Question

2. Answer these short questions below.

a. How might the auditor effectively use preliminary analytical procedures in the audit of various expense accounts, such as miscellaneous expenses? Give an example of how analytical procedures used in the audit of such accounts.

b. Explain why examining a sample of cash disbursements made after the end of the year is useful in determining the completeness of accounts payable.

c. The auditor often examines some expense accounts, such as legal expenses, in detail even if the account balance is not material. Explain why.

d. Why does the auditor examine travel and entertainment expenses? What would poor controls regarding executive reimbursements say about the tone at the top for purposes of evaluating and reporting on internal control?

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3. Following is a list of substantive tests could be performed in auditing accounts payable cycle. Explain the understanding of the test, what is it used for, how it occurred, what acceptable level should be achieved, and what assertions could be addressed through the test.

a. Cut-off test of purchase and cash disbursement

b. Agree of monthly statements

c. Confirmation of major vendor in accounts payable listing

d. Review long-term purchase commitments

e. Review of unusual journal entries

Answer 1

a. Preliminary analytical procedures in the audit of various expense accounts, such as miscellaneous expenses helps in identifying cases if any significant one-off unsual entries have been routed through miscleneous expenses- though based on its nature or materiality, may be a significant transaction or account caption. A year on year nature of expense wise comparison will help in detailed scurtiny and understanding of the account balances.

b. Cash disbursements made after the end of the year is useful in determining the completeness of accounts payable help in searching for any unrecorded liabilities which were not accounted for in the books of accounts. This helps to ensure that all liabilities were correctly recorded in the books and thus completenss of accounts payables too.

c. The auditor often examines some expense accounts, such as legal expenses, in detail even if the account balance is not material. This is because often in such ledgers the expenses incurred may be on account of some litigative impending matters/ disputes/ arbitration/court fees, etc which may not not be very material in absolute amounts, but significant from the point of view of business operations. Hence a party wise legal- professional expense analysis and also based on the nature of services provided such consultants is performed.

d.  Auditor examine travel and entertainment expenses to identify if any personal expenses are recorded under the pretext of business purpose. A clear separation between personal and business expenses should be ensured while employees and management claim expenses in relation to travel and entertainment.

WHy this reflects the tone of the management is because there should be a clear approval mechansism based on transparent rules and policies followed organisation wise and not only for below-management level employees.

Also only duly approved verified invoices should be recorded as expenses.

Poor controls in such areas of approvals and disbursements would highlight deficiencies in the design of the controls and the process and would be a trigger to further test the captions to ensure that there are no cases of risk of fraud or risk of control faiure.