When auditing prepaid insurance: A) for many audits, significant substantive pro

Question

When auditing prepaid insurance:

A) for many audits, significant substantive procedures are needed if the control risk is low.

B) companies often have a standard monthly journal entry to reclassify prepaid insurance as insurance expense.

C) the emphasis in the tests of details of balances is on insurance expense.

D) the auditor must prepare the insurance register.

Auditors usually test cost accounting records as part of the

A) acquisition tests.

B) payroll tests.

C) sales tests.

D) All of the above are correct.

Explanation / Answer

1. When auditing the prepaid insurance, the auditor gives emphasis in test of details to insurance expense. As prepaid expense is reversed to insurance expense for impacting the income statement, auditor needs to check whether correct amount is being booked as an expense for the period. Correct answer is C.

2. Cost accounting records are used to provide the detailed cost information that management needs to control current operations and plan for the future. It includes all the various costs which are related to the manufacturing of the product upto it's point of sale. As a result when auditor tests cost accounting records as part of the acquisition tests, payroll tests and sales tests. All these tests are included in the cost of the product and are used to determine sale price to the final customer.

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