14 - 1 ©2003 prentice hall business publishing, essentials of auditing 1/e, arens/elder/beasley...

14 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley

Audit of the Acquisition andPayment Cycle: Tests of Controls,Substantive Tests of Transactions,

and Accounts Payable

Chapter 14


Learning Objective 1

Identify the accounts and the

classes of transactions in the

acquisition and payment cycle.


Transactions in the Acquisitionand Payment Cycle

1. Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances

and purchase discounts


Accounts in the Acquisitionand Payment Cycle

Cash in Bank

Purchase Returnsand Allowances

PurchaseDiscounts

Raw MaterialPurchases

Property, Plant,and Equipment

PrepaidExpenses

Accounts PayableCash Acquisitionsdisbursements of goods and

services

Purchasereturns andallowances

Purchasediscounts


Accounts in the Acquisitionand Payment Cycle

Accounts PayableAcquisitionsof goods andservices

ManufacturingExpense Control

AdministrativeExpense Control

SubsidiaryaccountsRepair and maint.TaxesSuppliesFreight inUtilities

Selling ExpenseControl

SubsidiaryaccountsCommissionsTravel expenseDelivery expenseRepairsAdvertising

SubsidiaryAccountsSuppliesOfficers’ travelLegal feesAuditing feesTaxes



Describe the business functions

and the related documents

and records in the acquisition

and payment cycle.


Classes of Transactionsand Accounts

InventoryProperty, plant, and equipment

Prepaid expensesLeasehold improvements

Accounts payableManufacturing expenses

Selling and administrative expenses


Classes of Transactionsand Accounts

Cash in bank (from cash disbursements)Accounts payablePurchase discounts


Business Functionsin the Cycle

Processing purchase orders

Receiving goods and services

Recognizing the liability

Processing and recording cash disbursements


Documents and Records

Purchase requisition Purchase order

Receiving report

Processing purchase orders

Receiving goods and services



Acquisitions transaction file

Acquisitions journal or listing

Vendor’s invoice

Voucher

A/P trial balance

Debit memo

A/P master file

Vendor’s statement

Recognizing the liability



Cash disbursements transaction file

Check

Cash disbursements journal or listing

Processing and recording cash disbursements



Describe how e-commerce

affects the acquisition of

goods and services.


How E-Commerce Affects the Acquisition and Payment Cycle

Electronic data interchange (EDI) is theelectronic exchange of information between

companies and their suppliers and consumers.

Purchaseorders

Customerorders

Customers

EDI

Suppliers

EDI


How E-Commerce Affects the Acquisition and Payment Cycle

Some companies use extranets which linkthe intranets of two or more companies.

Other companies use business-to-business auctions hosted on the

Internet to negotiate purchases.

Information about products isavailable over the Internet.



Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for the

acquisition and payment cycle.


Understand Internal Control

The auditor gains an understanding of internalcontrol for the acquisition and payment

cycle by studying the client’s flowcharts,preparing internal control questionnaires,

and performing walk-through tests foracquisitions and cash disbursements.


Assess Planned Control Risk

Authorization of purchases

Separation of asset custodyfrom other functions

Timely recording andindependent review

of transactions

Authorization of payments


Evaluate Cost-Benefitof Testing Controls

The auditor identifies the key internal controlsand weaknesses and assesses control risk.

The auditor decides whether substantive testswill be reduced sufficiently to justify the cost

of performing tests of controls.


Controls and Substantive Tests ofTransactions for Acquisitions

Recorded acquisitions are for goods and servicesreceived, consistent with the best interests

of the client (existence).

Existing acquisitions are recorded (completeness).

Acquisitions are accurately recorded (accuracy).

Acquisitions are correctly classified (classification).


Controls and Substantive Tests ofTransactions for Acquisitions

Acquisition transactions are recorded on the correct dates (timing).

Acquisition transactions are properly includedin the accounts payable and inventory master

files and are properly summarized(posting and summarization).


Controls and Substantive Tests ofTransactions for Cash Disbursements

The assumption underlying these controlsand audit procedures is separate cash

disbursements and acquisitions journals.

The acquisitions and cash disbursementstests are typically performed concurrently.



Describe the methodology for

designing tests of details of

balances for accounts payable

using the audit risk model.


Identify client risks affecting accounts payable.

Methodology for Designing Testsof Details of Balances for A/P

Assess control risk and design and perform tests of controls and substantive

tests of transactions.

Set tolerable misstatement and assess inherent risk.



Design and perform analytical

procedures for accounts payable.


Analytical Procedures for the Acquisition and Payment Cycle

Analytical Procedure Possible MisstatementCompare acquisition- Misstatement ofrelated expense account accounts payablebalances with prior years. and expenses

Review list of accounts Classificationpayable for unusual, misstatement fornonvender, and interest- nontrade liabilitiesbearing payables.


Analytical Procedures for the Acquisition and Payment Cycle

Analytical Procedure Possible MisstatementCompare individual Unrecorded oraccounts payable with nonexistent accounts,previous years. or misstatementsCalculate ratios such as Unrecorded orpurchases divided by nonexistent accounts,accounts payable, and or misstatementsaccounts payable dividedby current liabilities.



Design and perform tests

of details of balances for

accounts payable, including

out-of-period liability tests.


Out-of-Period Liability Tests

Examine underlying documentation forsubsequent cash disbursements.

Examine underlying documentation for billsnot paid several weeks after the year end.

Trace receiving reports issued beforeyear-end to related vendors’ invoices.


Out-of-Period Liability Tests

Trace vendors’ statements that show a balancedue to the accounts payable trial balance.

Send confirmations to vendors with whichthe client does business.


Cutoff Tests

Relationship of cutoff to physicalobservation of inventory

Inventory in transit



Distinguish the reliability of

vendors’ invoices, vendors’

statements, and confirmations

of accounts payable

as audit evidence.


Reliability of Evidence

Distinction between vendors’invoices and vendors’ statements

Difference between vendors’statements and confirmations


Sample Size

Sample sizes for accounts payable tests varyconsiderably, depending on many factors.

Statistical sampling is less commonly usedfor the audit of accounts payable than for

accounts receivable.


End of Chapter 14

14 - 1 ©2003 prentice hall business publishing, essentials of auditing 1/e, arens/elder/beasley...

Documents

arenselderbeasley accounts

essentials of auditing

accounts cash

arenselderbeasley transactions

arenselderbeasley documents

liability slide

accounts payable chapter

services purchase returns