Transcript Acc 490 Chapter 8 Lecture

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Chapter 8
Acquisition and Expenditure Cycle
“Show those numbers to the damn auditors and I'll throw you out the $%*@@
window.”----(Buddy Yates, director of WorldCom, Inc. general accounting, to an
employee asking for an explanation of a large accounting discrepancy).
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Presentation Outline
I. The Expenditure Cycle
II. Expenditure Cycle Risk, Control
Procedures, and Testing
III. Audit Evidence in Management Reports
and Data Files
IV. Other Accounts in Cycle
I. The Expenditure Cycle
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A. Requisitioning in Stores
B. Order Processing in Purchasing
C. Receiving
D. Delivery Acknowledgement in Stores
E. Invoice Verification in Purchasing
F. Accounts Payable Prepares the Voucher
Package
G. Cash Disbursements
H. General Ledger
I. Internal Audit
A. Requisitioning in Stores
Prepare
Requisition
Requisition
Processing
Purchase
Database
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Requests for purchases
originate outside the
purchasing department.
Purchase requisitions
arise in stores or other
departments.
Requisitions should be
approved in the
originating department.
Purchasing has access to
the requisition thru the
purchase database.
B. Order Processing in Purchasing
Prepare
Order
Purchase
Requisition
Select
Vendor
Retrieve
Purchase
Requisition
Purchase
Database
Order
Processing
Purchase
Order
To Vendor
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 Purchase requisitions may
be overridden due to a
lack of funds, improper
authorization by the
requesting department,
etc.
 Purchasing selects a
vendor using an approved
vendor list or a bidding
process.
 Accounts payable, the
requesting department,
and receiving all have
access to the purchase
order through the
purchase database.
From Vendor
Delivery
Blind
Count
Delivery
C. Receiving
Match to
Purchase
Order
Enter
Receipt
To Stores
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 Receiving accesses the
Purchase
purchase order and matches
Order
it with the vendor delivery.
 Receiving only accepts
Retrieve
deliveries for which there is
Purchase
Order
an existing purchase order.
 Blind counts are often used to
force counters to actually
Purchase
count the items received.
Database
 A receiving supervisor later
verifies the quantity against
Order
the purchase order.
Processing
 Stores has access to this
report thru the purchase
database.
D. Delivery Acknowledgement in Stores
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From
Receiving
Delivery
Match to
Delivery
Receiving
Report
Retrieve
Receiving
Report
Goods
Receipt
Processing
Purchase
Database
 The stores department
acknowledges receipt of
the delivery on the
receiving report in the
purchase database.
 Purchasing and
accounts payable have
access to the
acknowledged report
thru the purchase
database.
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E. Invoice Verification in Purchasing
From Vendor
Vendor
Invoice
Purchase
Database
Invoice
Verification
Vendor
Invoice
To Accounts
Payable
 Purchasing uses the
purchase database to
compare the purchase order,
acknowledged receiving
report, and vendor invoice
for any discrepancies.
 Purchasing authorizes the
invoice for payment once
they are satisfied that the
invoice is correct per the
order and what was
received.
F. Accounts Payable Prepares the Voucher Package
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From Purchasing
Vendor
Invoice
Prepare
Voucher
Purchase
Requisition
Purchase
Order
Receiving
Report
Retrieve
Documents
Purchase
Database
Voucher
Processing
Voucher
Check
Voucher
To Cash
Disbursements
Accounts
Payable
or
Voucher
Register
Journal
Voucher
To General
Ledger
 The purchase
requisition, purchase
order, acknowledged
receiving report, and
approved vendor
invoice provide the
support for the
preparation of a
voucher.
 The voucher serves to
summarize the
purchase for entry on
the records as a
liability.
Voucher
From Accounts
Payable
G. Cash Disbursements
Cancel
Voucher
after
Signing
Check
Sign
Checks
Voucher
Check
Voucher
Check
Voucher
Post
Check
Register
Voucher
Check
Forward to
Payee
Control
Total
To General
Ledger
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Cash
disbursements
received the
voucher
package and
check for
signing.
Cash
disbursements
maintains a
check register
and forwards a
journal entry to
general ledger.
H. General Ledger
Control
Total
Journal
Voucher
From Cash
Disbursements
From Accounts
Payable
Compare
Post
General
Ledger
Processing
Control
Total
Journal
Voucher
General
Ledger
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General ledger
receives the journal
entry from accounts
payable (Debit –
Accounts payable
and Credit – Cash)
and compares it to
the control total for
cash disbursements.
The journal entry is
then posted into the
general ledger.
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I. Internal Audit
Bank
Statement
From
Bank
Cancelled
Checks
Bank
Reconciliation
Bank
Reconciliation
Bank
Statement
Cancelled
Checks
Check
Register
An independent
reconciliation
of the bank
account is
performed by
internal audit.
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II. Expenditure Cycle Risk, Control
Procedures, and Testing
A. Inherent Risks
B. Cost and Expense Capers – Exhibit 8.2
C. Expenditure Control Procedures
D. Assertions of Classes of Transactions and Events
for the Period: Acquisition and Expenditure
Cycle – Exhibit 8.4
E. Direction of Tests – Exhibit 8.3
F. The Completeness Assertion
G. Purchase Cutoffs
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A. Inherent Risks
Unrecorded liabilities – may arise when invoice
verification has not been completed for what should be
a liability.
Noncancelable purchase agreements – drop in market
prices below agree contractual price should result in
loss recognition.
Capitalizing expenses – expenditures with no future
value may be capitalized when they should be
expensed.
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B. Cost and Expense Capers – Exhibit 8.1 on p. 293
C. Expenditure Control Procedures
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• Information processing controls
–
–
–
–
Compare quantities against receiving report and purchase order
Compare prices against purchase order (i.e., quoted price)
Mathematically verify vendor's invoice
Determine when to pay invoice and prepare VOUCHER
• Segregation of duties
– AUTHORIZATION of the purchase is done by the purchasing department.
– Custody of the inventory item(s) is held by the receiving department and,
ultimately, the requesting department.
– Transactions are recorded by general accounting (control account) and accounts
payable department (subsidiary accounts) or vouchers payable
• Physical controls
– Prepare a receiving report upon initial receipt of inventory
– Count and verify inventory quantities upon delivery to the inventory
warehouse
– Restrict access to inventories by keeping them in a secured location
• Performance reviews
– Compare purchases data to data from previous years or expected
purchases data
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D. Assertions
of Classes of
Transactions
and Events
for the
Period:
Acquisition
and
Expenditure
Cycle –
Exhibit 8.4 on
p. 299
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E. Direction of Tests – Exhibit 8.3 on p. 298
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F. The Completeness Assertion
• Search for Unrecorded Liabilities
– Inquire of client about their procedures
– Scan open purchase order file
– Examine all UNMATCHED VENDOR
STATEMENTS/INVOICES
– Examine all UNMATCHED RECEIVING REPORTS
occurring near year-end
– Confirm A/P with NORMAL SUPPLIERS (even those
with zero balances)
– Review CASH DISBURSEMENTS occurring after
year-end
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G. Purchase Cutoffs
• Verify CUT-OFFs for purchases
– Examine Receiving Reports and Vendor Sales
Invoices occurring around year-end to ensure
inventory received is included in the
appropriate period.
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III. Audit Evidence in Management
Reports and Data Files
A. Open Purchase Orders
B. Unmatched Receiving Reports
C. Unmatched Vendor Invoices
D. Accounts (Vouchers) Payable Trial
Balance
E. Purchases Journal
F. Fixed Asset Reports
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A. Open Purchase Orders
Purchase orders are open from the time they
are issued until goods are received.
Auditors can find evidence of losses on
purchase commitments in this file (i.e.,
market prices are below price in purchase
order).
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B. Unmatched Receiving Reports
Auditors can inspect unmatched receiving
report file to determine whether the
company has material unrecorded liabilities
on the financial statement date.
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C. Unmatched Vendor Invoices
Auditors can inspect unmatched vendor
invoice file and compare it to the
unmatched receiving report file to
determine whether the company has
material unrecorded liabilities on the
financial statement date.
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D. Accounts (Vouchers) Payable
Trial Balance
The trial balance is a list of payable amounts by
vendor, and the sum should agree with the
accounts payable control account.
Some organizations have a trial balance of
individual unpaid vouchers rather than vendor
names.
Search for unrecorded liabilities should emphasize
small and zero balances, especially for regular
vendors.
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E. Purchases Journal
Purchases can be scanned for purchasing
patterns indicating error or fraud:
Purchase with unapproved vendors
Purchases to multiple companies at the
same address
Duplicate payments
Vendors whose address matches an
employee
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F. Fixed Asset Reports
Information for depreciation calculation (cost,
useful life, method salvage) can be used for
the audit of depreciation on a sample basis
or by computer applications to recompute
all depreciation.
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IV. Other Accounts in Cycle
A. Accrued Liabilities v. Accounts Payable
B. Auditing Accrued Liabilities and Prepaid
Expenses
C. Account Analysis for Prepaid Expenses –
Exhibit 8.5
D. Auditing Property Plant and Equipment
E. Sample PP&E and Depreciation
Document – Exhibit 8.6
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A. Accrued Liabilities v. Accounts
Payable
• Major differences between ACCRUED Liabilities
and ACCOUNTS PAYABLE
– Examples include INTEREST, PROPERTY TAXES,
WAGES, and INCOME TAXES PAYABLE
– These payables are not normally INVOICED or
EVIDENCED by the RECEIPT OF GOODS
• These differences may make it more difficult to
detect UNRECORDED ACCRUALS
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B. Auditing Accrued Liabilities and Prepaid
Expenses
•
•
•
•
Agree balances to PRIOR YEAR WORKPAPERS
Verify PAYMENTS
Examine UNDERLYING AGREEMENTS
RECALCULATE amounts
– Agree EXPENSE ACCOUNTS to trial balance
• Search for UNRECORDED ACCRUALS
– Review CASH DISBURSEMENTS at year-end
– Look for expected accruals at other stages of the audit
(BONDS, NOTES, employees paid on 15th, etc.)
• ANALYTICAL PROCEDURES
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C. Account Analysis for Prepaid Expenses – Exhibit 8.5
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D. AUDITING PROPERTY, PLANT, AND
EQUIPMENT
• GENERAL APPROACH
– Small number of transactions
• Relatively high dollar transactions
– Authorization of Transactions (Board of Directors)
takes on added importance.
– Less concern for ACCESS to ASSETS
– More concerned with UNRECORDED DISPOSALS
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D. AUDITING PROPERTY, PLANT, AND
EQUIPMENT (Continued)
• Agree balances to prior year documentation
• PURCHASES OF PPE
– VOUCH to INVOICE or COST RECORDS
– Inspect TITLE
– VOUCH to BOARD MINUTES
• EXPENDITURES SUBSEQUENT TO ACQUISITION
– VOUCH to INVOICE and WORK DESCRIPTIONS
– Consider propriety of classification (EXPENSE or CAPITALIZE)
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D. AUDITING PROPERTY, PLANT, AND
EQUIPMENT (Continued)
• DISPOSAL OF PPE
–
–
–
–
VOUCH from PPE to BOD MINUTES (AUTHORIZATION)
Vouch to cash receipts journal and validated deposit slip
Recalculate gain/loss
TRACE from BD MINUTES to PPE for disposals (COMPLETENESS)
• Look for unrecorded disposals
– Agree balances to PRIOR YEAR WORKPAPERS
– Examine insurance policies, property tax records, etc.
– PHYSICALLY INSPECT or CONFIRM fixed assets
• Both existing and newly-acquired items
• Confirm assets LEASED to others under capital leases
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D. AUDITING PROPERTY, PLANT, AND
EQUIPMENT (Continued)
• DEPRECIATION EXPENSE
– Recalculate using USEFUL LIFE, SALVAGE VALUE,
COST, and METHOD (VA)
– Evaluate REASONABLENESS of USEFUL LIFE,
SALVAGE VALUE, etc.
– Is depreciation consistent with COMPANY POLICY
(half year conventions)?
• LEASE AGREEMENTS
– Verify proper treatment (Capitalized or Operating)
– Ensure disclosure in footnotes is appropriate
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E. Sample PP&E and Depreciation Documentation – Exhibit 8.6
on p. 304
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Summary
Segregation of Duties in Expenditure Cycle
Risk and Testing in Expenditure Cycle
Searching for Unrecorded Liabilities
Audit of Property, Plant & Equipment