Discussions and Replies
AUDITING
Accounts Payable
Discussion Topic
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Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
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Do you think accounts payable confirmation can be useful to the auditor? How? What are the limitations of accounts payable confirmation? What are some alternatives to accounts payable confirmation?
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The confirmation of accounts payable is not a generally accepted auditing procedure. The auditor is required to obtain confirmation of accounts receivable only. The evidence supporting accounts payable, such as vendors' invoices and statements, is produced by outside sources. Determining that all payables are recorded is the primary objective of the accounts payable audit. It follows that confirmations are very useful in supplying supporting evidence for receivables but that auditing procedures other than confirmation are required to verify that all payables are recorded. The selection of accounts payable for confirmation would be from the following groups: (1) large accounts including important suppliers even though the account balance is small at balance sheet date; (2) accounts for which monthly statements are unavailable; (3) accounts with unusual transactions; and (4) accounts with zero balances that had substantial activity earlier in the year.
The main limitation of accounts payable confirmation is that it does not prove the completeness of recorded accounts payable. The accounts payable confirmation procedures are not always used because reliable externally generated evidence supporting accounts payable balances are generally available for audit inspection on the premises of client. Some auditors believe that it is not required to confirm accounts payable because the search for unrecorded liabilities is the basic means of testing for completeness of accounts payable.
The alternative procedures are generally performed for non replies of accounts payable confirmations and or selected unconfirmed accounts. This includes examination of unpaid invoices, receiving reports and bills supporting the recorded balances. The examination of vendor statement dated near the balance sheet date can also be made. The statement balances shall be reconciled to the balance in client account. The subsequent payment of liability shall be vouched. The invoices from few selected vendors for the purchase of goods and services after balance sheet date shall be inspected. It shall be determined whether invoices show an amount that was owed as on balance sheet date. Generally alternative procedures on non replies are not required because the search for unrecorded liabilities compensates for such procedures. The main benefit of this alternative procedure is that it provides 100% confirmation about the existence of accounts payable. The limitation is that this process is quite time taking and wastes auditor’s precious time. It is not very result oriented because performing basic or alternative audit procedures for accounts payable is not necessary.
Sales and Collections Cycle
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Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
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Which of these cycles would you, as an auditor, spend more time with? Would you suspect more misstatements in the revenues and collection cycle or in the purchases and payments cycle? Why? Give some examples to support you opinion.
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If I were an auditor, I would spend more time with the revenues and collections cycle due to the risk of improper revenue recognition and receivables valuation. It is beneficial for companies to overstate their earnings to keep stock prices high and senior managment may have bonus compensation tied to corporate earnings and this would directly impact shareholders, who rely upon the accuracy of a company's financial statements in making their investment decisions. Some examples include:
Freddie Mac disclosed in mid-2003 that the company had manipulated its accounting (understating its earnings by $5 billion over more than three years) to hide fluctuations in their earnings and to meet investor's expectations.
Fannie Mae was ordered in 2004 by the Securites and Exchange Commission to restate 4 years worth of financial statements due to failure to recognize an estimated $9 billion of losses on derivatives used to hedge interest-rate risks. Fannie incorrectly applied the rules in a way that allowed the company to spread out losses over many years rather than booking them immediately.
In 2005, the former CEO and CFO of American International Group (AIG) were accused of planning and authorizing two transactions that inaccurately portrayed AIG's financial results over a four year period. One transaction turned warranty insurance losses into investment losses, the other transaction inflated company reserves by $500 million.
In March of this year, it was reported that Caterpillar avoided reporting $7.9 billion brought to the US from its Swiss units and affiliates in order to keep its stock price high.
Auditing other Accounts
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Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
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What assertions is the auditor interested in when auditing Property, Plant, and Equipment? What are some possibilities for fraud in this particular account? What are some judgment decisions that the auditor needs to make in this account?
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When auditing Property, Plant, and Equipment accounts auditors need to verify valuation of the asset to the valuation report and consider reasonableness. The auditor needs to evaluate the depreciation rates to ensure they are consistent with account policies. Additionally he needs to review labor, material, and overhead costs for self-constructed assets. search for any profit element, and review capitalization of finance costs.
Auditors need to be cautious about the potential errors dealing with cost basis of an asset. For example, an auditor will need to make sure any major repairs are added to the cost of the asset rather than expensed. These repairs increase the useful life of the asset and will affect the balance on the financial statement. Lease accounting and dealing with fixed assets that are not purchased are inherently risky, because they are complex accounting issue. These type of assets have the potential for being fraudulently reported as expenses, which will cause the balance sheet and income state to have material misstatements.
