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.

http://all.net/books/audit/ASAP/prepaid.txt