AP-7: Audit Program for Prepaids,

Deferred Charges,
Intangibles, and Other Assets
Company Balance Sheet Date

The company has the following general ledger accounts that will be classified in the
prepaid, deferred charge, intangible, or other assets captions of the balance sheet.
General Ledger Number
Description or
Brief Purpose of ccount
Current or
Noncurrent sset!












udit Program for Prepaids, Deferred Charges,
"ntangibles, and #ther ssets
Company Balance $heet Date
udit
#b%ecti&es
udit Procedures for Consideration
N'
Performed
by
(or)paper
"nde*
+"NNC"L $TT,-,NT $$,.T"#N$
,'# ,*istence or occurrence. /' /aluation or
allocation.
C Completeness. P'D Presentation
and disclosure.
.'# .ights and obligations.
0D"T #B1,CT"/,$
. Prepaids, deferred charges, intangibles, and other assets
represent a complete listing of the company2s costs that are
allocable to future periods and that can reasonably be e*pected to
be reali3ed through future operations or otherwise 4assertions ,'#,
C, .'#, and /'5.


B. Prepaids and other assets are properly amorti3ed or written
off on an acceptable basis consistent with that used in prior periods.
ny permanent impairment of balances is recogni3ed by write6
downs charged to operations 4assertion /'5.


C. Prepaids and other assets, and their related amorti3ations
or write6downs, are properly described and classified. The
disclosures re7uired by GP for goodwill and other intangible
assets are made. ny restrictions, pledges, or liens against other
assets are disclosed 4assertion P'D5.

"D,NT"+"CT"#N C#D,$
The letters preceding each of the abo&e audit ob%ecti&es, i.e., , B,
etc., ser&e as identification codes. These codes are presented in the
left column labeled 8udit #b%ecti&es9 when a procedure
accomplishes an ob%ecti&e. "f the alpha code appears in a brac)et,
e.g., :;, :B;, etc., the audit procedure only secondarily
accomplishes the ob%ecti&e. "f an asteris) precedes a procedure, it is
a preliminary step or a follow up step that does not accomplish an
ob%ecti&e.


B$"C P.#C,D0.,$

, B, C
<. +or prepaids, deferred charges, and intangibles=
a. .e&iew the nature of each account and e&aluate if it is
appropriate to allocate such cost to future periods.


b. "f there are significant deferred ta* assets, test these
balances when performing the audit of income ta*es. 4$ee the audit
program at P6<<.5


c. Compare the current year asset balances to the prior year
asset balances and e*plain unusual &ariations. .e&iew the balances
in the related current year e*pense amorti3ation accounts and
compare them to the prior year2s balances. ,*plain unusual
&ariations noted by these procedures.


d. /ouch significant additions to in&oices, purchase
agreements, minutes, etc. Document the items tested.


e. Determine the reasonableness of the remaining asset
balances and remaining amorti3ation li&es. Determine if the
amorti3ation methods are in accordance with GP and are
consistent with prior years. "n7uire about whether goodwill and
other intangibles ha&e been tested for impairment and re&iew the
results of impairment tests. "f there are differences between boo)
and ta* amorti3ation methods, note these for consideration when
testing deferred ta*es. 4$ee the audit program at P6<<.5


f. Determine the proper financial statement descriptions and
classifications between current and noncurrent assets. +or goodwill
and other intangibles, summari3e in the wor)papers the information
needed to prepare any re7uired financial statement disclosures.
"n7uire about liens or restrictions on the assets and re&iew audit
wor) in other areas for the e*istence of liens or restrictions.

Practical Considerations=
Prepaid and deferred charges accounts normally are not
material and can be effecti&ely tested by scanning and analytical
procedures. Testing the ade7uacy of a company2s insurance
co&erage does not relate to any of the fi&e financial statement
assertions, nor does accounting literature re7uire disclosure of
ade7uacy of insurance co&erage 4$+$ No. >, paragraph <?@5.
Aowe&er, if you belie&e that such a re&iew is warranted because
there is an ob&ious high ris), for e*ample, in&entory stored in a
warehouse with high fire or theft ris), large fleets of cars or truc)s,
etc., you might perform additional procedures as a client ser&ice.


n analytical procedure that is sometimes helpful in analy3ing
the reasonableness of remaining balances is to di&ide the ending
balance by the current year charges to the e*pense amorti3ation
account. This pro&ides a rough test of the number of years of
remaining amorti3ation life. +or prepaid insurance, the figure
should coincide appro*imately to the remaining co&erage period of

ma%or policies. +or property ta*es, the figure normally should be
less than a year 4assuming such ta*es are paid one year in ad&ance5.

(hen an analytical procedure is used as the principal
substanti&e test of a significant financial statement assertion, $$
No. >B, nalytical Procedures, as amended by $$ No. CB, udit
Documentation, re7uires the auditor to document 4<5 the
e*pectation and the factors considered in its de&elopment 4unless
readily determinable from the wor) performed5, 4D5 the results of
the comparison between the e*pectation and recorded amounts, and
4@5 any additional procedures performed in response to significant
une*pected differences. $$ No. CB is effecti&e for audits of
financial statements for periods beginning on or after -ay <>,
D??D, with early application permitted.


$$ No. CB, udit Documentation, re7uires documentation of
substanti&e tests of details in&ol&ing inspection of documents to
include identification of the items tested. The authors belie&e items
tested can be identified by listing the itemsE by including a detail
schedule in the wor)papers, such as a detailed account analysis, on
which the items are identifiedE or by documenting in the
wor)papers the source and selection criteria. +or e*ample=


+or tests of significant items, documentation may describe the
auditor2s scope and the source of the items 4for e*ample, all
additions greater than F>,??? from the D?GD other assets detail5.


+or hapha3ard or random samples, documentation should
include the identifying characteristics of the items 4for e*ample, the
specific in&oice numbers, chec) numbers, etc.5.


+or systematic samples, documentation may indicate the
source, starting point, and sampling inter&al 4for e*ample, a
selection of chec)s from the cash disbursements %ournal for the
period <'<'GD to <D'@<'GD, starting with chec) number D<>? and
selecting e&ery <?th chec) thereafter5.


. $$ No. CB is effecti&e for audits of financial statements for
periods beginning on or after -ay <>, D??D, with early application
permitted.


"ntangible assets such as goodwill are normally created by the

purchase of another company. -a%or goodwill additions normally
re7uire additional procedures to test the purchase price allocation.

$+$ No. <HD, Goodwill and #ther "ntangible ssets,
supersedes PB #pinion No. <I, "ntangible ssets, and is effecti&e
for fiscal years beginning after December <>, D??<. ,arly
application is permitted for entities with fiscal years beginning after
-arch <>, D??<, pro&ided interim financial statements ha&e not
been issued. Goodwill and intangible assets ac7uired after 1une @?,
D??< are sub%ect to the amorti3ation pro&isions of $+$ No. <HD.
$+$ No. <HD changes the accounting for goodwill and other
intangible assets by 4<5 establishing the reporting unit as the unit of
accounting for goodwill, 4D5 pro&iding that goodwill and intangible
assets with indefinite useful li&es should not be amorti3ed but
should be tested annually for impairment, 4@5 pro&iding guidance
for testing goodwill and unamorti3ed intangibles for impairment,
and 4H5 re7uiring additional disclosures about goodwill and other
intangibles.


$#P CJ6>, .eporting on the Costs of $tart6up cti&ities,
re7uires entities to e*pense the costs of start6up acti&ities, including
organi3ational costs, as incurred.

, B, C D. +or other assets such as deposits and cash surrender &alues
of life insurance=


a. /ouch significant additions to deposits.


b. .e&iew the reasonableness of ma%or cash surrender &alues
of life insurance.


4<5 .e&iew the policy for ma%or cash surrender &alues and
determine that the company is indeed the beneficiary or otherwise
owns the cash surrender &alue. "f possible, compare cash surrender
&alues to &aluation tables in the policy.


4D5 "n7uire if there are any policy loans against cash surrender
&alues. "f there are loans, consider whether they ha&e been
appropriately accounted for.


4@5 Consider confirming the current status of life insurance
policies. .etain copies of all confirmations in the wor)papers.


c. Determine the proper description and classification
between current and noncurrent assets.

Practical Consideration=
$ee CL6<J for a confirmation letter for life insurance policies.

K @. Consider the need to apply one or more additional
procedures. The decision to apply additional procedures should be
based on a consideration of whether information obtained or
misstatements detected by performing substanti&e tests or from
other sources during the audit alter your %udgment about the need to
obtain a further understanding of control acti&ities, the assessed
le&el of ris) of material misstatements 4whether caused by error or
fraud5, and on an e&aluation of whether the basic procedures ha&e
been sufficient to achie&e the audit ob%ecti&es. ttach audit
program sheets to document additional procedures.

Practical Considerations=
Certain common additional procedures relating to the
following topics are illustrated following this program=
Prepaid insurance.
"ntangible assets.
Deferred ad&ertising costs.


Practitioners may refer to PPC2s Guide to +raud "n&estigations
for more e*tensi&e fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.

K H. Consider whether procedures performed are ade7uate to
respond to identified fraud ris) factors. "f fraud ris) factors or other
conditions are identified that re7uire an additional audit response,
consider those ris) factors or conditions and the auditor2s response
in connection with the performance of $tep << in P6<b.

Practical Consideration=
$pecific responses to identified fraud ris) factors are addressed
in indi&idual audit programs. "n connection with e&aluation and
other completion procedures in P6<b, the auditor considers the
need to perform additional procedures based on the results of
procedures performed in the indi&idual audit programs and the

cumulati&e )nowledge gained from performing those procedures.
K >. Consider whether the results of audit procedures indicate
reportable conditions in internal control and, if so, add to the memo
of points for the communication of reportable conditions. 4$ee
section <>?H for e*amples of reportable conditions, and see CG6<J
for a wor)sheet that can be used to document the points as they are
encountered during the audit.5

C#NCL0$"#N
(e ha&e performed procedures sufficient to achie&e the audit
ob%ecti&es for prepaids, deferred charges, intangibles, and other
assets, and the results of these procedures are ade7uately
documented in the accompanying wor)papers. 4"f you are unable to
conclude on any ob%ecti&e, prepare a memo documenting your
reason.5






Additional Audit Procedures for Prepaids,
Deferred Charges, Intangibles, and Other Assets
"nstructions= dditional procedures will occasionally be necessary on some small
business engagements. The following listing, although not all6inclusi&e, represents
common additional procedures and their related ob%ecti&es.


Prepaid "nsurance

, B, C naly3e the propriety of the prepaid insurance balances as set forth below=


a. #btain or prepare a detailed analysis of prepaid insurance
balances using the following column headings=

4<5
"nsurance
Company
4D5
Policy
Number
4@5
Type of
Co&erage
4H5
Co&erage
Limits
4>5
Policy
Term
from'to
4B5
Premium
Paid

4I5
Date
Paid
4J5
Premium
Period
4C5
Prepaid
Balance
<D'@<'G<
4<?5
dditions
4<<5
morti3ation
4<D5
Prepaid
Balance
<D'@<'GD


b. Determine the clerical accuracy of the client2s schedule
prepared for prepaid insurance.


c. $elect the largest indi&idual insurance premium and policy
and determine the propriety of the insurance co&erage identified on
the schedule.


d. Consider obtaining confirmation of retroacti&e ad%ustments
and premiums resulting from forms of co&erage such as wor)er2s
compensation, etc. 4only if indi&idually material5. .etain copies of
confirmations in the wor)papers.


e. Determine, by scanning the schedule, the o&erall
reasonableness of prepaid insurance balances.


f. Determine, by re&iew of the insurance co&erage in force,
whether significant insurable ris)s ha&e been considered.


Practical Considerations=


dditional procedures should be performed on prepaid
insurance only if it is material and if effecti&e analytical procedures
cannot be performed.


"f the client cannot prepare a detailed summary analysis of
prepaid insurance, the auditor should simply apply the procedures
to the supporting documents and summari3e the wor) done in
memorandum form.


#ften, the insurance agent can furnish an analysis that can be
used as a wor)paper in lieu of preparing a wor)paper analysis.


CL6@> presents a letter for 8Confirmation of "nsurance
Co&erage 4#ther than Life "nsurance5.9



"ntangible ssets

, B, C +or significant intangible assets ac7uired from others=


a. +or intangible assets ac7uired directly from others, &ouch
the cost of the asset. Cost is measured by the amount of cash
disbursed, the fair &alue of other assets distributed, the present
&alue of amounts to be paid for liabilities incurred, or the fair &alue
of stoc) issued 4see paragraphs >LB of $+$ No. <H<5.


b. +or intangible assets ac7uired as part of the ac7uisition of
another company, &ouch the total purchase cost of the ac7uired
company or group of purchased assets. Determine the propriety of
the allocation of the purchase price to intangible assets following
the guidance in $tatement of +inancial ccounting $tandards No.
<H<, Business Combinations. "nclude in the current or permanent
wor)paper files abstracts or copies of significant agreements
e*amined to e&aluate appropriate accounting.

Practical Consideration=
$+$ No. <H<, Business Combinations, re7uires that all
business combinations be accounted for by the purchase method
and pro&ides guidance for recogni3ing goodwill and other
intangible assets. $+$ No. <H< supersedes PB #pinion No. <B
and is effecti&e for business combinations occurring after 1une @?,
D??<.



Deferred d&ertising Costs

, B, C "f the client has significant amounts of deferred ad&ertising costs,
determine whether they are accounted for in accordance with $#P
C@6I and Practice Bulletin No. <@. $ummari3e in the wor)papers
the re7uired disclosures.


Additional Audit Procedures for Prepaids,
Deferred Charges, Intangibles, and Other Assets
Beginning Balance in Initial Audit
Company Balance Sheet Date
udit
#b%ecti&es
udit Procedures for Consideration
N'
Performed
by
(or)paper
"nde*

Instructions: dditional procedures will be necessary in an
initial audit. These procedures are applied to opening balances and
differ depending whether you are relying on your re&iew of a
predecessor2s wor) or placing no reliance on a predecessor2s audit.
4$ection <J?@ discusses considerations when replacing a
predecessor auditor, including a discussion of what the term
reliance means when used in this program.5 These procedures may
be applied in con%unction with the basic procedures applied to the
ending balance. The asteris)s preceding the procedures indicate
that they are an intermediate step in achie&ing audit ob%ecti&es for
the ending balance.

K <. "f a predecessor2s audit of the prior period2s financial
statements is to be relied on=


a. $can the predecessor2s wor)papers for prepaids, deferred
charges, and intangibles and consider whether the predecessor
e*amined appropriate documentary support for significant items.


b. Consider whether basic procedures applied in the current
period indicate that any significant items should ha&e been charged
to operations in the prior period.

Practical Considerations=
Normally procedures in the current period are sufficient to
achie&e audit ob%ecti&es related to opening balances.


"n applying basic procedure <c, watch for items treated as
assets in one period, but e*pensed in the other.


$ignificant intangible assets ac7uired from others may re7uire

additional procedures.
K D. "f no reliance on a predecessor is planned or possible=


a. s part of basic procedure <a, consider the prepaids,
deferred charges, and intangibles in the closing trial balance of the
prior period and e&aluate the appropriateness of allocation to future
periods.


b. s part of basic procedure <b, compare current period asset
balances to prior year balances.

Practical Consideration=
(atch for items treated as assets in one period, but e*pensed in
the other, and significant fluctuations.


c. /ouch significant deferred and intangible items to in&oices,
purchase agreements, minutes, etc. Document the items tested.


d. +or the cash surrender &alue of life insurance, consider
confirming the status of policies as of the end of the prior period
and the current period. .etain copies of all confirmations in the
wor)papers.


e. Consider whether basic procedures applied in the current
period indicate that any significant items should ha&e been charged
to operations in the prior period.

Practical Consideration=
s indicated abo&e, normally procedures in the current period
are sufficient or can be moderately e*tended to achie&e audit
ob%ecti&es related to opening balances.