Acquisition and Payment

1. Acquisition and Payment Transactions Acquisitions (purchases) Cash disbursements (payments) Purchase returns, allowances, discounts Cycle begins with: request for goods and ends with payment

2. Documents Purchase requisition Purchase order Receiving report Acquisitions transaction file Acquisitions journal vendor�s invoice debit memo voucher A/P Master file A/P Trial balance vendor�s statement check cash disbursements transaction file cash disbursement journal

3. Caution about e-commerce extranets allow online ordering P.O. �s issued on line exposure to computer security of other firms through extranets

4. Steps Understanding Internal Control-flowcharts, questionnaires and walkthrough Assess Planned Control Risk Authorization of Purchases General and Specific authorization Separation of Asset Custody from other functions Receiving, storeroom and accounting

5. Steps (continued) Assess Planned Control Risk Timely recording and independent review compare purchase order, receiving report, vendor�s invoice independent checks on performance Authorization of payments checks signed prenumbered checks cancel documents (invoice, P.O, receiving report)

6. Steps (continued) Determine extent of testing of controls To test or not to test Design Tests of Controls and Substantive Test of Transactions (Acquisitions) Existence purchase of personal items fraudulent transactions payment of officer�s memberships & vacations

7. Steps (Continued) Design Tests of Controls and Substantive Test of Transactions (Acquisitions) Completeness All goods received are recorded Accuracy quantity and unit costs in perpetual records Acquisitions are correctly classified Fixed assets repairs and maintenance Table 19-2

8. Design Tests of Controls and Substantive Test of Transactions (Cash Disbursements) See table 19-3

9. Designing Tests of Details of Balances Obligations for the acquisition of : raw materials equipment utilities repairs other services other goods

10. Steps Identify Client Business Risks Just-In-Time inventory purchasing e-commerce (sharing of information and systems) Set Tolerable Misstatement and Assess Inherent Risk large number of transactions (tolerable misstatement set high)

11. Steps Assess Control Risk and Design and Perform Tests of Controls and Substantive Tests of Transactions Receipt of goods promptly documented Prenumbered received reports Prenumbered vouchers promptly recorded Cash disbursements promptly paid and recorded accounts payable balances are reconciled with monthly vendor�s statements

12. Design and Perform Analytical Procedures See Table 19-4

13. Design and Perform Tests of Details of Accounts Payable Balance Emphasis is on completeness not existence realizable value objective is not applicable Concerned with clients obligation for payment rather than rights. If no obligation than payment should not be made

14. Details of Accounts Payable Out-of Period Liability Tests Examine underlying documentation for subsequent cash disbursements even if paid after year end were they a current year obligation? receiving reports, vendors invoice Examine underlying documentation for bills not paid several weeks after year end if unpaid well after year end were they a current year obligation? receiving reports, vendors invoice

15. Details of Accounts Payable Out-of Period Liability Tests (continued) Trace Receiving Reports Issued before year-end to related vendor�s invoices tests for unrecorded accounts payable Trace Vendor�s Statements that show a balance due to the accounts payable trial balance This is to try to catch whole vendors left of the A/P Trial Balance Send Confirmations to Vendors which the client does business with zero balance

16. Details of Accounts Payable Cutoff Tests Relationship of Cutoff to Physical Inventory last receiving report number should also be included in A/P and in inventory Inventory in Transit FOB destination and FOB origin See Table 19-5

17. Accounts Payable Detail Tests Reliability of Evidence vendors invoices and vendors statements vendors statement is better evidence because it comes from the vendor and includes the ending balance vendors statements and confirmations confirmations are better evidence since they are delivered directly to the auditor