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Unformatted text preview: Chapter 16 - Auditing Operations and Completing the Audit CHAPTER 16 Auditing Operations and Completing the Audit Review Questions 16-1 Revenue accounts that are verified during the audit of balance sheet accounts are the following (only three required): Balance Sheet Item Revenue Accounts Receivable Sales Notes Receivable Interest Securities and other investments Interest, dividends, gains on sale, share of investee's income Property, plant, and equipment Rent, gains on sales Intangible assets Royalties 16-2 Many analytical procedures are used in the verification of revenue. Typical are the following: (1) Comparison of this year's revenue to last year's. (2) Comparison of month-by-month revenue increments in the current year. (3) Comparison of revenue for each of the current year's months with the revenue of the prior year's comparable months. (4) Comparison of budgeted to actual revenue for each month of the current year. 84 Chapter 16 - Auditing Operations and Completing the Audit (5) Comparison of revenue to sales or production in units of product. Any unusual variations developed in the above comparisons should be thoroughly investigated and the reasons therefor obtained. 16-3 Items often misclassified as miscellaneous revenue include the following (only three required): (1) Collections on previously written-off receivables; these should be credited to the allowance for doubtful accounts and notes receivable. (2) Write-offs of old outstanding checks or unclaimed wages; in states having unclaimed property laws these write-offs should be credited to a liability account. (3) Proceeds from sale of scrap; these are generally applied to reduce cost of goods sold. (4) Rebates or refunds of insurance premiums; these should be offset against the related insurance expense or unexpired insurance. (5) Proceeds from sales of plant assets; these should be accounted for in the determination of gain or loss on the assets sold. 16-4 Expense accounts that are verified during the audit of balance sheet accounts are the following (only three required): Balance Sheet Item Expense Accounts and notes receivable Uncollectible accounts and notes expense Inventories Purchases and cost of goods sold Property, plant, and equipment Depreciation, repairs and maintenance, and depletion Intangible assets Amortization Accrued liabilities Related expenses, such as commissions, fees, bonuses, product warranty expenses, and others Interest bearing debt Interest 16-5 For income tax returns, the auditors should obtain or prepare analyses of officers' salaries and expenses, directors' fees, travel and entertainment, taxes, contributions, and casualty losses. 16-6 The department heads and other supervisors who direct operations and authorize expenditures should participate in the development of each year's budget and should receive frequent reports comparing actual revenue and cost data with the budget figures. When the budget is used in this way, it serves as a goal and as a measure of performance. used in this way, it serves as a goal and as a measure of performance....
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This note was uploaded on 11/07/2009 for the course DIVISION O CM 20253 taught by Professor Julian during the Spring '09 term at City University of Hong Kong.
- Spring '09