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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition PowerPoint PPT Presentation


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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University. Chapter 15 – Auditing the Expenditure Cycle. Chapter Overview.

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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition

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Modern Auditing:

Assurance Services and the Integrity of Financial Reporting, 8th Edition

William C. Boynton

California Polytechnic State University at San Luis Obispo

Raymond N. Johnson

Portland State University

Chapter 15 – Auditing the Expenditure Cycle


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Chapter Overview


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The Expenditure Cycle


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Develop Audit Objectives


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Understanding the Entity and Environment


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Inherent Risk, Including the Risk of Fraud

  • Management Misstatement of Expenditures

    • Understate expenses

    • Understate payables

  • Other Misstatement Factors

    • High volume of transactions

    • Unauthorized purchases

    • Misappropriation

    • Duplication of payments


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Analytical Procedures


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Consideration of Internal Control Components

  • Control Environment

  • Risk Assessment

  • Information and Communication

  • Monitoring


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Study Break

  • The expenditure cycle consists of all of the following activities, except:

    • Purchase transactions

    • Cash disbursement transactions

    • Sales transactions

    • Purchase adjustments

      C. Sales transactions


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Study Break

  • This analytical procedure calculates the average number of days it takes to retire accounts payables.

    • Current ratio

    • Quick ratio

    • Cost of Goods Sold to Accounts Payable

    • Accounts Payable Turn Days

      D. Accounts Payable Turn Days


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Purchase Transactions – Documents and Records

  • Purchase requisition

  • Purchase order

  • Approved vendor master file

  • Open purchase order file

  • Receiving report

  • Receiving file

  • Vendor Invoice


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Purchase Transactions – Common Documents and Records

  • Voucher

  • Exception reports

  • Voucher summary

  • Voucher register

  • Purchase transactions file

  • Accounts payable master file

  • Suspense files


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Purchase Transactions – Functions and Control Activities

  • Initiating Purchases

    • Placing vendors on an authorized vendor list

    • Requisitioning goods and services

    • Preparing purchase orders

  • Receipt of Goods and Services

    • Receiving the goods

    • Storing goods received for inventory

    • Returning goods to vendor

  • Recording Liabilities


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Systems Flowchart – Purchase Transaction


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Systems Flowchart – Purchase Transaction


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Systems Flowchart – Purchase Transaction


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Study Break

  • This item is a written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order.

    • Purchase requisition

    • Purchase order

    • Receiving report

    • Receiving file

      B. Purchase order


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Study Break

  • This function of processing of purchase transaction includes placing vendors on an authorized vendor list and preparing purchase orders.

    • Initiating purchases

    • Receipt of goods and services

    • Recording liabilities

    • Paying liabilities

      A. Initiating purchases


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Cash Disbursement Transactions– Common Documents and Records

  • Check

  • Check Summary

  • Cash Disbursements Transaction File

  • Cash Disbursements Journal or Check Register


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Cash Disbursement Transactions- Function and Control Activities

  • Computerized System

    • Paying the Liability

    • Recording the Disbursement

  • Manual System

    • Paying the Liability

    • Recording the Disbursement


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Systems Flowchart – Cash Disbursement Transactions


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Study Break

  • This record is a report of total checks issued in a batch or during a day.

    • Check

    • Check summary

    • Cash disbursements transaction file

    • Check register

      B. Check summary


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Purchase Adjustment Transactions– Common Documents and Records

  • Purchase Return Authorization

  • Shipping Report

  • Debit Memo


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Purchase Adjustment Function and Controls

  • Purchase Returns and Allowances

  • Other Controls

  • Tests of Controls


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Substantive Tests of Accounts Payable Balances

  • Determining Detection Risk for Tests of Details

    • Existence and Occurrence

    • Completeness

    • Rights and Obligations

    • Valuation and Allocation

    • Presentation and Disclosure


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Designing Substantive Tests

  • Initial Procedures

  • Analytical Procedures


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Designing Substantive Tests

  • Tests of Details of Transactions

    • Vouch Recorded Payables to Supporting Documentation

    • Perform Cutoff Tests

      • Purchases cutoff tests

      • Cash disbursement cutoff tests

      • Purchase return cutoff tests

    • Perform Search for Unrecorded Payables

      • Subsequent payments


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Designing Substantive Tests

  • Tests of Details of Balances

    • Accounts Payable Confirmations

    • Reconcile Unconfirmed Payables to Vendor Statements

  • Tests of Details of Disclosures


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Study Break

  • This is a report prepared on the shipment of goods to vendors showing the kinds and quantities of goods shipped.

    • Purchase Return Authorization

    • Shipping Report

    • Debit Memo

    • Check Summary

      B. Shipping Report


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Study Break

  • These items include all checks issued or vouchers paid after the balance sheet date.

    • Purchase return cutoff tests

    • Check summary

    • Subsequent payments

    • Confirmation of accounts payable

      C. Subsequent payments


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