ScottSACC7030-7assignment2

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Southern New Hampshire University *

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1002

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Accounting

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Nov 24, 2024

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1 COMPOSE A WEEKLY SUMMARY Scott Scott ACC 7030 11/14/2023 Chapter 14: Auditing The Financing/Investing Process: Prepaid Expenses, Intangible Assets, And Property, Plant, And Equipment

2 This chapter focuses on the financing/investing process, emphasizing selected asset accounts, i.e., intangible assets, prepaid expenses, and PP&E (Property, Plant, and Equipment). It starts by stressing the differences and similarities in the audit approach for the above three accounts. Prepaid expenses, including interest, rent, and insurance, are discussed, focusing on substantive procedures and risk assessment. The quality of prepaid expenses differs with accounts such as accounts inventory or receivable. Also, the chapter delves into the audit of prepaid insurance, underscoring the significance of control activities during the purchasing process. In most cases, substantive analytical methods are used for prepaid expenses because they are generally immaterial. Methods such as comparing current-year balances with previous years, estimating ending balances, and computing ratios are highlighted. Focusing on intangible assets, the chapter highlights inherent risk assessment, addressing the judgment needed in valuing assets like customer relations and trademarks. Testing for completeness and existence is vital and involves customer confirmation and legal documentation examination. The chapter also discusses the shifts from intangible assets to substantive methods, focusing on tests of details for impairment and valuation. The judgment and complexity associated with intangible assets require comprehensive testing, and the chapter highlights the role of valuation experts ( Messier Jr et al., 2017) . Besides, the chapter gives an overview of the property management process, mainly in larger entities using Information Technology (IT) systems. The flowchart for EarthWear’s accounting system is offered, and tests of details for PP&E transactions are addressed. The authors’ main focus on accuracy and completeness is outlined, involving detailed schedules and lead schedules for dispositions and additions of assets. The significance of cutoff testing and classification of transactions is emphasized in the context of property, plant, and equipment.

3 Chapter 15: Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income Statement Accounts This chapter focuses on auditing the long-term liabilities, stockholders’ equity, and income statement accounts. The chapter emphasizes the significance of a substantive audit approach for stockholders’ equity and long-term liabilities due to their fairly low transaction volumes but high materiality ( Messier Jr et al., 2017) . For public organizations, it mentions obtaining evidence from tests of controls for internal or interior control over financial reporting. Also, the chapter’s discussions on long-term debts highlight common types, such as bonds and notes, underscoring the probable challenges arising from warrants, convertible features, and other situations. Inherent risk assessment for bonds and notes is assumed to be low to moderate. However, the chapter recognizes the increasing complexities introduced by refined financial instruments. Control risk assessment for long-term debt regarding related and control activities and assertions, including authorization, valuation, disclosure-classification, completeness, and occurrence, is discussed. Substantive methods for long-term debt include confirming balances, using analytical procedures, and examining new debt agreements for auditing interest expense ( Crous et al., 2012) . Focusing on stockholders’ equity, the chapter acknowledges that a substantive method is usually used because of the small number of transactions, though control risk may be set at the maximum. Besides, independent registrars, dividend-disbursing agents, transfer agents, and huge entities play a vital role in the recording and processing of equity transactions. Auditing capital-stock accounts involves checking completeness, disclosures, valuation, and occurrence. The audit of retained earnings is also explained with a focus on transactions impacting retained earnings, including changes in appropriations and prior-period

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4 adjustments ( Crous et al., 2012) . Substantive methods for income statement accounts are discussed, including substantive analytical methods for expense and revenue accounts, tests of selected account balances, and direct tests of balance sheet accounts. Chapter 16: Auditing the Financing/Investing Process: Cash and Investments The chapter addresses auditing the financial/investing process, particularly cash and investments. Cash management is vital for every entity, targeting to guarantee sufficient cash to meet operational requirements. This chapter highlights the interrelationship of cash with different business processes, demonstrating the evidence obtained in the audit of other processes impacts the amount and type of evidence required for auditing cash ( Messier Jr et al., 2017) . Typically, the audit of cash is straightforward. However, the chapter discusses anecdotes, such as the Parmalat case associated with unusual events. The major sources of cash income are asset sales, revenue process, and proceeds from stock or debt issuances, whereas disbursements are mostly linked to human resource management and purchasing processes. The chapter discusses different types of banks used for cash management, including imprest cash accounts, branch accounts, and general cash accounts. It underscores the significance of enhancing cash flow through methods that delay cash payments and hasten cash receipts when appropriate. Control risk assessment for cash also involves assessing controls over disbursements and cash receipts, including bank reunions, which guarantee the entity’s records align with the bank’s balance ( Messier Jr et al., 2017) . Substantive methods for auditing cash include budgeted amounts and analytical methods comparing previous years’ balances. The chapter then discusses the shifts to auditing investment. Important controls for investments comprise approval of investment transactions and proper initiation. Classification controls, completeness, and accuracy are also vital, with the chapter offering direction on handling

5 comprehensive securities transactions. Substantive analytical methods for auditing investments include considering the impacts of financing and operating activities and comparing present-year balances with previous years ( Crous et al., 2012) . Allocation and valuation procedures are discussed, underscoring the approval of purchase prices for securities. Also, the chapter discusses disclosure connected to investments, highlighting the proper marketable securities classification. The significance of auditors with robust knowledge of fair value measurements is discussed, and it recommends engaging valuation experts when necessary. Also, substantive tests for fair value measurements are discussed, with certain procedures for Level 1 and Level 2/3 liabilities or assets, such as derivatives. References

6 Crous, C., Lamprecht, J., Eilifsen, A., Messier Jr, W., Glover, S., & Prawitt, D. (2012). EBOOK: Auditing and Assurance Services . McGraw Hill. Messier Jr, W. F., Glover, S. M., & Prawitt, D. F. (2017). Auditing & assurance services: A systematic approach . McGraw-Hill.

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