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Chapter 11

Chapter 11. Audit of Acquisition Cycle and Inventory. Audit of the Acquisition Cycle. Five Phases in Acquisition and Payment Process Authorized requisition Authorized purchase Receipt of goods and services Approval for payment Cash disbursement . Authorized Purchase.

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Chapter 11

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  1. Chapter 11 Audit of Acquisition Cycle and Inventory

  2. Audit of the Acquisition Cycle • Five Phases in Acquisition and Payment Process • Authorized requisition • Authorized purchase • Receipt of goods and services • Approval for payment • Cash disbursement

  3. Authorized Purchase • Separate purchasing function • promotes efficiency and effectiveness • eliminates potential favoritism • reduces the opportunity for fraud • centralizes control in one function

  4. Testing Controls over Accounts Payable & Related Expenses • Attribute sampling for some criteria • Evidence of proper authorization • Expense reimbursements • Other non-business expenses

  5. Substantive Tests of Accounts Payable • Testing for completeness • Accounts payable confirmations • Testing subsequent disbursements • Analytical review of related expense accounts • Year-end cutoff tests • Review of contracts for purchase commitments.

  6. Audits of Expense Accounts • Detailed test of expense accounts • Analytical procedures of expense accounts

  7. Diversity of items High volume Various accounting valuation methods Obsolete inventory Audit of Inventory and Cost of Goods Sold • Inventory is a complex accounting and auditing area because of:

  8. Inventory • Audits of inventories are complex because: • Many frauds involve inflating inventory • Inventory easily transportable • Multiple locations • Difficulty identifying obsolete inventory • Defective inventory • Valuation • Returned goods • Diversity of products • Complex valuation methods

  9. Internal Controls for Inventory • Well-conceived inventory control system should ensure • all purchases authorized • accounting system ensures timely, accurate, complete recording • receipt of inventory properly accounted for • cost accounting system up to date • perpetual inventory system • inventory reviewed for obsolescence

  10. Internal Control for Inventory • Well-conceived inventory control system should ensure • management reviews and manages inventory • new product introduction is controlled • long term contracts are closely monitored

  11. Substantive Testing of Inventory and Cost of Goods Sold • Assertions and audit procedures for inventory: • Existence:complete year-end physical inventory • Completeness:cutoff tests • Rights:review of long term contracts etc. • Valuation:combination of direct tests & analytics • Disclosure:review GAAP guidelines and client unusual circumstances

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