sol19 - 1Chapter 19 Completing the Tests in the Acquisition...

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1 Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts Review Questions 19-14 The analysis of expense accounts is a procedure by which selected expense accounts are verified by examining underlying supporting vendors' invoices or other documentation to determine if the transactions making up the total are correctly stated. The emphasis in most expense account analysis is on existence of recorded amounts, accuracy, and classification. Potentially the same objectives are accomplished in tests of controls and substantive tests of transactions as for expense account analysis. The major differences are that tests of controls and substantive tests of transactions are selected from all of the acquisitions and cash disbursements journals for the entire period whereas transactions examined for expense analysis are limited to the account being analyzed. Nevertheless, the procedures are closely related, and if the tests of controls and substantive tests of transactions procedures results are satisfactory, reduced expense account analysis is implied. 19-15 The approach for verifying depreciation expense should emphasize the consistency of the method of depreciation used and the related computations, since these aspects of depreciation expense are the main determinants of the account balance. The use of analytical procedures and reperformance tests is important for depreciation expense. In verifying repair expense, the emphasis should be on vouching transactions that may be capital items; therefore, examining supporting documentation for transactions from months with unusually large totals or transactions that are themselves large or unusual is the normal audit approach followed. The approach is different because in repairs and maintenance the primary objective is to locate improperly classified fixed assets, whereas in depreciation the emphasis is on consistency from period to period and accurate depreciation calculations. 19-16 The factors that should affect the auditor's decision whether or not to analyze an account balance are: 1. The analytical procedures indicate there is a high likelihood of misstatement in an account. 2. The tests of controls and substantive tests of transactions indicate there is a high likelihood of misstatement in an account. 3. The account is likely to contain misstatements because it is difficult for the client to properly classify or value the transactions. 4. The auditor knows that the account is frequently subject to abuse or misstatement. 5. The analysis of the account might disclose a contingency. 19-1
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6. Tax returns and the SEC require the disclosure of certain information, which the account is likely to provide. Four expense accounts that are commonly analyzed in audit engagements are:
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sol19 - 1Chapter 19 Completing the Tests in the Acquisition...

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