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Week 4 Team Assignment

Week 4 Team Assignment

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Consider and discuss the specific risks and nature of the company you will be auditing and create comprehensive work programs for the Acquisition, Payment, Property Plant, and Equipment (Fixed Assets), Notes Payable and Owner’s Equity accounts and cycles.

Submit a 700- to 1,050-word document that includes the following:

· Audit steps for tests of controls, balances, transactions, analytical procedures, etc. as well as other considerations such as sample size and sample methodology.

· A brief summary page should be included in this document, 525 to 700 words, for each of the audit programs. Include in this summary specific financial information gleaned from the current Form 10-K used to perform an analysis of work program steps. For example, if the team noted significant swings in the Fixed Assets balance year-over-year, identify these swings, and how you address them in your work program (this is in essence an audit procedure – analytical review).

The highlighted section is my section. Please stick to the word count (Between 525 to 700 words) and section should be in own words.

 

The team is using Coca-Cola as our company and here is the link for the annual 10K form:

 

http://www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/investors/2015-annual-report-on-form-10-k.pdf

 

I have included below what the rest of the team has written so far since we will need to include any significant swings found by my other teammates.

 

Acquisitions and Payments

Internal controls for the company acquisitions will help ensure the necessary items for business are purchased and deter false purchases. To ensure payments are made accurately, further internal controls restrict cash dispersals for anything other than properly authorized purchases. Auditors will review the internal controls to verify the level of risk associated with the acquisition and payments of purchases. A higher risk will necessitate a more thorough audit. Separation of duties between requesting, approving, verifying and paying employees creates a check and balance systems to help deter fraud. Purchase orders, like checks, should have a sequential numbering system for recording and verification (Arens, Elder, & Beasley, 2013).

Whether generated automatically by automated inventory processes or an employee, the purchasing requisition is the first step in an acquisition. The generated requisition goes through an approval chain of supervisor or management. After the requisition is approved the requisition generates a purchase order. The purchase order is used to show the authorization and invent to purchase when presented to the vendors (Arens, Elder, & Beasley, 2013). Upon receipt of the purchase order, the vendor will ship the ordered item(s) to the company. After merchandise arrives, the order is verified with the shipping documents and purchase order. Accounts payable is then notified the correct items have been received. Invoices are received from the vendor requesting payment for the delivered merchandise which includes expected cost. After correctness has been verified the invoice is entered for payment. Entered payments are forwarded to the last stop in the process where documentation is verified against the suggested payment. Remittance is then made via electronic funds transfer or check. When merchandise is returned to the vendor a debit memo is created which decreases the amount owed to the vendor (Arens, Elder, & Beasley, 2013).

The acquisition and payment cycle audit verifies that the accounts used in the acquisition and payment process is accurate and fairly stated (Arens, Elder, & Beasley, 2013). Purchases less discounts and returns should balance to the amount dispersed from the cash accounts. The inventory on hand should balance equal past inventory plus purchases and less merchandise used for production. Production expenses will be balanced to account payables. Commissions and bonuses should be verified against sales receipts. The audit will verify each aspect of the cycle against the others. By this verification process an auditor can form an opinion of the accuracy and fairness of statements.

Property, Plant, & Equipment

Misstatements in property, plant, and equipment can have a significant impact on financial statements, not only in the current year, but for many years to come. The audit of these items should be carefully conducted, as their amounts are often material. For Coca-Cola, total property, plants, and equipment, valued at $12,571 million, make up 14% of the total assets (The Coca-Cola Company, 2016). The primary accounting record for property, plants, and equipment is the fixed asset Masterfile. Included in the Masterfile are detailed records such as date of purchase, vendor purchased from, amount of original purchase, and expected life.

Several analytical procedures should be used in the audit of property, plant, and equipment. Compared to previous years, an auditor should look at depreciation expense and accumulated depreciation divided by gross equipment costs, gross manufacturing costs divided by some measure of production, and finally, repair and maintenance, small tools expense, supplies expense, and similar accounts. In addition, an auditor needs to verify current year acquisitions and disposals, the ending balance in the asset account, and depreciation expense along with accumulated depreciation.

A couple more important parts of auditing property, plant, and equipment consist of examining vendor invoices and actual physical examination of the assets. Invoices will help an auditor determine if equipment is owned or leased. These invoices will also show repair and maintenance expenses that might lead one to fixed assets that have not been recorded as such. An auditor can physically examine and verify the existence of many fixed assets. Physically examining the assets while verifying ownership will assist the auditor in completing the objective of existence and rights and obligations.

Notes Payable

“Auditors often set performance materiality at a low level because it is usually possible to completely audit the account balance and transactions affecting the notes payable account balance” (Arens, Elder, & Beasley, 2013). Notes payable is low level because there are not that many transactions that goes into notes payable. Notes payable is a liability which in-turn only has a transaction of the receivable of the liability and the liability such as interest which in Coca Colas disclosures it shows they have less than 1% in interest for both 2014 and 2015 years. In Coca Colas 10k form is shows that from 2014 to 2015 their notes payable account went down from $19,130 to $13,129 and that is a $6000 decrease which in turn is a 31% decrease and goes to show that Coca Cola puts more effort into paying their liabilities that would cost them more in the end.

There are four internal controls when it comes to notes payable. Proper authorization of any new notes and these usually come from higher level management. Repayment of the principal and interest which is on the accounting department to pay these based on the payment cycle. Proper documents which include the paid note payable. Verification is done by the person who does not have access to the detailed records of the notes payable.

“Test of notes payable transactions involve the issue of notes and the repayment of principal and interest” (Arens, Elder, & Beasley, 2013). As mentioned above this is the reason that notes payable is low level because the recording of receipts and the interest and principal is the only back up that is needed.

Owners’ Equity

“There is an important difference in the audit of owners’ equity between a publicly held corporation and a closely held corporation” (Arens, Elder, & Beasley, 2013). Since Coca cola is a publicly held company the verification of owners’ equity is more complex. In their consolidated balance sheet it shows that they are a publicly traded company because they have capital and common stock, paid-in capital and retained earnings and dividends. There total amount in shareowners’ equity has not changed between 2014 and 2015. They have had the same amount of $1760 which includes authorized shares of 11,200, but they have only issued 7040. Coca Cola also has subsidiaries which have other shares that were also issued 7040.

Owners’ equity is somewhat the same as notes payable in that the issuance of capital stock has to have authorization, but also needs authorization on how much shares to issue as well as the date it is to be released. Repurchasing of capital stock also has to be authorized but can only be approved by board members. The board also has to approve divideds on how they will be relased such as cash or stock and the payment dates of these payments.