Audit of the Acquisition and Payment Cycle

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Transcript Audit of the Acquisition and Payment Cycle

Audit of the Acquisition and Payment Cycle

Chapter 18

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Learning Objective 1

Identify the accounts and the classes of transactions in the acquisition and payment cycle.

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Transactions in the Acquisition and Payment Cycle 1. Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances and purchase discounts ©2003 Prentice Hall Business Publishing,

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Accounts in the Acquisition and Payment Cycle

Cash in Bank Accounts Payable Cash disbursements Acquisitions of goods and services Purchase Returns and Allowances Purchase returns and allowances Raw Material Purchases Property, Plant, and Equipment Purchase Discounts Purchase discounts Prepaid Expenses

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Accounts in the Acquisition and Payment Cycle

Accounts Payable Acquisitions of goods and services Manufacturing Expense Control Subsidiary accounts Selling Expense Control Subsidiary accounts Administrative Expense Control Subsidiary Accounts Repair and maint.

Taxes Supplies Freight in Commissions Travel expense Delivery expense Repairs Advertising Supplies Officers’ travel Legal fees Auditing fees Utilities

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Taxes

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Learning Objective 2

Describe the business functions and the related documents and records in the acquisition and payment cycle.

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Classes of Transactions and Accounts Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements Accounts payable Manufacturing expenses Selling and administrative expenses ©2003 Prentice Hall Business Publishing,

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Business Functions in the Cycle

Processing Purchase Orders Receiving Goods and Services Recognizing the Liability Processing and Recording Cash Disbursements

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Learning Objective 3

Describe how e-commerce affects the acquisition of goods and services.

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How E-Commerce Affects the Acquisition and Payment Cycle Electronic data interchange (EDI) is the electronic exchange of information between companies and their suppliers and consumers.

Suppliers Customers

EDI EDI Purchase orders Customer orders

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How E-Commerce Affects the Acquisition and Payment Cycle Information about products is available over the Internet.

Some companies use extranets which link the intranets of two or more companies.

Other companies use business to-business auctions hosted on the Internet to negotiate purchases.

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Learning Objective 4

Understand internal control and design and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle.

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Methodology for Designing Tests of Balances – Accounts Receivable Understand internal control – acquisitions and cash disbursements.

Assess planned control risk – acquisitions and cash disbursements.

Evaluate cost-benefit of testing controls.

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Methodology for Designing Tests of Balances – Accounts Receivable Design tests of controls and substantive tests of transactions for acquisitions and cash disbursements to meet transaction-related audit objectives.

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Understand Internal Control The auditor gains an understanding of internal control for the acquisition and payment cycle by studying the client’s flowcharts, preparing internal control questionnaires, and performing walk-through tests for acquisitions and cash disbursements.

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Assess Planned Control Risk Authorization of purchases Separation of asset custody from other functions Timely recording and independent review of transactions Authorization of payments ©2003 Prentice Hall Business Publishing,

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Evaluate Cost-Benefit of Testing Controls The auditor identifies the key internal controls and weaknesses and assesses control risk.

The auditor decides whether substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.

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Controls and Substantive Tests of Transactions for Acquisitions Recorded acquisitions are for goods and services received, consistent with the best interests of the client (existence).

Existing acquisitions are recorded (completeness).

Acquisitions are accurately recorded (accuracy).

Acquisitions are correctly classified (classification).

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Controls and Substantive Tests of Transactions for Cash Disbursements The assumption underlying these controls and audit procedures is separate cash disbursements and acquisitions journals.

The acquisitions and cash disbursements tests are typically performed concurrently.

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Learning Objective 5

Describe the methodology for designing tests of details of balances for accounts payable using the audit risk model.

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Methodology for Designing Tests of Details of Balances for A/P Phase I Set tolerable misstatement and assess inherent risk.

Identify client risks affecting accounts payable.

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Methodology for Designing Tests of Details of Balances for A/P Phases I and II Assess control risk and design and perform tests of controls and substantive tests of transactions.

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Methodology for Designing Tests of Details of Balances for A/P Phase III Design and perform analytical procedures.

Design and perform tests of details of accounts payable balance.

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Learning Objective 6

Design and perform analytical procedures for accounts payable.

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Analytical Procedures for the Acquisition and Payment Cycle Analytical Procedure Compare acquisition related expense account balances with prior years.

Review list of accounts payable for unusual, nonvender, and interest bearing payables.

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Analytical Procedures for the Acquisition and Payment Cycle Analytical Procedure Compare individual accounts payable with previous years.

Calculate ratios such as purchases divided by accounts payable, and accounts payable divided by current liabilities.

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Learning Objective 7

Design and perform tests of details of balances for accounts payable, including out-of-period liability tests.

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Out-of-Period Liability Tests Examine underlying documentation for subsequent cash disbursements.

Examine underlying documentation for bills not paid several weeks after the year end.

Trace receiving reports issued before year-end to related vendors’ invoices.

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Out-of-Period Liability Tests Trace vendors’ statements that show a balance due to the accounts payable trial balance.

Send confirmations to vendors with which the client does business.

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Learning Objective 8

Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations of accounts payable as audit evidence.

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Sample Size Sample sizes for accounts payable tests vary considerably, depending on many factors.

Statistical sampling is less commonly used for the audit of accounts payable than for accounts receivable.

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Types of Audit Tests for the Acquisition and Payment Cycle Cash in Bank Accounts Payable Payments

TOC , Audited by STOT , and AP

Expenses Acquisition Expenses

Audited by TOC , STOT , and AP

Ending balance

Audited by AP and TDP

Ending balance

Audited by AP TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

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Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Acquisition of assets Acquisition Assets

Audited by TOC , STOT , and AP

Ending balance

Audited by AP and TDP TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS

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End of Chapter 18

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