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Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions and Accounts Payable. Chapter 19. Learning Objective 1. Identify the accounts and the classes of transactions in the acquisition and payment cycle.

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Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions and Accounts Payable.

Chapter 19

learning objective 1
Learning Objective 1
  • Identify the accounts and the
  • classes of transactions in the
  • acquisition and payment cycle.
transactions in the acquisition and payment cycle
Transactions in the Acquisition and Payment Cycle

1. Acquisitions of goods and services

2. Cash disbursements

3. Purchase returns and allowances

and purchase discounts

accounts in the acquisition and payment cycle

Raw Material

Purchases

Cash in Bank

Accounts Payable

Cash

disbursements

Acquisitions

of goods and

services

Purchase Returns

and Allowances

Property, Plant

and Equipment

Purchase

returns and

allowances

Purchase

discounts

Purchase

Discounts

Prepaid

Expenses

Accounts in the Acquisitionand Payment Cycle
accounts in the acquisition and payment cycle1

Manufacturing Expense Control Account

Subsidiary accounts

Repair and maintenance

Taxes, Supplies

Freight in, Utilities

Accounts Payable

Selling Expense Control Account

Subsidiary accounts

Commissions

Travel, delivery expenses

Repairs, Advertising

Acquisitions

of goods and

services

Administrative Expense Control Account

Subsidiary accounts

Supplies, Officers’ travel

Legal fees

Auditing fees, Taxes

Accounts in the Acquisitionand Payment Cycle
learning objective 2
Learning Objective 2
  • Describe the business functions
  • and the related documents and
  • records in the acquisition and
  • payment cycle.
classes of transactions and accounts
Classes of Transactionsand Accounts

Acquisitions:

  • Inventory
  • Property, plant, and equipment
  • Prepaid expenses
  • Leasehold improvements
  • Accounts payable
  • Manufacturing expenses
  • Selling and administrative expenses
classes of transactions and accounts1
Classes of Transactionsand Accounts

Cash disbursements:

  • Cash in bank (from cash disbursements)
  • Accounts payable
  • Purchase discounts
business functions in the cycle
Business Functions in the Cycle

Processing purchase orders

Receiving goods and services

Recognizing the liability

Processing and recording cash disbursements

related documents and reports
Related Documents and Reports

Processing purchase orders

Purchase requisition

Purchase order

Receiving goods and services

Receiving report

related documents and reports1
Related Documents and Reports

Recognizing the liability

Acquisitions transaction file

Acquisitions journal or listing

Vendor’s invoice

Debit memo

Voucher

A/P master file

A/P trial balance

Vendor’s statement

related documents and reports2
Related Documents and Reports

Processing and recording cash disbursements

Check

Cash disbursements transaction file

Cash disbursements journal or listing

learning objective 3
Learning Objective 3
  • Describe how e-commerce
  • affects the acquisition of
  • goods and service.
how e commerce affects the acquisition and payment cycle
How E-Commerce Affects the Acquisition and Payment Cycle

Internet-based technologies

allow for electronic linkages

between suppliers and customers.

Suppliers

Customers

EDI

EDI

Customer

orders

Purchase

orders

how e commerce affects the acquisition and payment cycle1
How E-Commerce Affects the Acquisition and Payment Cycle

Information about products is available over

the Internet.

Some companies use extranets which allow

companies to communicate and conduct

business in a secure setting.

Other companies use business-to-business

auctions hosted on the Internet to

negotiate purchases.

learning objective 4
Learning Objective 4
  • Understand internal control, and
  • design and perform tests of
  • controls and substantive tests
  • of transactions for the acquisition
  • and payment cycle.
methodology for designing tests of balances accounts receivable

Understand internal

control – acquisitions

and cash disbursements.

Assess planned control

risk – acquisitions and

cash disbursements.

Determine extent of testing controls.

Design tests of controls and substantive tests of

transactions for acquisitions and cash disbursements

to meet transaction-related audit objectives.

Audit

procedures

Sample

size

Items to

select

Timing

Methodology for Designing Tests of Balances: Accounts Receivable
understand internal control
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.

assess planned control risk
Assess Planned Control Risk

Authorization of purchases

Separation of asset custody from

other functions

Timely recording and independent

review of transactions

Authorization of payments

evaluate cost benefit of testing controls
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.

controls and substantive tests of transactions for acquisitions
Controls and Substantive Tests ofTransactions 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).

attributes sampling
Attributes Sampling

Because of the importance of tests of controls

and substantive tests of transactions for

acquisitions and cash disbursements,

the use of attributes sampling is

common in this audit area.

learning objective 5
Learning Objective 5
  • Describe the methodology for
  • designing tests of details of
  • balances for accounts payable
  • using the audit risk model.
methodology for designing tests of details of balances for a r
Methodology for Designing Testsof Details of Balances for A/R

Phase I

Identify client business risks affecting accounts

payable.

Set tolerable misstatement and assess inherent

risk for accounts payable.

Assess control risk for accounts payable.

methodology for designing tests of details of balances for a r1
Methodology for Designing Testsof Details of Balances for A/R

Phase II

Design and perform tests of controls and

substantive tests of transactions for the

acquisition and payment cycle.

methodology for designing tests of details of balances for a r2

Design tests of details of accounts payable

balance to satisfy balance-related audit objectives.

Audit

procedures

Sample

size

Items to

select

Timing

Methodology for Designing Testsof Details of Balances for A/R

Phase III

Design and perform analytical procedures for

the acquisition and payment cycle.

learning objective 6
Learning Objective 6
  • Design and perform analytical
  • procedures for accounts payable.
analytical procedures for the acquisition and payment cycle

Analytical procedure

Possible misstatement

Compare acquisition-related

expense account balances

with prior years.

Misstatement of accounts

payable and expenses.

Review list of accounts payable

for unusual, nonvender, and

interest-bearing payables.

Classification

misstatement

for nontrade liabilities.

Analytical Procedures for the Acquisition and Payment Cycle
analytical procedures for the acquisition and payment cycle1

Calculate ratios, such as

purchases divided by accounts

payable, and accounts payable

divided by current liabilities.

Unrecorded or

nonexistent accounts,

or misstatements.

Analytical Procedures for the Acquisition and Payment Cycle

Analytical procedure

Possible misstatement

Compare individual accounts

payable with previous years.

Unrecorded or

nonexistent accounts,

or misstatements.

learning objective 7
Learning Objective 7
  • Design and perform tests of
  • details of balances for accounts
  • payable, including out-of-period
  • liability tests.
out of period liability tests
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.

out of period liability tests1
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.

cutoff tests

FOB destination

FOB origin

Cutoff Tests

Relationship of cutoff to physical

observation of inventory

Inventory in transit

learning objective 8
Learning Objective 8
  • Distinguish the reliability of
  • vendors’ invoices, vendors’
  • statements, and confirmations
  • of accounts payable as audit
  • evidence.
reliability of evidence
Reliability of Evidence

Distinction between vendors’

invoices and vendors’ statements.

Difference between vendors’

statements and confirmations.

sample size
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.

types of audit tests for the acquisition and payment cycle

Cash in

Bank

Accounts

Payable

Acquisition

Expenses

Payments

Expenses

Audited by

TOC,STOT, and AP

Audited by

TOC, STOT, and AP

Ending

balance

Ending

balance

Audited by APand TDB

TOC + STOT + AP + TDB

= Sufficient competent evidence per GAAS

Types of Audit Tests for theAcquisition and Payment Cycle
types of audit tests for the acquisition and payment cycle1

Accounts

Payable

Acquisition

Assets

Acquisition

of assets

Audited by

TOC, STOT, and AP

Ending

balance

Audited by

APand TDB

TOC + STOT + AP + TDB

= Sufficient competent evidence per GAAS

Types of Audit Tests for theAcquisition and Payment Cycle
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