COMPLETING THE TEST IN THE ACQUISITION AND

PAYMENT CYCLE : VERIFICATION OF SELECTED

ACCOUNTS

Arranged By :
Group 7th

1. Esti Setianingsih (7211420098)

2. Muhammad Irfan Fauzi (7211420111)
3. Ariska Wahyu Wigati (7211420136)
4. Ivana Putri Kusumaningrum (7211420147)

AKUNTANSI
FAKULTAS EKONOMI
UNIVERSITAS NEGERI SEMARANG
2022

CHAPTER 1
INTRODUCTION
1. BACKGROUND
The acquisition and payment cycle includes the decisions and processes required to
provide goods and services in the conduct of the business. This cycle usually begins with the
act of purchasing by employees who need goods or services and ends with payment of
accounts payable.
2. PROBLEM FORMULATION
1. What are types of other accounts?
2. What is audit of property, plant, and equipment and how to audit them?
3. What is audit of prepaid expense and how to audit them?
4. What is audit of accrued liabilities and how to audit them?
5. What is audit account of income and expenses and how to audit them?
3. PURPOSES

1. To explain types of other accounts

2. To explain audit of property, plant, and equipment and method to audit them

3. To explain audit of prepaid expense and method to audit them

4. To explain audit of accrued liabilities and how to audit them

5. To explain audit account of income and expenses and how to audit them
TYPES OF OTHER ACCOUNTS IN THE ACQUISITION AND PAYMENT CYCLE
The issues for some of the other key accounts in this cycle are examined, namely the audit of:
● Property, plant, and equipment
● Prepaid expenses
● Other liabilities
● Income and expense accounts

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are assets that have expected lives of more than one
year, are used in the business, and are not acquired for resale. Because the audits of property,
plant, and equipment accounts are similar, one example (equipment) is used to illustrate an
approach to auditing all three types of accounts.

Overview of Equipment Related Account

The accounts commonly used for equipment are illustrated in Figure 19-1.

The auditing of equipment emphasizes the verification of current period acquisitions

rather than the balance in the account carried forward from the preceding year. In addition,
the expected life of assets over one year requires depreciation expense and accumulated
depreciation accounts, as shown in Figure 19-1, which are verified as part of the audit of the
assets. Finally, equipment may be sold or disposed of, triggering a gain or loss entry that the
auditor may need to verify. In the audit of equipment and related accounts, it is helpful to
separate the tests into the following categories:
1. Perform Substantive Analytical Procedures
 As in all audit areas, the type of analytical procedures depends on the nature of the
client’s operations. Table 19-3 illustrates substantive analytical procedures often performed
for equipment. Most of the typical substantive analytical procedures are used to assess the
likelihood of material misstatements in depreciation expense and accumulated depreciation.

2. Verify Current Year Acquisitions

Companies must correctly record current year additions because the assets have long term
effects on the financial statements. The failure to capitalize a fixed asset, or the recording of
an acquisition at the incorrect amount, affects the balance sheet until the company disposes of
the asset. The income statement is affected until the asset is fully depreciated. The starting
point for the verification of current year acquisitions is normally a schedule obtained from the
client of all acquisitions recorded in the general ledger property, plant, and equipment
accounts during the year. The client obtains this information from the property master file. A
typical schedule lists each addition separately and includes the date of the acquisition,
vendor, description, notation of whether it is new or used, life of the asset for depreciation
purposes, depreciation method, and cost.
3. Verify Current Year Disposals
The starting point for verifying disposals is the client’s schedule of recorded disposals.
The schedule typically includes the date when the asset was disposed of, name of the person
or firm acquiring the asset, selling price, original cost, acquisition date, and accumulated
depreciation. Detail tie-in tests of the recorded disposals schedule are necessary, including
footing the schedule, tracing the totals on the schedule to the recorded disposals in the general
ledger, and tracing the cost and accumulated depreciation of the disposals to the property
master file. The following procedures are often used for verifying disposals:
● Review whether newly acquired assets replace existing assets
● Analyze gains and losses on the disposal of assets and miscellaneous income for receipts
from the disposal of assets
● Review plant modifications and changes in product line, and changes in major, costly
computer-related equipment; property taxes; or insurance coverage for indications of
deletions of equipment
● Make inquiries of management and production personnel about the possibility of the
disposal of assets
When an asset is sold or disposed of without having been traded in for a replacement
asset, the accuracy of the transaction can be verified by examining the related sales invoice
and property master file. The auditor should compare the cost and accumulated depreciation
in the master file with the recorded entry in the general journal and recompute the gain or loss
on the disposal of the asset for comparison with the accounting records. When trade-in of an
asset for a replacement occurs, the auditor should make sure that the new asset is capitalized
and the replaced asset correctly eliminated from the records, considering the book value of
the asset traded in and the additional cost of the new asset.

4. Verify Ending Balance Of Asset Account

When designing audit tests, auditors first consider the nature of internal controls over
equipment. Ideally, auditors are able to conclude that controls are sufficiently effective to
allow them to rely on balances carried forward from the prior year. Important controls
include the use of a master file for individual fixed assets, adequate physical controls over
assets that are easily movable (such as computers, tools, and vehicles), assignment of
identification numbers to each plant asset, and periodic physical count of fixed assets and
their reconciliation by accounting personnel. A formal method of informing the accounting
department of all disposals of fixed assets is also an important control over the balance of
assets carried forward into the current year.
Typically, the first audit step concerns the detail tie-in objective: Equipment, as listed in
the master file, agrees with the general ledger. Examining the master file that totals to the
general ledger balance is ordinarily sufficient. The auditor may choose to use audit software
to foot an electronic version of the master file or manually test-foot a few pages. After
assessing control risk for the existence objective, the auditor decides whether it is necessary
to verify the existence of individual items of equipment included in the master file. If there is
a high likelihood of a material amount of missing fixed assets still included in the master file,
the auditor can select a sample from the master file and examine the actual assets. Similarly,
based on the auditor’s assessment of control risk for the completeness objective, the auditor
may physically examine a sample of major equipment items and trace them to the master file.

5. Verify Depreciation Expense

 The most important balance-related audit objective for depreciation expense is accuracy.
Auditors focus on determining whether the client followed a consistent depreciation policy
from period to period and whether the client’s calculations are correct. A useful method of
auditing depreciation is a substantive analytical procedure performed by multiplying
undepreciated fixed assets by the depreciation rate for the year. In making these calculations,
the auditor must make adjustments for current year additions and disposals, assets with
different lengths of life, and assets with different methods of depreciation. Many CPA firms
maintain an electronic spreadsheet in their permanent file that includes a breakdown of the
fixed assets by method of depreciation and length of life. If the auditor’s expectation for
depreciation is reasonably close to the client’s totals, considering performance materiality and
assessed control risk for depreciation expense, tests of details for depreciation can be
eliminated.
When a substantive analytical procedure cannot be effectively performed or indicates a
potential misstatement, more detailed tests are usually needed. To do this, auditors recompute
depreciation expense for selected assets to determine whether the client is following a proper
and consistent depreciation policy. To be relevant, the detailed calculations should be tied in
to the total depreciation calculations by footing the depreciation expense on the property
master file and reconciling the total with the general ledger. Because accounting standards
require footnote disclosures related to fixed asset depreciation, including disclosure of
depreciation methods and related useful lives by asset class, auditors perform procedures to
obtain evidence that the four presentation and disclosure-related audit objectives for
depreciation are satisfied. For example, auditors compare information obtained through audit
tests of the depreciation expense accounts to information disclosed in footnotes to ensure the
information presented is consistent with the actual method and assumptions used to calculate
and record depreciation.

6. Verify ending Balance in accumulated Depreciation

The debits to accumulated depreciation are normally tested as a part of the audit of
disposals of assets, while the credits are verified as a part of depreciation expense. If the
auditor traces selected transactions to the accumulated depreciation records in the property
master file as a part of these tests, then little additional testing should be required for the
ending balance in accumulated depreciation. Two objectives are usually emphasized in the
audit of the ending balance in accumulated depreciation:
● Accumulated depreciation as stated in the property master file agrees with the general
ledger. This objective can be satisfied by test-footing the accumulated depreciation in the
property master file and tracing the total to the general ledger.
● Accumulated depreciation in the master file is accurate.
Audit of Prepaid Expense

Prepaid expenses, deferred charges, and intangible are assets that vary in life from several
month to several years. These Include :

● · Prepaid rent
● · Organization costs
● · Prepaid taxes
● · Patents
● · Prepaid insurance
● · Trademarks
● · Deferred charges
● · Copyrights
● · Goodwill

In several cases, analytical procedures are often sufficient for prepaid expenses. But in
some case, prepaid expenses can be significant and complex. For example. Audit for
intangible assets, goodwill is depend on auditor’s knowledge about the nature of the business
and needs testing of management’s significant assumptions. Because the complexity of
evaluating intangible assets, an auditor usually involving some specialist to help evaluate the
assets.

What is analytical procedures?

In SA 520, analytical procedures is defined as an evaluation of financial information

conducted through analysis the relationship between financial data and non financial data.
For example relationship between wages expense and number of employees.
Analytical procedures also include anticipated entity results such as budget estimates,
and auditor expectations, i.e. in this context are prepaid expenses and prepaid insurance. If
there is a difference in the amount of expectations, further investigation is required taking
into account that misrepresentation, either individually or when aggregated with other errors,
may cause the financial statements presented to be materially incorrect.

In this chapter, we will discuss some special internal control and audit test that related to
prepaid expenses. For example of audit of prepaid insurance is used as an account
representative of this group because it is found in most audits, problems that usually occurs
are typical of this class of accounts., and the auditor’s responsibility for the review of
insurance coverage is an additional consideration not found in the other accounts in this
category.
Internal control for prepaid insurance and insurance expense can easily divided into three
categories :

1. Controls over the acquisition and recording of insurance

Controls over the acquisition and recording of insurance are a part of acquisition and
payment cycle. Consistent with the procedures discussed in that cycle, proper
authorization for new insurance policies and payment of insurance premiums are
importans controls.

2. Control over the insurance register

An insurance register is a record of insurance policies in force and the expiration date of
each policy. Auditors use insurance register to identify policies in force related to prepaid
insurance accounts. Because the terms and amounts provide the basis of determining
prepaid insurance amounts, the auditor independently verifies these terms and amount to
the underlying insurance policies or contracts.

3. Control over the charge-off of insurance expense

Companies usually have a standard monthly journal entry to reclassify prepaid insurance
as insurance expense. If the significant entry is required to adjust the balance in prepaid
insurance at the end of year, it indicates a potential misstatement in the recording of the
acquisition of insurance throughout the year or in the calculation of the year end balance
in prepaid insurance.

In the audit of prepaid insurance, the auditor obtains a schedule from the client that lists
for each policy in force :

● Policy information (policy number, amount of coverage, and annual premium)

● Beginning prepaid insurance balance
● Payment of policy premiums
● Amount charged to insurance expense
● Ending prepaid insurance balance
 Usually the auditors perform the following analytical procedures for prepaid
insurance and insurance expense :

1. Comparing total prepaid insurance and insurance expense with previous years

2. Calculate the ratio of prepaid insurance to insurance expense and compare it with
previous year

3. Compare the individual insurance policy coverage on the schedule of insurance

obtained from client with the preceding year’s schedule

4. Review the insurance coverage listed on the prepaid insurance schedule with an
appropriate client official or insurance broker for adequacy of coverage.

For many audits, no additional substantive procedures are needed unless assessed control
risk is high or the test indicate a high likelihood of significant misstatement. Example of
the additional substantive test are :

● Test for existence and omissions of insurance policies in force can be

performed on the client’s prepaid insurance schedule by checking a sample of
insurance invoice and obtaining a confirmation of insurance information from
the company’s insurance agent.
● Reviewing insurance policies for claimants other than the clients to test
unrecorded liabilities and pledged assets
● Verify the accuracy of prepaid insurance involve verifying amount of the
insurance premium, the length of the policy period, and the allocation of the
premium to unexpired insurance.
● The correct classification of debits to different insurance expense accounts
should be reviewed as a test of the income statement.
● Check the cutoff of insurance acquisitions
B. AUDIT OF ACCRUED EXPENSES
Acrued Liabilities are the estimated unpaid obligations for services or benefits that
have been received before the balance sheet date. (SA 542 An accounting estimate is an
estimate of a monetary amount when an accurate measurement method is not available)
Many accrued liabilities represent future obligations for unpaid services resulting
from the passage of time but are not payable at the balance sheet date. For example, the
benefits of property rental accrue throughout the year. Therefore, at the balance sheet date, a
certain portion of the total rent cost that has not been paid should be accrued. Other similar
liabilities include:
● Accrued payroll
● Accrued payroll taxes
● Accrued officers’ bonuses
● Accrued commissions
● Accrued professional fees
● Accrued rent
● Accrued interest
A second type of accrual involves estimates where the amount of the obligation due is
uncertain, such as the obligation for federal income taxes when there is a reasonable
likelihood that the amount reported on the tax return will be changed after the Internal
Revenue Service audits the return. Accrued warranty costs and accrued pension costs are
similar accruals.
The verification of accrued expenses varies depending on the nature of the accrual
and the circumstances of the client. For most audits, accruals take little audit time. In other
instances, certain accounts, such as accrued income taxes, warranty costs, and pension costs,
are often material and require considerable audit effort. The following discussion of the audit
of accrued property taxes is used as an example of the audit of an accrued liability account.
 Figure 19-3 illustrates the accounts typically used by companies for accrued property
taxes, showing the relationship between accrued property taxes and the acquisition and
payment cycle through the debits to the liability account. Because the source of the debits is
the cash disbursements journal, the payments of property taxes should have already been
partially tested by the tests of the acquisition and payment cycle transactions.

When partially tested by the tests of the acquisition and payment cycle transactions.
As with insurance expense, the balance in property tax expense is a residual amount that
results from the beginning and ending balances in accrued property taxes and the payments of
property taxes. Therefore, the emphasis in the tests should be on the ending property tax
liability and payments. When auditors verify accrued property taxes, all eight balance-related
audit objectives except realizable value are relevant.
(SA 200 Auditors must satisfy each of the eight balance-related audit objectives. These are
called account receivables balance-related audit objectives.
1. Detail Tie In
2. Occurrence-Exixstence
3. Completeness
4. Accuracy
5. Classification
6. Cutoff-timing
7. Realizable value
8. Rights)

Two are especially significant:

1. Existing properties for which accrual of taxes is appropriate are on the accrual
schedule. The failure to include properties for which taxes should be accrued will
understate the property tax liability (completeness). A material misstatement can
occur, for example, if taxes on property were not paid before the balance sheet date
and not included as accrued property taxes.

2. Accrued property taxes are accurately recorded. The auditor’s concern is the
consistent treatment of the accrual from year to year (accuracy).

The auditor uses two primary tests for the inclusion of all accruals.
● Auditors verify the accruals at the same time as the audit of current year property tax
payments. In most audits, there are few property tax payments, but each payment is
often material, and therefore it is common to verify each one. Auditors also compare
the accruals with those of previous years. The auditor often begins by obtaining a
schedule of property tax payments from the client and comparing each payment with
the preceding year’s schedule to determine whether all payments have been included
in the client-prepared schedule.

● After auditors are satisfied that all taxable property has been included in the
clientprepared schedule, they evaluate the reasonableness of property taxes on each
property used by the client to estimate the accrual. The auditor can verify the accrued
property tax by recalculating the portion of the total tax applicable to the current year
for each piece of property.
 AUDIT OF INCOME AND EXPENSES ACCOUNT
Two concepts in the audit of income and expense accounts are needed to consider the
purpose of the income statement:
1. Periodic matching of income and expense is necessary to determine the correct
operating results
2. Consistent application of accounting principles over different periods is necessary for
comparability
Approach to Auditing Profit and Expense Accounts
The audit of profit and expense accounts relates to other parts of the audit. The part of the
audit that directly affects the profit and expense account is:
1. Analytical procedure
In the analytical procedure carried out in the profit and expense account audit, there
are audit standards that the auditor must comply with as the basis for carrying out
analytical procedures, namely SA 520. SA 520 describes the evaluation of financial
information related to financial and non-financial data with the output of obtaining
relevant audit evidence and concluding that the results of the financial statements are
consistent with the auditor's understanding of the entity.
2. Tests of controls and substantive tests of transactions
The most important means of verifying many of the income statement accounts in
each transaction cycle are understanding internal control and performing the related
tests of controls and substantive tests of transactions

3. Tests of details of balances

a. Tests of details of balances – Expense Analysis. View the auditor's examination
of the underlying documentation for each transaction and the amount consisting of the
details of the total expense account
b. Tests of details of balances – Allocations Account. Determine whether an
expense is an asset or an expense for the current period

Case Study
You are the manager in the audit of Vernal Manufacturing Company and are turning
your attention to the income statement accounts. The in-charge auditor assessed
control risk for all cycles as low, supported by tests of controls. There are no major
inherent risks affecting income and expense accounts. Accordingly, you decide that
the major emphasis in auditing the income statement accounts will be to use analytical
procedures. The client prepared a schedule of the key income statement accounts that
compares the prior-year totals with the current year totals. The in-charge auditor
completed the last column of the audit schedule, which includes explanations of
variances obtained from discussions with client personnel. The audit schedule is
included on page 650.
Required
1. Examine the schedule prepared by the client and your staff and write a
memorandum to the in-charge that includes criticisms and concerns about the
audit procedures performed and questions for the in-charge auditor to resolve.
2. Evaluate the explanations for variances provided by client personnel. List any
alternative explanation to those given.
3. Indicate which variances are of special significance to the audit and how you
believe they should be responded to in terms of additional audit procedures.
 CHAPTER III

CONCLUSION

This chapter concludes our discussion of accounts and transactions in the acquisition
and payment cycle. To adequately audit the numerous accounts associated with this cycle,
auditors need an understanding of key accounts, classes of transactions, business functions,
documents, and records related to acquisition and payment cycle transactions. Many of these
accounts such as accounts payable; property, plant, and equipment; depreciation expense; and
prepaid expenses have unique characteristics that affect how the auditor gathers sufficient
appropriate evidence about related account balances. And, finally, interrelationships between
different audit tests in the acquisition and payment cycle can provide a basis for the auditor’s
verification of many financial statement accounts.