AUDITING  Accounts Payable Discussion Topic I'm Done Top of Form Due July 30 at 11:59 PM Starts Jul 24, 2017 1:00 AM Bottom of Form Do you think accounts payable confirmation can be useful to the auditor?  How?  What are the limitations of accounts payable confirmation?  What are some alternatives to accounts payable confirmation? Replies 1 The confirmation of accounts payable is not a generally accepted auditing procedure.   The auditor is required to obtain confirmation of accounts receivable only.  The evidence supporting accounts payable, such as vendors' invoices and statements, is produced by outside sources.  Determining that all payables are recorded is the primary objective of the accounts payable audit.  It follows that confirmations are very useful in supplying supporting evidence for receivables but that auditing procedures other than confirmation are required to verify that all payables are recorded.  The selection of accounts payable for confirmation would be from the following groups: (1) large accounts including important suppliers even though the account balance is small at balance sheet date; (2) accounts for which monthly statements are unavailable; (3) accounts with unusual transactions; and (4) accounts with zero balances that had substantial activity earlier in the year. The main limitation of accounts payable confirmation is that it does not prove the completeness of recorded accounts payable. The accounts payable confirmation procedures are not always used because reliable externally generated evidence supporting accounts payable balances are generally available for audit inspection on the premises of client. Some auditors believe that it is not required to confirm accounts payable because the search for unrecorded liabilities is the basic means of testing for completeness of accounts payable. The alternative procedures are generally performed for non replies of accounts payable confirmations and or selected unconfirmed accounts. This includes examination of unpaid invoices, receiving reports and bills supporting the recorded balances. The examination of vendor statement dated near the balance sheet date can also be made. The statement balances shall be reconciled to the balance in client account. The subsequent payment of liability shall be vouched. The invoices from few selected vendors for the purchase of goods and services after balance sheet date shall be inspected. It shall be determined whether invoices show an amount that was owed as on balance sheet date. Generally alternative procedures on non replies are not required because the search for unrecorded liabilities compensates for such procedures. The main benefit of this alternative procedure is that it provides 100% confirmation about the existence of accounts payable. The limitation is that this process is quite time taking and wastes auditor’s precious time. It is not very result oriented because performing basic or alternative audit procedures for acco ...

1. AUDITING
Discussion Topic
I'm Done
Top of Form
Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
Bottom of Form
Do you think accounts payable confirmation can be useful to the
auditor? How? What are the limitations of accounts payable
confirmation? What are some alternatives to accounts payable
confirmation?
Replies
1
The confirmation of accounts payable is not a generally
accepted auditing procedure. The auditor is required to obtain
confirmation of accounts receivable only. The evidence
supporting accounts payable, such as vendors' invoices and
statements, is produced by outside sources. Determining that
all payables are recorded is the primary objective of the
accounts payable audit. It follows that confirmations are very
useful in supplying supporting evidence for receivables but that
auditing procedures other than confirmation are required to
verify that all payables are recorded. The selection of accounts
payable for confirmation would be from the following
groups: (1) large accounts including important suppliers even
though the account balance is small at balance sheet date; (2)
accounts for which monthly statements are unavailable; (3)
accounts with unusual transactions; and (4) accounts with zero
balances that had substantial activity earlier in the year.
The main limitation of accounts payable confirmation is that it
does not prove the completeness of recorded accounts payable.
The accounts payable confirmation procedures are not always

2. used because reliable externally generated evidence supporting
accounts payable balances are generally available for audit
inspection on the premises of client. Some auditors believe that
it is not required to confirm accounts payable because the
search for unrecorded liabilities is the basic means of testing for
completeness of accounts payable.
The alternative procedures are generally performed for non
replies of accounts payable confirmations and or selected
unconfirmed accounts. This includes examination of unpaid
invoices, receiving reports and bills supporting the recorded
balances. The examination of vendor statement dated near the
balance sheet date can also be made. The statement balances
shall be reconciled to the balance in client account. The
subsequent payment of liability shall be vouched. The invoices
from few selected vendors for the purchase of goods and
services after balance sheet date shall be inspected. It shall be
determined whether invoices show an amount that was owed as
on balance sheet date. Generally alternative procedures on non
replies are not required because the search for unrecorded
liabilities compensates for such procedures. The main benefit of
this alternative procedure is that it provides 100% confirmation
about the existence of accounts payable. The limitation is that
this process is quite time taking and wastes auditor’s precious
time. It is not very result oriented because performing basic or
alternative audit procedures for accounts payable is not
necessary.
Discussion Topic
I'm Done
Top of Form
Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
Bottom of Form
Whichof these cycles would you, as an auditor, spend more time

3. with? Would you suspect more misstatements in the revenues
and collection cycle or in the purchases and payments cycle?
Why? Give some examples to support you opinion.
Replies
If I were an auditor, I would spend more time with the revenues
and collections cycle due to the risk of improper revenue
recognition and receivables valuation. It is beneficial for
companies to overstate their earnings to keep stock prices high
and senior managment may have bonus compensation tied to
corporate earnings and this would directly impact shareholders,
who rely upon the accuracy of a company's financial statements
in making their investment decisions. Some examples include:
· Freddie Mac disclosed in mid-2003 that the company had
manipulated its accounting (understating its earnings by $5
billion over more than three years) to hide fluctuations in their
earnings and to meet investor's expectations.
· Fannie Mae was ordered in 2004 by the Securites and
Exchange Commission to restate 4 years worth of financial
statements due to failure to recognize an estimated $9 billion of
losses on derivatives used to hedge interest-rate risks. Fannie
incorrectly applied the rules in a way that allowed the company
to spread out losses over many years rather than booking them
immediately.
· In 2005, the former CEO and CFO of American International
Group (AIG) were accused of planning and authorizing two
transactions that inaccurately portrayed AIG's financial results
over a four year period. One transaction turned warranty
insurance losses into investment losses, the other transaction
inflated company reserves by $500 million.
· In March of this year, it was reported that Caterpillar avoided
reporting $7.9 billion brought to the US from its Swiss units
and affiliates in order to keep its stock price high.
Discussion Topic
I'm Done

4. Top of Form
Due July 30 at 11:59 PM
Starts Jul 24, 2017 1:00 AM
Bottom of Form
What assertions is the auditor interested in when auditing
Property, Plant, and Equipment? What are some possibilities
for fraud in this particular account? What are some judgment
decisions that the auditor needs to make in this account?
Replies
1
When auditing Property, Plant, and Equipment accounts
auditors need to verify valuation of the asset to the valuation
report and consider reasonableness. The auditor needs to
evaluate the depreciation rates to ensure they are consistent
with account policies. Additionally he needs to review labor,
material, and overhead costs for self-constructed assets. search
for any profit element, and review capitalization of finance
costs.
Auditors need to be cautious about the potential errors dealing
with cost basis of an asset. For example, an auditor will need to
make sure any major repairs are added to the cost of the asset
rather than expensed. These repairs increase the useful life of
the asset and will affect the balance on the financial statement.
Lease accounting and dealing with fixed assets that are not
purchased are inherently risky, because they are complex
accounting issue. These type of assets have the potential for
being fraudulently reported as expenses, which will cause the
balance sheet and income state to have material misstatements.
TAXATION
Discussions
1S Corp v. C Corp
Briefly discuss the similarities and differences between a S
Corp v. a C Corp.
Replies

5. 1.
There are many similarities and differences between S
corporations and C corporations. While all corporations start as
C corporations, they can be changed to an S corporation. This
requires the taxpayer to file IRS form 2553 if they wish to make
the change. State tax forms will also be necessary to prepare.
There are many other requirements for both that are the same.
Both have directors (shareholders) that run the business.
Shareholders get a part of the profit depending on their
percentage of shares they hold. The main difference between
the two types of corporations is in the way they are taxed. There
is a double tax on dividends for C corporations. Profits from C
corporations are taxed and are reported on the corporate tax
return. These profits are given in the form of dividends. The
after tax profits that are distributed as dividends are also taxed.
In an S corporation the shareholders report the income on their
tax returns and are taxed.
C corporations have greater flexibility when selling, holding,
and issuing stock. The IRS has stipulations on S corporations.
According to the IRS an S corporation may not have greater
than 100 shares of stock, cannot have more than one class of
stock, or be owned by any other C corporation, S corporation,
LLC, partnership or types of trusts. Also, only U.S citizens or
residents may hold stock. The S corporation can’t deduct
benefits costs unlike the C corporation which can.
Small businesses like S corporations because of the tax savings
and large companies like the flexibility they get from C
corporations.
Reference:
Reference:
https://www.legalzoom.com/articles/what-is-the-difference-
between-s-corp-and-c-corp
2.
C corporation is a separate legal entity owned by shareholders
and formed by filing incorporation documents with a state and
paying fees. A corporation may be right for a person if they:

6. -want flexible profit-sharing among owners
-want flexibility to set salaries for employees/owners to
minimize Social Security and Medicare taxes
-Want to be able to easily sell your business
-Expect your business to own real estate and much more
An S corporation is a standard corporation that elected a special
tax status with IRS. It shares the same requirements as a C
corporation but it's special tax status eliminates the double-
taxation that can occur with a C corporation's income. An S
corporation works better if you:
-want flexibility to set salaries for employee/owners to
minimize Social Security and Medicare taxes
-Flexibility of accounting methods is desired, because
corporations must use the accrual method of accounting unless
they are considered to be small corporation and S corporations
typically don't have to use the accrual method unless they have
inventory.
The big differences between the two include:
-Taxation: Profits of C corporations face possible double
taxation when corporate income is distributed to shareholders as
dividends. S corporations are pass-through tax entities so there
is no tax paid at corporate level
-Corporate ownership: C corporations have unlimited number of
shareholders while S corporations can have no more than 100
shareholders.
-S corporation election: must become an S corporation by
making a timely filling of Form 2553 with IRS, and all
shareholders of the corporation must agree in writing to the S
corporation election.
-Michael
Retrieved July 24, 2017 from:
https://www.bizfilings.com/toolkit/research-
topics/incorporating-your-business/compare-types-of-businesses
Discussion 2
Permitted Tax Years for Partnerships and S Corporations

7. Both S Corps and partnerships have rules on permissible tax
years, and cannot just use whatever tax year they like. What are
the rules for each? Compare and contrast them, since they are
not exactly the same. What is the government worried about?
In other words, what tax-saving scheme is the government
worried might occur if that these requirements are designed to
prevent? Do you think there is really so much to worry about?
Replies:
1
A partnership must typically use the same tax year as the
partners who own the majority of the partnership income and
capital. If each is different then the partnership must use the tax
year of its principal partners with more than 5% interest in the
partnership. And if that doesn’t work then the partnership must
use the tax year that has the least aggregate deferral of income
to the partners. An S Corporation must adopt a calendar year
unless the corporation has a business purpose for electing a
fiscal year and be approved by the IRS. From what I could read
off the IRS website the reason for these accounting period rules
is to prevent partners from deferring partnership income by
choosing a different tax year for the partnership. I think this is a
logical fear for the government since most people attempt to
avoid taxes as best as they can.
IRS Publication 538. 2016. Accounting Periods. Retrieved from:
https://www.irs.gov/publications/p538/ar02.html#en_US_20161
2_publink1000270602
2
According to the IRS, S Corps pass all liability on to their
shareholders. For each individual shareholder, income, losses,
deductions, and credits for their share of the corporation are
reflected in their person tax returns subject to their marginal tax
rate. The benefit is that the same income is not taxed on the
corporate level as well as the at the individual level. Not all of
the gains are incomes are passes to the shareholders as some are

8. proprietary to the operation on the business itself.
The following conditions must be present to be considered an S
Corporation:
· Be a domestic corporation
· Have only allowable shareholders
· May be individuals, certain trusts, and estates and
· May not be partnerships, corporations or non-resident alien
shareholders
· Have no more than 100 shareholders
· Have only one class of stock
· Not be an ineligible corporation
https://www.irs.gov/businesses/small-businesses-self-
employed/s-corporations
A partnership is more involved that an S Corporation in terms
of the involvement of the individuals in the partnership.
Partners contribute money, property, labor or skill, any losses
or gains in the business are divided upon the partners based on
their share percentage.
The partnership is required to disclose annually information
about income, deductions, gains, and losses from operations.
When the partners file their individual tax returns, the
combination of the returns collectively should equal the annual
information provided for the partnership.
Partners are owners in the company, so they use a Schedule K-1
versus employees that get a W-2 at the end of the tax year.
https://www.irs.gov/businesses/small-businesses-self-
employed/partnerships
In regards to the permitted tax year, or Section 444 compliance,
S Corps and partnerships can choose to close their tax year by
September 30. This could be elected for many reasons, but the
biggest one is to bunch together expected deductions or losses
into the same 12 month period starting October 1 to lower the
tax liability. I do think these adjustments can be abused like all
tax credits, deductions, and losses.