AUDITING AND ASSURANCE SERVICES

IN MALAYSIA

TOPIC 9: AUDIT OF PURCHASE AND PAYMENTS

CYCLE + ACCOUNT RECEIVABLES

References: Chapter 9

AUD390 2011

LEARNING OUTCOMES Overview of the accounts & classes of

transactions Business functions &documents Financial report assertions Major internal control & related audit

procedures Substantive tests for account payable

AUD390 2011

AUD390 AUDITING DIA

AUDIT OF PURCHASEAND PAYMENT CYCLE

OVERVIEW OFPURCHASE &

PAYMENT CYCLE

KEY CONTROLACTIVITIES

TYPES OF AUDITTESTS PERFORMED

OVERVIEW OF PURCHASE & PAYMENT CYCLE

Objective to audit:To evaluate whether the account affected

by the purchase of goods and services and the cash payment for those purchased are fairly presented in accordance with generally accepted accounting principles

AUD390 AUDITING DIA

ACCOUNTS IN THE CYCLE

Cash Purchase: Cash/Bank Acc vs. Purchase Acc

Credit Purchase: Acc Payable vs. Purchase Acc

Purchase Return & Allowance: Purchase Return Acc vs. Acc Payable vs. Cash/Bank Acc

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CLASSES OF TRANSACTIONS

1. Acquisition / Purchase of goods & services2. Cash disbursements3. Purchase returns and allowances and

purchase discounts

AUD390 AUDITING DIA

AUD390 AUDITING DIA

CLASSES OF TRANSACTIONS

ACCOUNTS BUSINESS FUNCTIONS

DOCUMENTS & RECORDS

1. Acquisition /Purchase InventoryProperty, Plant & EquipmentPrepaid ExpensesLeasehold ImprovementsAccounts PayableManufacturing ExpensesSelling ExpensesAdministrative Expenses

1. Processing purchase order

2. Receiving goods & services

3. Recognizing the liability

Purchase requisitionPurchase orderReceiving report

Acquisition transaction fileAcquisitions journal or listingVendor’s invoiceDebit memoVoucherAccounts payable master fileAccounts payable trial balanceVendor’s statement

2. Cash disbursements/ Payment

Cash in bankAccounts PayablePurchase Discount

4. Processing & recording cash disbursements

ChequeCash disbursements transaction fileCash disbursements journal or listing

KEY CONTROL ACTIVITIES

1. Authorization of purchases2. Separation of asset custody from other

functions3. Timely recording4. Independent review of transaction5. Authorization of payment

AUD390 AUDITING DIA

1. AUTHORIZATION OF PURCHASES Purpose:

To ensure that the goods & services purchase are for authorized company purposes

To avoid the purchase of excessive or unnecessary items

E.g. Established approval authority i.e.

purchase of capital assets above RM1 million may require approval from BOD

AUD390 AUDITING DIA

CONT… Issued relevant documents to authorize

the transaction occur i.e. After the purchase requisition have

been approved, a purchase order to purchase the good must be initiated

Purchase order issued should be prenumbered and should include sufficient column and spaces to minimize the likelihood of unintentional omission on the form when goods are ordered

AUD390 AUDITING DIA

2. SEPARATION OF ASSET CUSTODY FROM OTHER FUNCTIONS

Separate the receiving department, storeroom unit and accounting function

To prevent theft or misuse of goods

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3. TIMELY RECORDING Method of recording:

Upon the receipt of the goods & services OR

Upon the vendor’s invoice is received Proper recording involves verifying goods

received against relevant documents i.e. details on the purchase order, the receiving report & vendor’s invoice, to determine all information are correct

AUD390 AUDITING DIA

4. INDEPENDENT REVIEW OF TRANSACTION

Independent party check on information recorded in the system is required to ensure proper procedure of record keeping

AUD390 AUDITING DIA

5.AUTHORIZATION OF PAYMENT Establish List of Approval authority

Different ranking of personnel responsible to approve different amount of payment

E.g.

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Amount of Payment (RM)

Approval Authority

Above RM1,000,000

Board of Directors

500,000 – 1,000,000

Senior Managers

100,000 – 500,0000

Head of Administration

Department

CONT… Separation of responsibilities between

those:Recording the transactionPreparer of the chequeApproval of the payment

Proper documentationCheque should be in sequence of numberPrinted on special paper that makes it

difficult to alter the payee or amountEstablish a special physical control over

blank, voided and signed chequeAUD390 AUDITING DIA

AUDIT OF ACCOUNT PAYABLES

Using Tests of Details of Balance1. Detail Tie-in2. Existence3. Completeness4. Accuracy5. Classification6. Cutoff7. Obligations8. Presentation and disclosures

AUD390 AUDITING DIA

ACCOUNTS PAYABLEDETAIL TIE-IN

To determine:Account Payable (AP) in the AP list agree with

related master fileThe total is correctly added, and agrees with the

general ledger (GL) Examples of Audit Tests:

Re-add the total of AP listsTrace the total to GL

AUD390 AUDITING DIA

ACCOUNTS PAYABLEEXISTENCE

To determine:AP is the AP List exist

Examples of Audit Tests:Trace from AP List to vendors’ invoices and

statementsConfirm AP, emphasizing large and unusual

amounts

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ACCOUNTS PAYABLECOMPLETENESS

To determine:Existing AP are included in the AP list

Examples of Audit Tests:Perform out-of-period liability tests

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ACCOUNTS PAYABLEACCURACY

To determine:Account Payable (AP) in the AP list are accurate

Examples of Audit Tests:Trace from AP List to vendors’ invoices and

statements

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ACCOUNTS PAYABLECLASSIFICATION

To determine:Account Payable (AP) in the AP list are

properly classified Examples of Audit Tests:

Review the list and master file for related parties, notes or other interest-bearing liabilities, long term liabilities and debit balances

AUD390 AUDITING DIA

ACCOUNTS PAYABLECUTOFF

To determine:Transactions in the acquisition and payment

cycle are recorded in the proper period Examples of Audit Tests:

Perform out-of-period liability testsPerform detailed tests as part of physical

observation of inventoryTest for inventory in transit

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ACCOUNTS PAYABLEOBLIGATIONS

To determine:The company has an obligation to pay the

liabilities included in accounts payable Examples of Audit Tests:

Examine vendors’ statements and confirm accounts payable

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ACCOUNT PAYABLESPRESENTATION &

DISCLOSURE To determine:

Accounts in the acquisition and payment cycle are properly presented and disclosed

Examples of Audit Tests:Review statements to make sure material

related parties and long-term and interest-bearing liabilities are segregated

AUD390 AUDITING DIA