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PREPAID EXPENSES AND DEFERRED CHARGES
AUDIT OBJECTIVES AND SUBSTANTIVE AUDIT PROCEDURES
AUDIT OBJECTIVES
To determine that the prepaid expenses or deferred charges carried forward at the beginning of the period are actually chargeable to the operations of future periods from these expenses carried forward as assets.
To ascertain the correctness of the prepaid or deferred amount at the end of the period as well as the amount consumed or had expired, if any, during the period under view.
To ascertain the propriety of the amount charged as prepaid expenses or as deferred charges.
To determine proper presentation and classification of prepaid expenses and deferred charges on the statement of financial position.
To determine the reasonableness and consistency in amortizing prepaid expenses and deferred charges to expenses.
SUBSTANTATIVE AUDIT PROCEDURES
A. Prepaid Expenses
1. Prepaid Insurance
a.Inspect insurance policies on a test basis.b.Review coverage premiums.c.Vouch premium paid and amounts
charged to expense during the year and amounts prepaid at year-end.
2. Prepaid Advertising
a.Examine advertising contracts with advertising agencies and note effective dates covered by the agreement.
b.Test-count undated advertising and sales promotion materials.
3. Prepaid Interesta.Examine loan agreement and vouch
interest payments.b.Verify mathematical accuracy of the
computation of interest expense and prepaid interest.
4. Prepaid Rent
a.Examine signed rental agreement noting the effective dates covered by the agreement.
b.Vouch total amount paid and compare with provisions in the rental agreement.
c.Verify distribution of the prepaid amount to prepaid rent and rental expense by recalculating the amounts.
5. Office Supplies
a.Vouch purchases of office supplies on a test basis.
b.Conduct physical count of supplies inventory on a test basis.
6. Other Prepayments
a.Review existence of adequate records and documentation.
b.Evaluate allocation of prepaid expenses between asset and expense account.
B. Deferred Charges
1. Plant Rearrangement Cost
a.Vouch charges to plant rearrangement cost.
b.Review propriety of amortization policy.c.Verify computation of amortization of
plant rearrangement costs for the current years.
3. Other Deferred Charges
a. Evaluate allocation of deferred charges between asset and expense account.
a.Vouch expenditures related to issuance of bonds.
b.Verify mathematical correctness of amortization of bond issue costs chargeable to the current year.
2. Deferred Bond Issue Cost
PREPAID INSURANCE
Pioneer Insurance P 2,917FGU Insurance 3,046Commonwealth Co. -Universal Co. 400
Total P 6,363
XYZ CompanyE-Prepaid InsuranceDecember 31, 2010
XYZ CompanyE1 – Prepaid InsuranceDecember 31, 2010
GROUP 4
Leader : Sheryl Grace Galarido
Members :Lizzete Joy GrafeJiam Joseph IlaoDolly Eurlyn IsipKristy Marie Lastimosa