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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 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • 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 Controls, Substantive Tests of Transactions, and Accounts Payable.

1. Acquisitions of goods and services

2. Cash disbursements

3. Purchase returns and allowances

and purchase discounts


Accounts in the acquisition and payment cycle
Accounts in the Acquisition Controls, Substantive Tests of Transactions, and Accounts Payable.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 acquisition and payment cycle1
Accounts in the Acquisition Controls, Substantive Tests of Transactions, and Accounts Payable.and Payment Cycle

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


Learning objective 2
Learning Objective 2 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Describe the business functions

  • and the related documents and

  • records in the acquisition and

  • payment cycle.


Classes of transactions and accounts
Classes of Transactions Controls, Substantive Tests of Transactions, and Accounts Payable.and 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 Transactions Controls, Substantive Tests of Transactions, and Accounts Payable.and Accounts

Cash disbursements:

  • Cash in bank (from cash disbursements)

  • Accounts payable

  • Purchase discounts


Business functions in the cycle
Business Functions in the Cycle Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Processing purchase orders

  • Receiving goods and services

  • Recognizing the liability

  • Processing and recording cash disbursements


Related documents and reports
Related Documents Controls, Substantive Tests of Transactions, and Accounts Payable.and Reports

Processing purchase orders:

  • Purchase requisition

  • Purchase order

Receiving goods and services:

  • Receiving report


Related documents and reports1
Related Documents Controls, Substantive Tests of Transactions, and Accounts Payable.and Reports

Recognizing the liability:

  • Vendor’s invoice

  • Debit memo

  • Voucher

  • Acquisitions transaction file


Related documents and reports2
Related Documents Controls, Substantive Tests of Transactions, and Accounts Payable.and Reports

Recognizing the liability:

  • Acquisitions journal or listing

  • Accounts payable master file

  • Accounts payable trial balance

  • Vendor’s statement


Related documents and reports3
Related Documents Controls, Substantive Tests of Transactions, and Accounts Payable.and Reports

Processing and recording cash disbursements:

  • Check

  • Cash disbursements transaction file

  • Cash disbursements journal or listing


Learning objective 3
Learning Objective 3 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • 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 Controls, Substantive Tests of Transactions, and Accounts Payable.

Internet-based technologies allow for electronic

linkages between suppliers and customers.

Information about products is available over

the Internet.


How e commerce affects the acquisition and payment cycle1
How E-Commerce Affects the Acquisition and Payment Cycle Controls, Substantive Tests of Transactions, and Accounts Payable.

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 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Understand internal control, and

  • design and perform tests of

  • controls and substantive tests

  • of transactions for the acquisition

  • and payment cycle.


Methodology for designing controls and substantive tests
Methodology for Designing Controls and Substantive Tests Controls, Substantive Tests of Transactions, and Accounts Payable.

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


Understand internal control
Understand Internal Control Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Study the client’s flowcharts

  • Review internal control questionnaires

  • Perform walk-through tests


Assess planned control risk
Assess Planned Control Risk Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Authorization of purchases

  • Separation of asset custody from

  • other functions

  • Timely recording and independent

  • review of transactions

  • Authorization of payments


Determine extent of testing of controls
Determine Extent of Testing Controls, Substantive Tests of Transactions, and Accounts Payable.of Controls

  • The auditor identifies the key internal controls

  • and weaknesses and assesses control risk

  • The auditor performs tests of controls to obtain

  • evidence that controls are operating effectively


Controls and substantive tests of transactions for acquisitions
Controls and Substantive Tests Controls, Substantive Tests of Transactions, and Accounts Payable.of Transactions for Acquisitions

  • Recorded acquisitions are for goods

  • and services received (occurrence)

  • Existing acquisitions are recorded

  • (completeness)

  • Acquisitions are accurately recorded

  • (accuracy)


Controls and substantive tests of transactions for acquisitions1
Controls and Substantive Tests Controls, Substantive Tests of Transactions, and Accounts Payable.of Transactions for Acquisitions

  • Acquisitions are correctly included

  • in the master files (posting and

  • summarization)

  • Acquisitions are correctly classified

  • (classification)

  • Acquisitions are recorded on the

  • correct dates (timing)


Attributes sampling
Attributes Sampling Controls, Substantive Tests of Transactions, and Accounts Payable.

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.


Important differences
Important Differences Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Larger number of transactions

  • Significant judgment

  • Wide range of dollar amount


Learning objective 5
Learning Objective 5 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Describe the methodology for

  • designing tests of details of

  • balances for accounts payable

  • using the audit risk model.


Methodology for designing tests of balances for accounts payable
Methodology for Designing Tests Controls, Substantive Tests of Transactions, and Accounts Payable.of Balances for Accounts Payable

Identify client business

risks affecting

accounts payable

Phase I

Set tolerable misstatement

and assess inherent risk

for accounts payable

Phase I

Assess control risk for

the acquisition and

payment cycle

Phase I


Methodology for designing tests of balances for accounts payable1
Methodology for Designing Tests Controls, Substantive Tests of Transactions, and Accounts Payable.of Balances for Accounts Payable

Design and perform

tests of controls and

substantive tests

of transactions

for the acquisition

and payment cycle

Phase II


Methodology for designing tests of balances for accounts payable2
Methodology for Designing Tests Controls, Substantive Tests of Transactions, and Accounts Payable.of Balances for Accounts Payable

Design and perform

analytical procedures

for accounts

payable balance

Phase III

Phase III

Design tests of

details of accounts

payable balance to

satisfy balance-

related audit

objectives

Audit procedures

Sample size

Items to select

Timing


Learning objective 6
Learning Objective 6 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Design and perform analytical

  • procedures for accounts payable.


Analytical procedures for the acquisition and payment cycle
Analytical Procedures for the Acquisition and Payment Cycle Controls, Substantive Tests of Transactions, and Accounts Payable.

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, nonvendor, and

interest-bearing payables

Classification misstatement

for nontrade liabilities


Analytical procedures for the acquisition and payment cycle1
Analytical Procedures for the Acquisition and Payment Cycle Controls, Substantive Tests of Transactions, and Accounts Payable.

Analytical procedure

Possible misstatement

Compare individual accounts

payable with previous years

Unrecorded or nonexistent

accounts, or misstatements

Calculate ratios, such as

purchases divided by accounts

payable, and accounts payable

divided by current liabilities

Unrecorded or nonexistent

accounts, or misstatements


Learning objective 7
Learning Objective 7 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • 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 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • 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 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • 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
Cutoff Tests Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Relationship of cutoff to physical

    observation of inventory

  • Inventory in transit

  • FOB destination

  • FOB origin


Learning objective 8
Learning Objective 8 Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Distinguish the reliability of

  • vendors’ invoices, vendors’

  • statements, and confirmations

  • of accounts payable as audit

  • evidence.


Reliability of evidence
Reliability of Evidence Controls, Substantive Tests of Transactions, and Accounts Payable.

  • Distinction between vendors’ invoices

  • and vendors’ statements

  • Difference between vendors’ statements

  • and confirmations


Sample size
Sample Size Controls, Substantive Tests of Transactions, and Accounts Payable.

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
Types of Audit Tests for the Controls, Substantive Tests of Transactions, and Accounts Payable.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

AP and

TDB

Audited

by AP

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS


Types of audit tests for the acquisition and payment cycle1
Types of Audit Tests for the Controls, Substantive Tests of Transactions, and Accounts Payable.Acquisition and Payment Cycle

Accounts

Payable

Acquisition

Assets

Acquisition

of assets

Audited by

TOC, STOT, and AP

Ending

balance

Audited by

AP and

TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS


End of chapter 19

End of Chapter 19 Controls, Substantive Tests of Transactions, and Accounts Payable.


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