Question

Write a 525- to 700-word summary. Research a recent article on auditing acquisitions, payments, property plant and equipment (fixed assets), notes payable, or owner's equity. Apply what you learn to your future or current job.

Answer 1

Solution :

Auditing Acquisitions and payment cycle:

In the matter of Acquisitions there are chances of company financials being manipulated. For e.g. overstatement of inventory which shows big amount in the bag of assets and hence showing higher assets over liabilities giving good current ratio and liquidity ratio. Undervaluing accounts payable which interprets lower current liabilities and gives a strength-full picture of company. To prevent this from happening auditors needs to closely monitor internal controls and key acquisition accounts.

1. Assess Risks:

Now a days business use various way outs to sustain in the competitive market. In this they use many tactics to fulfil the business targets and sustain with there targets and complete them. As a part of this strategies they reduce there margin ratio and instead provide high incentive scale to the employees to complete the target. Therefore auditors have document level enquiry and get deep into the business transactions to know where the things are misbehaved.

2. Ensure Controls are properly followed in the business:

The internal controls of a company must be stronger so that the chances of getting frauds in business are less. Companies now a days have a separate department to approve vendors for the company to purchase material and review them regularly to avoid risk of frauds and kickback of purchases. Thus a auditor checks whether there is separation of duties for various roles and at the authorisation level of sanctioning purchase orders.

3. Evaluate Inventory and Cost of goods sold:

Inventory is a very significant asset in the balance sheet of the company. This should not be overstated. This could give vague results in the acquisition valuation. Thus to audit the liquid asset of a company that is inventory, a physical verification of a sample of a inventory of various types (e.g. finished goods, WIP, Raw material etc.) is taken place to verify that given inventory is in place. In this obsolete inventory in observed carefully as it loses its value overtime and needs to be checked.

4. Look at Accounts Payable and Related creditor expenses:

Accounts payable is a sum of money payable to the creditor of the company and hence this should be carefully audited to check whether there is any unrecorded payment towards a party which is not pulled to general ledger from its subsidiary ledger. For this both general ledger and the subsidiary ledger accounts are matched together. Purchasing is related to inventory and hence the inventory and the purchase value is compared together to check whether the purchase value matches with the inventory value.

Thus these internal control audit factors of a company are very important from the acquisition audit point of view. These should be kept in mind while practically carrying out auditing for the acquisition of the business.