You are engaged to perform an audit of the Giordani Corporation for the year ended December 31, 2013. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than $25,000 for two business days before and after year-end from the purchases journal and ensure that all transactions are recorded in the proper period.
During your firm's observation of Giordani's physical inventory, you obtained the following cutoff information: the last receiving report number in 2013 was 49,745. Your audit work identified the following items for further investigation:
Selections from the December 2013 Purchase Journal
Date RR# Vendor Name Amount Explanation
a. 12/30 49,742 Allen Chem. $29,875 Chemicals purchased for manufacturing process.
b. 12/31 none Khan Consulting $45,000 Payment for consulting services for the three-month period beginning December 1, 2013. The $45,000 was charged to consulting expenses.
c. 12/31 49,744 Goff Materials $205,000 Raw materials used in the manufacturing process.
Selections from the January 2014 Purchase Journal
Date RR# Vendor Name Amount Explanation
d. 1/01 49,746 Temper Trucks $75,985 Purchase of a new forklift
e. 1/02 49,743 Pack Products $42,000 Paper products used in manufacturing process.
f. 1/02 none Telecom Inc. $32,450 December 2013 telephone bill.
Required:
For each of the six items provided in the table above, consider whether there is evidence of proper cutoff of payables and accruals (i.e., the transaction is recorded in the proper period). If the item is not properly recorded, prepare the necessary adjusting entries at December 31, 2013.
Audit test of proper cutoff of payables and accruals
One of the parts of any audit performed in accordance with generally accepted auditing standards is to determine if the audit client performed a proper cutoff at the end of year of each and any important or material accounts payable and accruals. This work includes a search for any unrecorded liabilities at the balance sheet date, and also determining if any payments made toward the end of the year have been properly recorded on the books.
