Question

2. What control procedures would firms commonly use for the acquisition and payment activities?

3. What substantive analytical procedures might an auditor use to perform an analytical procedure for acquisitions?

4. What substantive analytical procedures might an auditor use to perform an analytical procedure for accounts payable?

Answer 1

1 ANSWER :-

a will-received control system should provide reasonable assurance that:
-all purchases are authroized
-there exists a timely, and complete recording of inventory
-receipt of inventory is properly accounted for and tested
-a PERIODIC INVENTORY SYSTEM: a system of inventory record keeping in which no continuous record of changes in inventory is kept
-a PERPETUAL INVENTORY SYSTEM is a system of inventory record keeping where book inventory is continuously in agreement with inventory on hand within specific time periods.
-CYCLE COUNTS are taken as part of the perpetual inventory system. involves periodic testing of the accuracy of the perpetual inventory record by counting all inventories on a cyclical, or periodic basis
,etc.

2 ANSWER :-

Substantive procedures are intended to create evidence that an auditor assembles to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of the financial records of an entity. Thus, substantive procedures are performed by an auditor to detect whether there are any material misstatements in accounting transactions.

Substantive procedures include the following general categories of activity:

• Testing classes of transactions, account balances, and disclosures
• Agreeing the financial statements and accompanying notes to the underlying accounting records
• Examining material journal entries and other adjustments made during the preparation of the financial statements

At a general level, substantive procedures related to testing transactions can include the following:

• Examining documentation indicating that a procedure was performed
• Reperforming a procedure to ensure that the procedure functions as planned
• Inquiring or observing regarding a transaction

Examples of substantive procedures are:

• Bank confirmation
• Accounts receivable confirmation
• Inquire of management regarding the collectibility of customer accounts
• Match customer orders to invoices billed
• Match collected funds to invoices billed
• Observe a physical inventory count
• Confirm inventories not on-site
• Match purchasing records to inventory on hand or sold
• Confirm the calculations on an inventory valuation report
• Observe fixed assets
• Match purchase orders and supplier invoices to fixed asset records
• Confirm accounts payable
• Examine accounts payable supporting documents
• Confirm debt
• Analytical analysis of assets, liabilities, revenue, and expenses

Thus, an auditor who is testing a validity assertion regarding a company's fixed assets could conduct a physical observation of the assets, and then test for record accuracy by evaluating whether there is an asset impairment.

Substantive procedures are included in the audit plan around which an audit is structured. If the results of substantive procedures are not as expected, additional procedures may be added to the audit plan.

3 ANSWER :-

analytical procedure for account payable is as follows:

• Compare the days sales outstanding metric to the amount for prior years. This relationship between receivables and sales should remain about the same over time, unless there have been changes in the customer base, the credit policy of the organization, or its collection practices. This is a form of ratio analysis.
• Review the current ratio over several reporting periods. This comparison of current assets to current liabilities should be about the same over time, unless the entity has altered its policies related to accounts receivable, inventory, or accounts payable. This is a form of ratio analysis.
• Compare the ending balances in the compensation expense account for several years. This amount should rise somewhat with inflation. If not, there is a chance that fraudulent payments are being made to fake employees through the payroll system. This is a form of trend analysis.
• Examine a trend line of bad debt expenses. This amount should vary in relation to sales. If not, management may not be correctly recognizing bad debts in a timely manner. This is a form of trend analysis.
• Multiply the number of employees by average pay to estimate the total annual compensation, and then compare the result to the actual total compensation expense for the period. The client must explain any material difference from this amount, such as bonus payments or employee leave without pay. This is a form of reasonableness test.

When the results of these procedures are materially different from expectations, the auditor should discuss them with management. A certain amount of skepticism is needed when having this discussion, since management may not want to spend the time to delve into a detailed explanation, or may be hiding fraudulent behavior. Management responses should be documented, and could be valuable as a baseline when conducting the same analysis in the following year.

Auditors are required to engage in analytical procedures as part of an audit engagement.