Explain the relationship between substantive tests of transactions for the acquisition and payment cycle and tests of details of balances for the verification of prepaid insurance.

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Part $1$

A$.$

Since the source of the debits to prepaid insurance is the acquisitions journal or similar$$ record, the current period premiums have already been partially verified as a part of the acquisition and payment cycle. The allocation of premium payments is not tested.

B$.$

Performing substantive tests of transactions for the acquisition and payment cycle does not cover the audit of prepaid insurance because the accounts are not linked. The test of details of balances for the verification of prepaid insurance is important due to the materiality of the prepaid account.

C$.$

The source of the credits to the prepaid insurance account is to the acquisitions journal.$$ Therefore, during the review of substantive test of$$ transactions, the premium payments for the prepaid insurance account are verified as part of the cycle.

D$.$

Performing substantive tests of transactions for the acquisition and payment cycle is important to identify potentially significant misstatements. Once the misstatements are$$ identified, the tests of details of the balances in the prepaid insurance account can be completed through performing analytical procedures.