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Rights and ObligationsGenerally, there is little risk related to this assertion because entities seldom have an incentive to record liabilities that are not obligations of the entity. Review of the voucher packets for adequate supporting documents relating liabilities to the entity provides sufficient evidence to support this assertion.
Chapter 11 Auditing the Purchasing Process423ValuationThe valuation of individual accounts payable is generally not a difficult assertion to test. Accounts payable are recorded at either the gross amount of the invoice or the net of the cash discount if the entity normally takes a cash discount. The tests of details of account balances noted in Table11–10 normally provide sufficient evidence as to the proper valuation of accounts payable.The valuation of accruals depends on the type and nature of the accrued expenses. Most accruals are relatively easy to value, and proper valuation can be tested by examining the underlying source documents. Real estate taxes and interest are examples of accruals that are generally easy to value. In the first case, real estate appraisals or bills usually serve as the basis for the accrual amount (see Exhibit 11–3). In the second case, the amount of interest accrued relates directly to the amount of debt and the interest rate stipulated in the loan agreement. Other accruals, however, may require the auditor to verify the entity’s estimates. Auditing standards provide the auditor with guidance in auditing an entity’s estimates. Examples of such esti-mates include accruals for vacation pay, pension expense, warranty expense, and income taxes. The Advanced Modulein this chapter provides a discussion of auditing the income tax provision and related balance sheet accounts.Classifi cation and UnderstandabilityThe major issues related to the presentation and disclosure assertion about classifica-tion are (1) identifying and reclassifying any material debits contained in accounts payable, (2) segregating short-term and long-term payables, and (3) ensuring that different types of payables are properly classified. Proper classification can usually be verified by reviewing the accounts payable listing and the general ledger accounts payable account. If material debits are present, they should be reclassified as receiv-ables or as deposits if the amount will be used for future purchases. Any long-term payables should be identified and reclassified to the long-term liability section of the balance sheet. Also, if payables to officers, employees, or related parties are material, they should not be included with the trade accounts payable. The auditor should also ensure that accrued expenses are properly classified.