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Thursday, May 19, 2016

Audit of Liabilities: Internal Control Measures and Substantive Audit Procedures


Internal Control Measures for Liabilities

Current Liabilities

Accounts payable
1. A proper system of requisitioning, purchase order placement and approval, receiving, invoice approval, and approval for payment should be well-defined and established.
2. Subsidiary accounts payable records or unpaid vouchers should be reconciled with controlling account at frequent intervals.
3. Check mathematical accuracy of suppliers' invoices prior to recording.
4. Adjustments to accounts payable should be properly approved.
5. Debit balances in accounts payable should be reviewed and resolved.

Notes payable
1. Borrowings on notes payable should be properly authorized. Specify the institutions from which money may be borrowed and designate the officers authorized to sign notes.
2. Unissued notes should be properly safeguarded.
3. Subsidiary notes payable records should be reconciled with controlling account at frequent intervals.
4. Subsidiary notes payable records should be reconciled with controlling account at frequent intervals.
5. Paid notes should be properly cancelled and preserved.

Long-Term Liabilities
1. Long-term obligation should be properly authorized by the board of directors or by a required majority of the shareholders.
2. There should be proper control over issued and unissued obligations as in bonds, by an independent bond trustee or transfer agent.
3. Redeemed bonds should be cancelled, property mutilated and retained for audit in order to prevent unauthorized issuance.
4. Bond ledger should be used in which details of bond issued, cancelled and outstanding are shown. A subsidiary bondholder's ledger should also be maintained by the issuing corporation or the bond trustee for bonds registered, as to principal and interest.
5. Proper control should be exercised over the payment of interest on long-term liabilities. Payment may be done by an independently engaged interest-paying agent.

Saturday, May 7, 2016

Philippine Accounting Standards (PAS) Series: PAS41 - Agriculture

Objective of PAS 41

The objective of PAS 41 is to establish standards of accounting for agricultural activity-- the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the enterprise's biological assets).

Key Definitions:
1. Agricultural activity is the management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets.
2. Agricultural produce is the harvested product of the entity’s biological assets.
3. A biological asset is a living animal or plant.  
4. Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.
5. A group of biological assets is an aggregation of similar living animals or plants.
6. Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

Initial Recognition
An enterprise should recognize a biological asset or agriculture produce only when:
1. The enterprise controls the asset as a result of part events
2. It is probable that future economic benefits will flow to the enterprise
3. The fair value or cost of the asset can be measured reliably

Measurement
Biological assets should be measured on initial recognition and at subsequent reporting dates at fair value less estimated point-of-sale costs, unless fair value cannot be reliably measured. 

Agricultural produce should be measured at fair value less estimated point-of-sale costs at the point of harvest. Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce. 

The gain on initial recognition of biological assets at fair value, and changes in fair value of biological assets during a period, are reported in net profit or loss.

A gain on initial recognition of agricultural produce at fair value should be included in net profit or loss for the period in which it arises.

All costs related to biological assets that are measured at fair value are recognized as expenses when incurred, other than costs to purchase biological assets. 

PAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognized in financial statements, does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are determined to be clearly inappropriate or unworkable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the enterprise must still measure all of its other biological assets at fair value. If circumstances change and fair value becomes reliably measurable, a switch to fair value less point-of-sale costs is required. 

Sunday, May 1, 2016

Audit of Investments: Internal Control Measures and Substantive Audit Procedures


Internal Control Measures for Investments

1. Purchases and sales of investments should be properly authorized (normally by the board of directors or investment committee of the board of directors).

2. Access to securities should not be vested in one person only.

3. Custodianship of investment securities and the accounting for them should be segregated.

4. Securities must be physically controlled in order to prevent unauthorized usage and they must be registered in the name of the entity.

5. Income received from investments should be reconciled periodically with amounts that should be received.

Substantive Audit Procedures for Investments

Existence or Occurrence: Recorded investments and investment exist

1. Inspect securities on hand and trace to list.

2. Confirm securities held by others.

Completeness: All investments and investment income are recorded

3. Apply analytical procedures.

Rights and obligations: Investments and investment income are owned by the entity

4. Examine supporting broker's advises and paid checks for investments acquired during the period.

5. Examine remittance advises for dividends, interest and disposals of investments.

Valuation and allocation: Investments are valued in accordance with GAAP and investments and investment income are mathematically accurate

6. Reconcile the investment list to the subsidiary ledger and general ledger account.

7. Recalculate interest income and verify dividend income by reference to published reports of dividends.

Presentation and disclosure: Investments and investment income are presented and disclosed in accordance with GAAP

8. Review financial statements and perform analytical procedures to whether accounts are classified and disclosed in the financial statements in accordance with GAAP.

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