

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Page 1: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

AUDITINGCHAPTER 13

Accounts Payable, Prepaids, & Accrued LiabilitiesBy David N. Ricchiute

Page 2: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 132

TOPICSRelationship assertions & audit proceduresRelationship audit risk, nonfinancial measures, substantive testsSubstantives tests for A/PSubstantive tests for prepaid expenses, accrued liabilitiesExpense recognition & earnings manipulation2Audit sampling & A/PComputer-assisted audit techniques for A/P

Page 3: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 133

ASSERTIONS & OBJECTIVES

Management assertions: Recorded Purchases & A/P Exist Include all transactions

(completeness) Represent rights, obligations of entity Are valued appropriately Are presented & disclosed properly

Page 4: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 134

AUDIT RISKS

Payment problems Insufficient cash

Overstated purchasesUnderstated payables

Page 5: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 135

OBJECTIVES & PROCEDURES: Existence/Occurrence

Objective: determine whether all payables exist & all purchases occurred Exist

Confirm with creditors Transactions occurred

Cutoff testing for proper period

Page 6: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 136

OBJECTIVES & PROCEDURES:Completeness

Objective: determine whether all purchases, payables are actually presented Complete

Test for unrecorded liabilities Analytical procedures Test cutoff

FOB shipping point FOB destination

Page 7: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 137

OBJECTIVES & PROCEDURES:Rights & Obligations

Objective: determine whether payables & other recorded liabilities are bona fide obligations Rights & obligations

Confirm with creditors Test for unrecorded liabilities

Page 8: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 138

OBJECTIVES & PROCEDURES:Valuation, Allocation

Objective: determine whether payables are reported at appropriate dollar amounts Valuation, allocation

Verify A/P trial balance Confirm with creditors Test for unrecorded liabilities

Page 9: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 139

OBJECTIVES & PROCEDURES:Presentation, Disclosure

Objective: determine whether payables are properly classified, described, disclosed Presentation, disclosure

Compare statement presentation, disclosure with GAAP requirements

Page 10: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1310

NONFINANCIAL MEASURES OF RISK

Examples for payables: Failure to get low price provider Unfavorable price variances Significant lag in product

development

Page 11: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1311

AUDIT RISK MODELAR = CR x IR x DR

Detection risk (DR): likelihood that error could occur & not be detectedBased on Control risk (CR)

Likelihood of material error Inherent risk (IR)

Strategies & threats

Page 12: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1312

DETECTION RISK

DR = ____AR___ IR x CR

Nature, extent, timing substantive tests Nature: more/less persuasive tests Extent: larger/smaller samples Timing: balance sheet date or interim

Page 13: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1313

ASSERTIONS & PROCEDURESPurchases & Payables-1

ValuationVerify mathematical accuracy A/P Foot, cross-foot aged trial

balance Compare trial balance total to GL Trace sample vendor accounts to

voucher packages Examine supporting documents

Page 14: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1314

ASSERTIONS & PROCEDURESPurchases & Payables-2

Existence, Obligations, ValuationConsider confirming year-end payables with creditors

Existence, Occurrence, Completeness Test cut-off for recording in proper period

Page 15: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1315

ASSERTIONS & PROCEDURESPurchases & Payables-3

Completeness, Valuation, ObligationsTest for unrecorded liabilities

Existence, Occurrence, Completeness, ValuationPerform analytical procedures

Page 16: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1316

ASSERTIONS & PROCEDURESPurchases & Payables-4

Presentation & DisclosureReview statements to determine Payables, other liabilities properly

classified, described Disclosures adequate

Page 17: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1317

SUBSTANTIVE TESTS:Payables Confirmation

Not commonly confirmed unless Controls inadequate Concern with liabilities

overstatement

Main concern for payables: understatement Confirmation not effective for

detecting unrecorded liabilities Not listed on trial balance Not in sample

Page 18: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1318

TESTING UNRECORDED LIABILITIES

Four sources Year-end A/P trial balance Cash disbursements journal Canceled voucher packages File unmatched receiving reports

Page 19: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1319

CAPITALIZED COSTS:AOL

In fiscal 1995, 1996, AOL capitalized advertising costs in an account called “Deferred Membership Acquisition Costs,” & amortized costs over a 24 month period$77 million, 19% assets$314 million, 33% assets

Is this the proper accounting treatment?What was the effect on the financial

statements?

Page 20: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1320

ASSERTIONS & PROCEDURES: Prepaid Expenses

Examples: Prepaid insurance, rent, advertising, & suppliesExistence, rights, obligations Examine insurance policies

Completeness: Insurance coverage exceeds replacement

cost Cutoff testing from A/P

Valuation Recalculate unexpired premiums

Page 21: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1321

ASSERTIONS & PROCEDURES : Accrued Liabilities

Examples: accrued taxes, warranty costs, rent, interestOccurrence, obligations, valuation Examine property tax bills Compare provisions to prior year:

reasonableness Additions/disposals assets

Completeness Unusual fluctuations

Page 22: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1322

EXCESS RESERVES:W. R. Grace

From 1991 – 95, Grace recorded $20 million in excess reserves on statements of a health-care subsidiary that produced a large portion of Grace’s consolidated net income. “Extra earnings could be used when they wanted to goose up the numbers.”

Specifically, how would they “goose up the numbers?”

Page 23: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1323

EARNINGS MANIPULATIONEnvironmental Liabilities

Columbia Transmission in recent years recorded projected compliance costs related to low levels of contamination by PCB-based lubricating oils. . . resulted in additional pre-tax charges of $65 million

Page 24: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1324

MANAGEMENT, AUDITOR INCENTIVES

Management Incentive to understate cleanup costs Examples

Arco, Exxon, Phillips’ stock prices declined due to environmental disasters

Auditor Incentive for reasonable assurance

that material environmental liabilities are disclosed Shareholders may sue if unreported

Page 25: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1325

NONSTATISTICAL SAMPLING: Accounts Payable

Assess control riskSelect sampling planDetermine Population, sampling unit, sample size

Evaluate results Decision rule: if likely error <

tolerable error then payables not likely materially misstated

Page 26: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1326

COMPUTER-ASSISTED TESTS: A/P Accuracy

Verify footings, cross-footings, extensions of aged trial balance or subsidiary recordsCompare details of trial balance with subsidiary recordsCompare details subsidiary records with source documents

Page 27: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1327

COMPUTER-ASSISTED TESTS: Summarizing Data

Age A/P according to due datesList debit balances for reclassification to A/R

Page 28: AUDITING CHAPTER 13 Accounts Payable, Prepaids, & Accrued Liabilities By David N. Ricchiute

GBW 8th ed., Ch. 1328

COMPUTER-ASSISTED TESTS: Sample Selection, Comparison

Use random number generator to select sample from aged A/P trial balanceCompare charges/credits from subsidiary records with purchases/cash disbursements


UBS (CANADA) AMERICAN EQUITY FUND … Current liabilities Due to investment dealers 77,242 - - Accrued management fees 20,739 14,850 22,005 Accrued liabilities 70,318 62,304

ACCRUED - | does

The Three Most Highly Negotiated and Often Disputed … · 2012-06-20 · Accrued expenses 5,447 Accrued expenses 5,447 Accrued income taxes 762 Accrued income taxes - Deferred revenue

AUDITING CHAPTER 1 Introduction to Audit & Other Assurance Services By David N. Ricchiute

FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS ......Accrued Fund Assessment 343,289 54,039 Accrued Management Fee (40,201) 2,486 Accrued Income Taxes 0 (2,011) Accrued Loss Adjusting

AUDITING CHAPTER 15 Inventory & Fixed Assets By David N. Ricchiute

AUDITING CHAPTER 19 Compliance & Internal Auditing By David N. Ricchiute

Accrued Financial Services, Inc. v. Prime Retail, Inc

annual report 2018 - Seniors Firstseniorsfirstinc.org/wp-content/uploads/2016-2018.pdfAccounts receivable 1,174,509 Certificates of deposit 533,102 Prepaids and other assets 101,201

BENEFITS ACCRUED ON IMPLEMENTATION OF E-PROCUREMENT SYSTEM

TRADE CREDIT, ACCRUED EXPENSES AND DEFERRED INCOME

UNITED STATESd18rn0p25nwr6d.cloudfront.net/CIK-0001494319/16c... · Current portion of long-term debt 13 26.9 25.0 Accrued compensation 95.9 103.6 Other accrued expenses 14 439.8

ACCRUED - Washington, D.C

AUDITING CHAPTER 16 Investment, Debt, & Equity By David N. Ricchiute

Accrued Interest en[1]

AUDITING CHAPTER 6 Evidence By David N. Ricchiute

District of Columbia Accrued Safe and Sick Leave Actdcwagelaw.com/wp-content/uploads/dc-accrued-safe...District of Columbia Accrued Safe and Sick Leave Act Rev 8/3/2020 § 32-531.01

THE MEANING OF received by AND accrued to

AUDITING CHAPTER 11 Accounts Receivable & Cash Balances By David N. Ricchiute

Financial Disclosure Fines Accrued Report - Fines Accrued as of October 25, 2013 720am.pdf

ESTIMATING LOSS IN VALUE: ACCRUED DEPRECIATION Chapter 12

Auditing the Acquistion Cycle · 2013. 8. 30. · 14-3 Sources of Accrued Liabilities Accrued liabilities Sometimes called accrued expenses Examples: Salaries, interest, rent Accumulate

AUDITING CHAPTER 18 Other Assurance & Attestation Services By David N. Ricchiute

Chapter 3: Accruals and Deferrals Agenda Accrual Accounting Accrued Revenue Accrued Expenses Deferred Revenue Deferred Expenses

AUDITING CHAPTER 10 Sales & Cash Receipts Transactions By David N. Ricchiute

AUDITED FINANCIAL STATEMENTS 2012–2013 ... payable and accrued liabilities……………… $ 28,855 $ 15,730 Accrued salaries and wages………………..…………… 3,579

ROCKY MOUNTAIN HOUSE, ALBERTA FINANCIAL STATEMENTS …€¦ · Accounts payable and accrued liabilities - operating 638,979 614,706 Accounts payable and accrued liabilities - capital-69,318

IMPACT OF UNFUNDED ACCRUED LIABILITY PAYMENTS ON …

Unlocking the Mysteries of Accrual Accountingcontroller.admin.ri.gov/documents/Training/166...May 14, 2018  · An Example of Accrued Expense • The theory behind booking accrued

Arts Council of Central Louisiana · Other Receivables Prepaids Total Cunent Assets Endowment Investments I nvestments-Designated Total Endowment Investments Property and Equipment

Arts Council of Central Louisiana...Other Receivables Prepaids Total Cunent Assets Endowment Investments I nvestments-Designated Total Endowment Investments Property and Equipment

California Institute of Technology · Accounts payable and accrued expenses $ 404,707412,728 $ Accrued compensation and benefits 269,881 257,302 Deferred revenue and refundable advances

Market Valuation of Accrued Social Security Benefits - … ·  · 2014-07-30Market Valuation of Accrued Social Security Benefits by John Geanakoplos ... defined-benefit pension plans

Audit Mcqs Ricchiute Test Bank

B.COM – I – ACCOUNTING · PDF fileFOR THE PERIOD OPENING 1 JANUARY 2004 ... (To reverse the accrued interest income) ... (To reverse the accrued interest expense)