Transcript Information Systems

Audit of the Acquisition and
Payments Cycle
An Overview of Functions, Documents, and
Accounting Systems
• Starting point
• Any Department
Purchase details
N
Prepare prenumbered
Purchase Requisition
Purchase Requisition
Accounts
Payable
Purchasing
Payments Cycle-2
PURCHASE REQUISITION
28314
Copy
Okra Development Corp.
To:
Purchasing
From:
Stockroom
Date:
August 5, 201X
Ship by September 12, 201X
Quantity
Number
Description
10
Model 317
Roller Bearings
Stockroom Clerk
Rita Silverstein
Payments Cycle-3
• Purchasing Department
Originating
Department
Purchase Requisition
Determine Vendor,
prepare prenumbered
Purchase Order
N
Purchase Requisition
Purchase Order
Originating Department
Receiving
Accounts
Payable
Vendor
Payments Cycle-4
Copy
Okra Development Corp.
8924 Bailey Road
Salem, OR 92117
Purchase Order
Date:
Ship By:
Terms:
6-3378
August 5, 201X
September 12, 201X
2/10, n/30
FOB Shipping Point
To:
Faragut Sales, Inc.
3812 Briar Drive
Salem, Or 92115
Ship to Okra Development Corp.
8924 Bailey Road, Salem, OR 92117
PR28314
Quantity
Number
Description
Price
Amount
10
Model 317
Roller Bearing for
Model 3118 Ripper
48.00
480.00
Purchase order number must appear on
all shipments and invoices.
Ordered By
Margaret Spangler
Payments Cycle-5
• Receiving Department
Purchasing
Blind copy of
Purchase Order
Count goods, match
with Purchase Order,
and prepare
Receiving Report
A
Filed until
goods received
along with
invoice copy
Blind copy of
Purchase Order
A
Receiving Report
Originating Department with
goods
Purchasing
Accounts
Payable
Payments Cycle-6
Okra Development Corp.
8924 bailey Road, Salem Or 92117
Receiving Report No.
Carrier:
Yellow Express
August 28, 201X
229-237441
8-09321
Purchase Order:
Supplier:
Faragut Sales, Inc.
Invoice No.
D8-9912
Quantity
Description
Condition
10
Roller Bearings
ok
Receiving Clerk
6-3378
Tony Morelli
Payments Cycle-7
Faragut Sales, Inc.
D8-9912
3812 Briar Drive, Salem, OR 92115
SALES INVOICE
Sold to
Shipped to
Freight Bill No.
Okra Development Corp.
8924 Bailey Road
229-237441
8924 Bailey Road
Salem, Or 92117
Salem, Or 92117
FOB Shipping Point
Invoice Date
Date Shipped
Terms
Your Order No.
August 25, 201X
August 20,201X
2/10,n/30
6-3378
Quantity
We are pleased to serve you.
Price
Amount
10
Model 317 Roller Bearings
48.00
480.00
Payments Cycle-8
• Accounts Payable Department
Originating
Department
Purchase Requisition
Purchasing
Purchase Order
Receiving
Vendor
Receiving Report
Vendor’s Invoice
Compare. Then
prepare Voucher and
enter in Voucher
Register
Voucher Register to
General
Accounting
Purchase Requisition
Purchase Order
Receiving Report
Vendor’s Invoice
Voucher
D
To Cash Disbursements
when due
Payments Cycle-9
Voucher No.
9-00018
Amount
480.00
Vendor
Faragut Sales Inc.
Account No.
682
Invoice No.
D8-9912
Terms
2/10, n/30
Due Date
Sept. 4, 201X
Net Amount
470.40
Receiving Report No.
8-09321
Mathematical Accuracy
B.K.
Purchase Order No.
6-3378
Documents Reviewed
J.S.
Purchase Requisition No.
28314
Account Code Approved
F.Y.D
VOUCHER REGISTER
Page 287
Paid
Credit
Debit
Voucher No.
Date
Payee
Date
Cheque No.
Vouchers Payable
Amount
Account No.
9-00018
Aug. 29/201X
Faragut Sales, Inc.
Sept. 4/201X
867
480.00
480.00
682
Payments Cycle-10
• Cash Disbursements Department
Purchase Requisition
Purchase Order
Receiving Report
Vendor’s Invoice
Voucher
From Accounts
Payable
(1)
Check prices, verify math and consistency between documents, prepare
cheques and cheque register.
(2)
Review documentation, sign cheques, and cancel vouchers
Purchase Requisition
Purchase Order
Receiving Report
Vendor’s Invoice
Voucher
Cheque
D
To Vendor
Cheque Register
To General Accounting
Payments Cycle-11
Managing Risk in the Payments Cycle
•
Possible Errors
1.
Cutoff errors
2.
Consignment goods
3.
Misclassification
4.
Recording a transaction
Payments Cycle-12
Fraud in the Acquisition and Payment Cycle
• Most frauds
• Management
• Three areas to look at:
•
Paying for fictitious purchases
•
Receiving kickbacks
•
Purchasing goods for personal use
Payments Cycle-13
Designing Tests of Controls for the Acquisition and
Payment Cycle
•Understand
general controls
•Understand internal control;
evaluate design effectiveness
By assertion:
•Assess planned
control risk;
identify and assess risks of
material misstatement
•Evaluate
•The type of
cost-benefit of testing
controls
audit procedures?
•What is the sample size?
•Items to be
selected?
•Timing – when to do the procedures?
•Design tests of controls
to meet
transaction-related objectives
Payments Cycle-14
Attribute Sampling for Tests of Controls
• Attribute sampling is common in the area of tests
of controls of acquisitions and payments.
• There can be a large number of accounts
• Stratification
• The following slides shows test of controls for
acquisitions and payments
Payments Cycle-15
Acquisitions - Assertions and Test of Controls
Existence or Occurrence
•
Recorded acquisitions are for goods and services
received, consistent with the best interests of the
client.
1. Approval of acquisition
2. The voucher package
•
Breakdown in control
Payments Cycle-16
Completeness
•
•
Existing acquisition transactions are recorded.
1.
Receiving reports are prenumbered and accounted for.
2.
Prenumbering of the voucher
Breakdown in control
Payments Cycle-17
Accuracy
•
•
Recorded acquisition transactions are accurate.
1.
Batch totals of transactions are mathematically accurate and
compared with computer batch summary reports
2.
Transactions are approved for prices and discounts
Breakdown in control
Payments Cycle-18
•
Classification
•
•
Acquisitions transactions are properly classified.
1.
A good chart of accounts is necessary
2.
Posting to the correct accounts
Breakdown in control
Payments Cycle-19
•
Timing
•
•
Acquisition transactions are recorded on the correct
dates.
1.
Transactions should be recorded as soon as possible
2.
The transaction date should be the system date
Breakdown in control
Payments Cycle-20
•
Posting and summarization
•
Acquisition transactions are properly included in the
vendor and inventory master files, and are properly
summarized.
1.
•
Reconciliation of accounts payable master file to the general
ledger
Breakdown in control
Payments Cycle-21
Cash Disbursements - Assertions and Test of Controls
•
Occurrence
•
•
Recorded cash disbursements are for goods and services
actually received.
1.
Adequate segregation of duties
2.
Examination of all supporting documentation prior to payment
3.
Approval of payment shown on supporting documents at the time
cheques are signed.
Breakdown in control
Payments Cycle-22
PURCHASE REQUISITION
28314
Copy
Okra Development Corp.
Copy
Okra Development Corp.
8924 Bailey Road
Salem, OR 92117
Purchase Order
Date:
Ship By:
Terms:
Okra Development Corp.
8924 bailey Road, Salem Or 92117
Receiving Report No.
6-3378
August 5, 201X
September 12, 201X
2/10, n/30
FOB Shipping
Point
8-09321
Faragut Sales, Inc.
D8-9912
3812 Briar Drive, Salem, OR 92115
SALES INVOICE
Voucher No.
9-00018
Amount
480.00
Vendor
Faragut Sales Inc.
Account No.
682
Invoice No.
D8-9912
Terms
2/10, n/30
Due Date
Sept. 4, 201X
Net Amount
470.40
Receiving Report No.
8-09321
Mathematical Accuracy
B.K.
Purchase Order No.
6-3378
Documents Reviewed
J.S.
Purchase Requisition No.
28314
Account Code Approved
F.Y.D
Payments Cycle-23
OKRA DEVELOPMENT CORP.
867
8924 Bailey Road, Salem, OR 92117
Sept. 4, 201X
Pay to the
order of
Faragut Sales, Inc.
$474.40
Four hundred and seventy 40/100-----------------
Dollars
Dewey Lee
THE BANK
of OREGON
Treasurer
CHEQUE REGISTER
Page 292
Voucher
Payee
Faragut Sales, Inc
Vouchers
Purchase
Cash
Cheque
No.
No.
Date
Payable Dr.
Discounts Cr
Cr
867
9-00018
Sept. 4, 201X
480.00
9.60
470.40
Payments Cycle-24
•
Completeness
•
Existing cash disbursement transactions are
recorded.
1. Cheques. Key control over cheques?
2. Cash disbursements journal.
3. Bank reconciliation
•
Breakdown in control
Payments Cycle-25
Alpha Bravo Company
Prepared by
Proof of Cash
Reviewed by
GHY
Dated 8/7/1X
For the Month of June 201X
5-31-1X
Balance per bank
Receipts
$11,800
b
Disbursements
$18,300
b
(500)
b
600
b
6-30-1X
$21,200
b
$8,900
b
600
b
Deposits in transit
May 31
500
June 30
Outstanding cheques
May 31
(800)
(800)
June 30
j
400
NSF cheques
Cash balance
$11,500
Balance per books
$11,320
L
(20)
b
(400)
(100)
j
(100)
j
$18,300
r
$20,700
d
$9,100
$18,200
L
$21,710
L
$8,810
L
(20)
b
(10)
b
300
b
Bank service charge
May
June
10
Bank collection
May
200
b
(200)
June
Cash balance
300
$11,500
^
$18,300
r
^
$20,700
d
^
^ Footed
d Traced to cash disbursements journal
b Traced to bank statement
L Traced to general ledger
r Traced to cash receipts journal
j Customer’s NSF cheque redeposited on July 8 and cleared
$9,100
^
Payments Cycle-26
•
Accuracy
•
•
Recorded cash disbursement transactions are
accurate.
1.
Check the calculations
2.
Bank reconciliation
Breakdown in control
Payments Cycle-27
•
Classification
•
Cash disbursement transactions are properly
classified.
1. Chart of accounts
2. Checking the classification
•
Breakdown in control
Payments Cycle-28
•
Timing
•
Cash disbursement transactions are recorded on
the correct dates.
1. The date of the transaction
2. Recording of transactions
•
Breakdown in control
Payments Cycle-29
•
Posting and Summarization
•
Cash disbursement transactions are properly
included in the vendor master file and properly
summarized.
1. Vendor master file
2. Detail tie-in
•
Breakdown in control
Payments Cycle-30
System Conversions
• System conversions arise when
• For example
Payments Cycle-31
Impact of System Conversion
• When an organization changes an entire
system or a set of systems, there are three
issues that the auditor needs to address:
– A new system of internal controls
– The auditor will need to audit
– The auditor will need to
• An example of an accounts payable
conversion from batch to online
Payments Cycle-32
Conversion Tests of Controls and Tests of Detail
Key internal control
Existence:
Must have only authorized
vendiors with the actual balances.
Thus agree vendor file details for
each vendor from the new (online)
system to the old (batch) system.
Completeness & Accuracy:
All vendor balances at date of
conversion are included. Thus
agree aged accounts payable trial
balance details from the old
(batch) system to the new (online)
system for each vendor and in
total.
Cutoff:
Information needs to be recorded
in the appropriate system and is
not omitted. Thus procedures
must exist to ensure appropriate
cutoff of transactions.
Common test of control
Common test of details
Review vendor file listings for
evidence of agreement.
On a test basis, agree vendor file
details for vendors from the new
(online) system to the old (batch)
system.
Review aged accounts payable trial
balance listings for evidence of
comparison.
On a test basis, agree aged A/P
trial balance details from the old
(batch) system to the new (online)
system for vendors and in total.
Conduct cutoff tests, for receiving
reports and vendor invoices.
Same as for tests of controls.
Payments Cycle-33
Problem 16-12, Page 529
• In testing the cutoff of accounts payable at the balance sheet
date, explain why it is important that the auditors coordinate
their tests with the physical observation of inventory. What
can the auditor do during the physical inventory to enhance
the likelihood of an accurate cutoff?
Payments Cycle-34
Problem 18-20, Page 634, Canadian 11th. Edition
You are the staff auditor testing the combined purchase and cash disbursements journal for a
small audit client. Internal control is regarded as reasonably effective, considering the number of
personnel.
The auditor in charge has decided that a sample of 80 items should be sufficient for this audit
because of excellent controls and gives you the following instructions:
1. All transactions selected must exceed $100.
2. At least 50 of the transaction items must be for purchases of raw materials because these
transactions are typically material.
3. It is not acceptable to include the same vendor in the sample more than once.
4. All vendors’ invoices that cannot be located must be replaced with new sample items.
5. Both cheques and supporting documents are to be examined for the same transactions.
6. The sample must be random, after modifications for instructions 1 through 5.
REQUIRED:
a. Evaluate each of these instructions for testing acquisition and cash disbursement
transactions.
b. Explain the difficulties of applying each of these instructions to attributes sampling.
Payments Cycle-35