The document outlines an audit program for testing prepaid expenses with the following key steps:
1. Obtain or prepare a comparative summary of prepaid expense balances and test for reasonableness of fluctuations.
2. Obtain or prepare a detailed analysis of prepaid expense accounts including additions, expenses, and balances. Test the mathematical accuracy of the analysis.
3. Examine supporting documentation for additions and recompute or apply analytics to test the ending account balances. Compare expenses to income statement accounts.
The document outlines an audit program for testing prepaid expenses with the following key steps:
1. Obtain or prepare a comparative summary of prepaid expense balances and test for reasonableness of fluctuations.
2. Obtain or prepare a detailed analysis of prepaid expense accounts including additions, expenses, and balances. Test the mathematical accuracy of the analysis.
3. Examine supporting documentation for additions and recompute or apply analytics to test the ending account balances. Compare expenses to income statement accounts.
The document outlines an audit program for testing prepaid expenses with the following key steps:
1. Obtain or prepare a comparative summary of prepaid expense balances and test for reasonableness of fluctuations.
2. Obtain or prepare a detailed analysis of prepaid expense accounts including additions, expenses, and balances. Test the mathematical accuracy of the analysis.
3. Examine supporting documentation for additions and recompute or apply analytics to test the ending account balances. Compare expenses to income statement accounts.
The document outlines an audit program for testing prepaid expenses with the following key steps:
1. Obtain or prepare a comparative summary of prepaid expense balances and test for reasonableness of fluctuations.
2. Obtain or prepare a detailed analysis of prepaid expense accounts including additions, expenses, and balances. Test the mathematical accuracy of the analysis.
3. Examine supporting documentation for additions and recompute or apply analytics to test the ending account balances. Compare expenses to income statement accounts.
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AUDIT PROGRAM PREPAID EXPENSES
OVERVIEW
Test Comparative Summary
Obtain or prepare a comparative summary (1).
Test balances for reasonableness, fluctuations and omissions (2).
Test Account Balances
Recompute or apply analytics to test account balances (3).
Test Account Detail
Obtain or prepare a detailed analysis (4).
Test mathematical accuracy of the analysis (5).
Examine supporting documentation (6).
Recompute or apply analytics to test account balances (7).
Compare expenses/write-offs with income statement accounts (8).
Additional Procedures
Confirm details of agreements with third parties (9).
Obtain information for disclosure (10).
OVERVIEW-PREPAID EXPENSES
AUDIT PROGRAM
PREPAID EXPENSES
GUIDANCE
Prepaid expenses are costs that have been paid but that apply to future periods or to the production of future revenue. Examples include insurance, rent, taxes and interest. When designing the audit program the auditor should consider the nature of prepaid account balances and the risks associated with transactions flowing through the accounts.
When preparing this program the auditor should consider and design audit procedures that address relevant presentation and disclosure requirements.
AUDIT PROGRAM
PREPAID EXPENSES
Test Comparative Summary
OBTAIN OR PREPARE A COMPARATIVE SUMMARY (1).
1. Obtain or prepare a comparative summary of prepaid expense balances (this may be
incorporated into the analysis in step 4). Trace individual balances to the general ledger and previous audit's working papers.
Done by Date
..../../..
TEST BALANCES FOR REASONABLENESS, FLUCTUATIONS AND OMISSIONS (2).
2. Review the balances for reasonableness, expected or unexpected fluctuations between
periods and obvious omissions.
Done by Date
..../../.. Test Account Detail
OBTAIN OR PREPARE A DETAILED ANALYSIS (4).
4. Obtain an understanding of the accounting policies relevant to prepaid expenses and an
analysis of those accounts, including:
a. Description of accounts
b. Balances at beginning of period.
c. Additions.
d. Amounts expensed or written off during the period.
e. Balances at end of period.
Trace the beginning and ending balances to the comparative summary obtained in step 1 or to the general ledger and previous audit's working papers.
Done by Date
..../../..
TEST MATHEMATICAL ACCURACY OF THE ANALYSIS (5).
5. Test mathematical accuracy of the analysis.
Done by Date
..../../..
EXAMINE SUPPORTING DOCUMENTATION (6).
6. Examine documentation (e.g., invoices, authorizations, contracts, agreements) that supports
additions.
Done by Date
..../../..
GUIDANCE:
This step requires a decision on the extent of testing. When examining documentation to support additions to the account balance during the period, it is often appropriate to use accept/reject testing. For example, the auditor may select one or two insurance policies and test whether the division has accounted for them properly. If errors are not found, the auditor concludes that the division has accounted for the remaining policies properly and confirms this fact by recomputing or applying analytical procedures to the period-end balance.
When testing prepaid expenses the auditor should perform procedures that are particularly responsive to accounting policies subject to management's judgments and estimates; for example, procedures that take account of allocations of an unusual nature such as advertising or royalty expenses. In this regard, the assessment of the control environment should be considered, particularly those aspects dealing with management's judgments and financial statement integrity.
When reviewing the details of prepaid insurance the auditor should consider whether the division has any significant uninsured risks (for example, product liability) and evaluate those risks as potential contingent liabilities (see loss contingencies and commitments area). In this regard, the auditor should consider the risks inherent to the division's business and industry, the availability of insurance coverage in force and management's philosophies and key decisions relating to self-insured risks (for example, pay-as-you-go insurance contracts). Senior members of the audit team may most appropriately assess these risks.
RECOMPUTE OR APPLY ANALYTICS TO TEST ACCOUNT BALANCES (7).
7. By recomputation or the application of analytical procedures, test calculation of balance at
end of period.
Done by Date
..../../..
COMPARE EXPENSES/WRITE-OFFS WITH INCOME STATEMENT ACCOUNTS (8).
8. Compare amounts expensed or written off with income statement accounts. Investigate significant differences.
Done by Date
..../../..
GUIDANCE:
Having audited the opening balance in the prior period, tested the additions during the period (step 6) and tested the balance at the end of the period (step 7), the auditor need only compare amounts expensed or written off with income statement accounts (step 8). Further audit work on the income statement accounts should not be necessary unless significant differences exist.
Capital Budgeting Questions: What Services Will The Firm Offer or What Will It Sell? What New Products Will Be Introduced? in What Markets Will It Compete?
Capital Budgeting Questions: What Services Will The Firm Offer or What Will It Sell? What New Products Will Be Introduced? in What Markets Will It Compete?
