In this chapter, the learning objectives are: Know the various types of prepaid expenses, deferred charges, and intangible assets; understand the auditor's approach to auditing prepaid insurance and intangible assets. | Chapter Fourteen Auditing Financing Process: Prepaid Expenses and Property, Plant and Equipment Auditing Prepaid Expenses Other assets that provide economic benefit for less than a year: Prepaid insurance. Prepaid rent. Prepaid interest. Inherent Risk Assessment – Prepaid Expenses The inherent risk associated with prepaid expenses is generally assessed as low because the accounts do not involve any complex or contentious accounting issues. Control Risk Assessment – Prepaid Expenses Because prepaid expenses are normally processed through the purchasing process, control activities in purchasing should ensure that each item is properly authorized and recorded. Substantive Procedures – Prepaid Insurance Substantive Analytical Procedures Compare current-year balance with prior year’s balances after considering any changes in operations. Compute the ratio of expense to assets or sales and compare the ratio to prior year’s ratio. Substantive Procedures – Prepaid Insurance Tests of Details of the Prepaid Insurance Account Audit testing begins by obtaining a detail schedule of the prepaid insurance account. Existence and Completeness Confirm policy with insurance broker, examine supporting source documents. Rights and Obligations Confirm policy beneficiary with the insurance broker. Valuation Determine unexpired portion of policy and insurance expense. Classification Determine propriety of distribution between manufacturing overhead and SG&A expense. Auditing the Property Management Process Property, plant and equipment usually represents a material amount in the financial statements. Recurring Engagement The auditor is able to focus on additions and retirements in the current period because amounts from prior periods have been subject to audit procedures. New Engagement the auditor has to verify the assets that make up the beginning balance in property, plant and equipment. Property Management Process at EarthWear Clothiers Physical Plant IT Department . | Chapter Fourteen Auditing Financing Process: Prepaid Expenses and Property, Plant and Equipment Auditing Prepaid Expenses Other assets that provide economic benefit for less than a year: Prepaid insurance. Prepaid rent. Prepaid interest. Inherent Risk Assessment – Prepaid Expenses The inherent risk associated with prepaid expenses is generally assessed as low because the accounts do not involve any complex or contentious accounting issues. Control Risk Assessment – Prepaid Expenses Because prepaid expenses are normally processed through the purchasing process, control activities in purchasing should ensure that each item is properly authorized and recorded. Substantive Procedures – Prepaid Insurance Substantive Analytical Procedures Compare current-year balance with prior year’s balances after considering any changes in operations. Compute the ratio of expense to assets or sales and compare the ratio to prior year’s ratio. Substantive Procedures – Prepaid Insurance Tests of Details .
