audit of the acquisition and payments cycle

Audit of the Acquisition and Payments Cycle

An Overview of Functions, Documents, and Accounting Systems

• Starting point• Any Department

Accounts Payable

Purchasing

Prepare prenumbered Purchase Requisition Purchase Requisition

Purchase details

Payments Cycle-2

PURCHASE REQUISITION 28314

Okra Development Corp. Copy

To: Purchasing

From: Stockroom

Date: August 5, 201XShip by September 12, 201X

Quantity Number Description

10 Model 317 Roller Bearings

Stockroom Clerk Rita Silverstein

Payments Cycle-3

• Purchasing Department

Accounts Payable

Vendor

Determine Vendor, prepare prenumbered Purchase Order

Purchase RequisitionOriginating Department

Receiving

Originating Department

Payments Cycle-4

Okra Development Corp.8924 Bailey RoadSalem, OR 92117

Copy

Purchase Order 6-3378

Date:Ship By:Terms:

August 5, 201XSeptember 12, 201X2/10, n/30

FOB Shipping Point

To:

Faragut Sales, Inc.3812 Briar DriveSalem, Or 92115

Ship to Okra Development Corp.8924 Bailey Road, Salem, OR 92117

PR28314

Quantity Number Description Price Amount

10 Model 317 Roller Bearing for Model 3118 Ripper 48.00 480.00

Purchase order number must appear on all shipments and invoices.

Ordered By

Margaret Spangler

Payments Cycle-5

• Receiving Department

Accounts Payable

Purchasing

Count goods, match with Purchase Order, and prepare Receiving Report

Blind copy of

Purchase OrderPurchasing

Originating Department with goods

Filed until goods received along with invoice copy

Blind copy of

Purchase Order

Payments Cycle-6

Okra Development Corp.8924 bailey Road, Salem Or 92117

Receiving Report No. 8-09321

Carrier: Yellow Express 229-237441 Purchase Order: 6-3378

August 28, 201X Supplier: Faragut Sales, Inc.

Invoice No. D8-9912

Quantity Description Condition

10 Roller Bearings ok

Receiving Clerk Tony Morelli

Payments Cycle-7

Faragut Sales, Inc.3812 Briar Drive, Salem, OR 92115

D8-9912

SALES INVOICE

Sold to Shipped to Freight Bill No.

Okra Development Corp. 8924 Bailey Road 229-237441

8924 Bailey Road Salem, Or 92117

Salem, Or 92117 FOB Shipping Point

Invoice Date Date Shipped Terms Your Order No.

August 25, 201X August 20,201X 2/10,n/30 6-3378

Quantity We are pleased to serve you. Price Amount

10 Model 317 Roller Bearings 48.00 480.00

Payments Cycle-8

• Accounts Payable Department

Voucher Register to General Accounting

Compare. Then prepare Voucher and enter in Voucher Register

Purchase Requisition

Purchasing

To Cash Disbursements when due

Purchase Order

Receiving Report

Vendor’s Invoice

Originating Department

Receiving

Vendor

Payments Cycle-9

VOUCHER REGISTERPaid Credit Debit

Voucher No. Date Payee Date Cheque No. Vouchers Payable Amount Account No.

9-00018 Aug. 29/201X Faragut Sales, Inc. Sept. 4/201X 867 480.00 480.00 682

Voucher No. 9-00018

Amount 480.00

Vendor Faragut Sales Inc. Account No. 682

Invoice No. D8-9912 Terms 2/10, n/30

Due Date Sept. 4, 201X Net Amount 470.40

Receiving Report No. 8-09321 Mathematical Accuracy B.K.

Purchase Order No. 6-3378 Documents Reviewed J.S.

Purchase Requisition No. 28314 Account Code Approved F.Y.D

Payments Cycle-10

• Cash Disbursements Department

(1) Check prices, verify math and consistency between documents, prepare cheques and cheque register.

(2) Review documentation, sign cheques, and cancel vouchers

Cheque Cheque Register

To Vendor To General Accounting

From Accounts Payable

Payments Cycle-11

Managing Risk in the Payments Cycle

• Possible Errors

1. Cutoff errors

2. Consignment goods

3. Misclassification

4. Recording a transaction

Payments Cycle-12

Fraud in the Acquisition and Payment Cycle• Most frauds

• Management

• Three areas to look at:•Paying for fictitious purchases

•Receiving kickbacks

•Purchasing goods for personal use

Payments Cycle-13

Designing Tests of Controls for the Acquisition and Payment Cycle

•The type of audit procedures?•What is the sample size?

•Items to be selected? •Timing – when to do the procedures?

By assertion:

Payments Cycle-14

Attribute Sampling for Tests of Controls

• Attribute sampling is common in the area of tests of controls of acquisitions and payments.

• There can be a large number of accounts

• Stratification

• The following slides shows test of controls for acquisitions and payments

Payments Cycle-15

Acquisitions - Assertions and Test of ControlsExistence or Occurrence

• Recorded acquisitions are for goods and services received, consistent with the best interests of the client.1. Approval of acquisition

2. The voucher package

• Breakdown in control

Payments Cycle-16

Completeness

• Existing acquisition transactions are recorded.

1. Receiving reports are prenumbered and accounted for.

2. Prenumbering of the voucher


Payments Cycle-17

Accuracy

• Recorded acquisition transactions are accurate.

1. Batch totals of transactions are mathematically accurate and compared with computer batch summary reports

2. Transactions are approved for prices and discounts


Payments Cycle-18

• Classification• Acquisitions transactions are properly classified.

1. A good chart of accounts is necessary

2. Posting to the correct accounts


Payments Cycle-19

• Timing• Acquisition transactions are recorded on the correct

dates.

1. Transactions should be recorded as soon as possible

2. The transaction date should be the system date


Payments Cycle-20

• Posting and summarization• Acquisition transactions are properly included in the

vendor and inventory master files, and are properly summarized.

1. Reconciliation of accounts payable master file to the general ledger


Payments Cycle-21

Cash Disbursements - Assertions and Test of Controls• Occurrence

• Recorded cash disbursements are for goods and services actually received.

1. Adequate segregation of duties

2. Examination of all supporting documentation prior to payment

3. Approval of payment shown on supporting documents at the time cheques are signed.


Payments Cycle-22

PURCHASE REQUISITION 28314

Okra Development Corp. Copy

Okra Development Corp.8924 Bailey RoadSalem, OR 92117

Copy

Purchase Order 6-3378

Date:Ship By:Terms:

August 5, 201XSeptember 12, 201X2/10, n/30

FOB Shipping Point

Okra Development Corp.8924 bailey Road, Salem Or 92117

Receiving Report No. 8-09321

Faragut Sales, Inc.3812 Briar Drive, Salem, OR 92115

D8-9912

SALES INVOICEVoucher No. 9-00018

Amount 480.00

Vendor Faragut Sales Inc. Account No. 682

Invoice No. D8-9912 Terms 2/10, n/30

Due Date Sept. 4, 201X Net Amount 470.40

Receiving Report No. 8-09321 Mathematical Accuracy B.K.

Purchase Order No. 6-3378 Documents Reviewed J.S.

Purchase Requisition No. 28314 Account Code Approved F.Y.D

PAID

Payments Cycle-23

CHEQUE REGISTERVoucher Vouchers Purchase Cash

Payee Cheque No. No. Date Payable Dr. Discounts Cr Cr

Faragut Sales, Inc 867 9-00018 Sept. 4, 201X 480.00 9.60 470.40

OKRA DEVELOPMENT CORP.8924 Bailey Road, Salem, OR 92117

867

Sept. 4, 201X

Pay to the order of Faragut Sales, Inc. $474.40

Four hundred and seventy 40/100----------------- Dollars

Dewey LeeTHE BANKof OREGON

Treasurer

Payments Cycle-24

• Completeness• Existing cash disbursement transactions are

recorded.1. Cheques. Key control over cheques?

2. Cash disbursements journal.

3. Bank reconciliation

• Breakdown in controlPayments Cycle-25

5-31-1X Receipts Disbursements 6-30-1X

Balance per bank $11,800 b $18,300 b $21,200 b $8,900 b

Deposits in transit

May 31 500 (500) b

June 30 600 b 600 b

Outstanding cheques

May 31 (800) (800) j

June 30 400 (400)

NSF cheques (100) j (100) j

Cash balance $11,500 $18,300 r $20,700 d $9,100

Balance per books $11,320 L $18,200 L $21,710 L $8,810 L

Bank service charge

May (20) b (20) b

June 10 (10) b

Bank collection

May 200 b (200)

June 300 300 b

Cash balance $11,500 $18,300 r $20,700 d $9,100

^ ^ ^ ^

^ Footed d Traced to cash disbursements journal

b Traced to bank statement L Traced to general ledger

r Traced to cash receipts journal j Customer’s NSF cheque redeposited on July 8 and cleared

Alpha Bravo Company

Proof of Cash

For the Month of June 201X

Prepared by GHY Dated 8/7/1XReviewed by

Payments Cycle-26

• Accuracy• Recorded cash disbursement transactions are

accurate.1. Check the calculations

2. Bank reconciliation


Payments Cycle-27

• Classification• Cash disbursement transactions are properly

classified.1. Chart of accounts

2. Checking the classification


Payments Cycle-28

• Timing• Cash disbursement transactions are recorded on

the correct dates.1. The date of the transaction

2. Recording of transactions


Payments Cycle-29

• Posting and Summarization• Cash disbursement transactions are properly

included in the vendor master file and properly summarized.

1. Vendor master file

2. Detail tie-in


Payments Cycle-30

System Conversions

• System conversions arise when

• For example

Payments Cycle-31

Impact of System Conversion

• When an organization changes an entire system or a set of systems, there are three issues that the auditor needs to address:– A new system of internal controls

– The auditor will need to audit

– The auditor will need to

• An example of an accounts payable conversion from batch to online

Payments Cycle-32

Conversion Tests of Controls and Tests of Detail

Key internal control Common test of control Common test of details

Existence:Must have only authorized vendiors with the actual balances. Thus agree vendor file details for each vendor from the new (online) system to the old (batch) system.

Review vendor file listings for evidence of agreement.

On a test basis, agree vendor file details for vendors from the new (online) system to the old (batch) system.

Completeness & Accuracy:All vendor balances at date of conversion are included. Thus agree aged accounts payable trial balance details from the old (batch) system to the new (online) system for each vendor and in total.

Review aged accounts payable trial balance listings for evidence of comparison.

On a test basis, agree aged A/P trial balance details from the old (batch) system to the new (online) system for vendors and in total.

Cutoff:Information needs to be recorded in the appropriate system and is not omitted. Thus procedures must exist to ensure appropriate cutoff of transactions.

Conduct cutoff tests, for receiving reports and vendor invoices.

Same as for tests of controls.

Payments Cycle-33

Problem 16-12, Page 529

• In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that the auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelihood of an accurate cutoff?

Payments Cycle-34

You are the staff auditor testing the combined purchase and cash disbursements journal for a small audit client. Internal control is regarded as reasonably effective, considering the number of personnel.

The auditor in charge has decided that a sample of 80 items should be sufficient for this audit because of excellent controls and gives you the following instructions:

1.All transactions selected must exceed $100.2.At least 50 of the transaction items must be for purchases of raw materials because these

transactions are typically material.3.It is not acceptable to include the same vendor in the sample more than once.4.All vendors’ invoices that cannot be located must be replaced with new sample items.5.Both cheques and supporting documents are to be examined for the same transactions.6.The sample must be random, after modifications for instructions 1 through 5.

REQUIRED:a.Evaluate each of these instructions for testing acquisition and cash disbursement

transactions.b.Explain the difficulties of applying each of these instructions to attributes sampling.

Problem 18-20, Page 634, Canadian 11th. Edition

Payments Cycle-35