AUDIT PROCESS

 

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WHAT IS PREPAID EXPENSES?

PURCHASING PROCESS

INTRODUCTION

The purchasing process affects prepaid insurance and property, plant, andequipment transactions because such transactions are subject to the control activities included in the purchasing process. For example, control activities in the purchasing process may provide assurance as to the proper authorization and recording of insurance policies.

Question 1

How does the purchasing process affect prepaid insurance transaction?

If a company prepays its expenses, it usually has the next 12 month to use up that asset. Businesses prepay their expenses all the time. For example, they often pay a year's worth of business insurance at once. They may also pay rent and interest expenses in advance.

EXAMPLE:

At the end of each month, your client's accounting personnel need to prepare a journal entry to book the expired portion of the prepaid expenses. For example if the company pays RM1200 for 12 months of insurance, the prepaid insurance asset account is reduced by RM 100 every month, and the insurance expenses account is increased by RM100. 

Question 2

Identify two substantive analytical procedure that can be use to audit prepaid insurance.

Sufficient appropriate evidence on prepaid insurance can generally be gathered by performing substantive analytical procedures. Substantive analytical procedure for prepaid insurance.

• Due to the few transactions, and the usually immaterial balance of the prepaid insurance account, substantive tests are effective for verifying account balance
• Common substantive procedure for testing the prepaid insurance account include; 
• Computing the current-year balance in prepaid insurance and insurance expense to prior years' balances, taking any changes in operation into account
• Computing the ration of insurance expense to assets or sales and comparing it to prior year's ratios
• Computing an estimate of the ending prepaid account balance using the current premium and the amount of the time remaining of the policy at the end of the period.

i) Valuation

• Auditor is concerned with whether the unexpired portion of prepaid insurance, and this insurance expenses, is properly valued
• By verifying the unexpired portion of prepaid insurance, the auditor also verifies

ii) Rights and Obligations

• Beneficiary of the policy can be indentified by requesting such information on the confirmations sent to the insurance brokers or by examining the insurance policies.
• If beneficiary is someone other than the entity, this could indicate an unrecorded liability, or the another party has a claim again the insured assets 

iii) Existence and Completeness

• Can test for this in the insurance policies included in the account analysis by sending a confirmation to the entity's insurance brokers requesting information on each policy number, coverage expiration date and premium.
• Effective and efficient way of obtaining evident for these two assertions.

iv) Classification

• Assertion determine the correctness of classification to account we want to make sure that the accounts are being properly classified or the amount are being properly classified to the proper classes.

Question 3 

Confirmation is a useful audit for verifying information related to prepaid insurance. What type of information would be requested from an entity's insurance broker in such a confirmation?

Definition of confirmation is the process of obtaining and evaluation a direct communication from third party in response to a request for informing about a particular item affecting financial statement assertions.

Details of a Certification of Insurance. Certificates of Insurance contain separate sections for different types of liability coverage listed as general, auto, umbrella and workers' compensation. " Insured refers to the policyholder , the person, or company who appears on the certificate as being covered by the insurance. In additional to coverage levels, the certification includes the policyholder's name, mailing address, and describes of the operations the insured performs. The address of the issuing insurance company is listed, along with contact information for the insurance agent or the insurance agency's contact person. If several insurance companies are involved, all names and contact information are listed.

The certificate briefly describes the insured's policies and limits provided for each type of coverage. For example, the general liability section summarizes the six limits the policy offers by category and indicates whether coverage applies on a per claim or per occurrence basis. Because state laws determine the benefits provided to injured workers, the worker's compensation coverage will show no limit. However, an employer's liability coverage limits should be listed. When a client requested a COI, they become a certificate holder. The client's name and contact information appear in the bottom left-hand corner along with statements showing the insurer's obligation to notify the client of policy cancellations.  

Conclusion  

In conclusion , a company issues a purchase order to a supplier for goods, receives the goods, records an account payable, and pays the supplier. There are several ancillary activities, such as the use of petty cash or procurement cards for smaller purchases. This set of sequential, interrelated activities is known as the purchasing cycle, or expenditure cycle.