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    Audit of The Financing and Investing Cycle

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    Erica
    This document discusses internal controls and substantive audit procedures related to property, plant, and equipment accounts. It provides examples of seven potential errors in these accounts, describing an internal control to prevent each error and a substantive audit procedure to discover it. It also lists seven audit areas and describes an unrecorded liability that could be uncovered in each area along with the audit procedure to uncover it.

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    Audit of The Financing and Investing Cycle

    Uploaded by

    Erica
    84 views4 pages
    This document discusses internal controls and substantive audit procedures related to property, plant, and equipment accounts. It provides examples of seven potential errors in these accounts, describing an internal control to prevent each error and a substantive audit procedure to discover it. It also lists seven audit areas and describes an unrecorded liability that could be uncovered in each area along with the audit procedure to uncover it.

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    Audit-of-the-Financing-and-Investing-Cycle

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    This document discusses internal controls and substantive audit procedures related to property, plant, and equipment accounts. It provides examples of seven potential errors in these accounts, describing an internal control to prevent each error and a substantive audit procedure to discover it. It also lists seven audit areas and describes an unrecorded liability that could be uncovered in each area along with the audit procedure to uncover it.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    84 views4 pages

    Audit of The Financing and Investing Cycle

    Uploaded by

    Erica
    This document discusses internal controls and substantive audit procedures related to property, plant, and equipment accounts. It provides examples of seven potential errors in these accounts, describing an internal control to prevent each error and a substantive audit procedure to discover it. It also lists seven audit areas and describes an unrecorded liability that could be uncovered in each area along with the audit procedure to uncover it.

    Copyright:

    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 4

    Chapter 8: Audit of the Financing and Investing Cycle: Tests of

    Controls and Substantive Tests of Transactions

    8-19. For each of the following errors in property, plant, and equipment
    accounts, state an internal control the client could install to prevent the error
    from occurring and a substantive audit procedure the auditor could use to
    discover the error.

    1) The asset lives used to depreciate equipment are less than


    reasonable, expected useful lives.

    Internal Control: Application of the government study


    depreciation table.
    Substantive Audit Procedure: Compare the lives used to the
    government study depreciation table.

    2) Capitalizable assets are routinely expensed as repairs and


    maintenance, perishable tools, or supplies expense.

    Internal Control: Require approval for all the expenditures.


    Substantive Audit Procedure: Verify all the expense charges
    to these accounts.

    3) Construction equipment that is abandoned or traded for


    replacement equipment is not removed from the accounting
    records.

    Internal Control: Require a construction foreman to report to


    the accounting department periodically.
    Substantive Audit Procedure: Review all the equipment listed
    on the accounting records.
    4) Depreciation expense for manufacturing operations is charged to
    administrative expenses.

    Internal Control: Ensure that all the expense records are


    internally verified.
    Substantive Audit Procedure: Review all the depreciation and
    administrative expenses by ratio comparison to the previous
    years.

    5) Tools necessary for the maintenance of equipment are stolen by


    company employees for their personal use.

    Internal Control: Allocate the tools to every foreman and count


    the tools periodically.
    Substantive Audit Procedure: Have a physical count of the
    tools.

    6) Acquisitions of property are recorded at an improper amount.

    Internal Control: Ensure that all the records of property


    acquisition are internally verified.
    Substantive Audit Procedure: Review all the supporting
    documentations on the property acquisitions and compare the
    amounts to the recorded ones.

    7) A loan against existing equipment is not recorded in the


    accounting records. The cash receipts from the loan never
    reached the company because they were used for the down
    payment on a piece of equipment now being used as an
    operating asset. The equipment is also not recorded in the
    records.

    Internal Control: Deposit all the cash directly into the bank
    account.
    Substantive Audit Procedures:
    (1) Confirm the bank accounts and all the other tests for the
    unrecorded loans.
    (2) Take a physical examination of the plant assets.

    8-20. As part of the audit of different audit areas, it is important to be alert


    for the possibility of unrecorded liabilities. For each of the following audit
    areas or accounts, describe a liability that could be uncovered and the audit
    procedures that could uncover it.
    a. Minutes of the board of directors’ meetings

    Liability that could be uncovered: A lawsuit


    Audit Procedure: Review the minutes of the board of directors’
    meetings.

    b. Land and buildings

    Liability that could be uncovered: A building used as a


    collateral
    Audit Procedure: Review the documents of ownership and the
    bank confirmations.

    c. Rent expense

    Liability that could be uncovered: An unrecorded lease


    Audit Procedure: Review all the lease agreements.

    d. Interest expense

    Liability that could be uncovered: A note payable


    Audit Procedure: Review all the preliminary records for the
    related loans.

    e. Cash surrender value of life insurance

    Liability that could be uncovered: A policy loan


    Audit Procedure: Confirm with the life insurance company.

    f. Cash in the bank

    Liability that could be uncovered: A note payable


    Audit Procedure: Secure a confirmation from the bank.

    g. Officers’ travel and entertainment expense

    Liability that could be uncovered: An income taxes payable


    Audit Procedure: Review all the travel and the expense
    reports.

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