2. Chapter 4 Learning Objectives
4-1 Identify the accounts and the classes of transactions in the
acquisition and payment cycle.
4-2 Describe the business functions and the related documents and
records in the acquisition and payment cycle.
4-3 Understand internal control, and design and perform tests of
controls and substantive tests of transactions for the acquisition
and payment cycle.
4-4 Describe the methodology for designing tests of details of
balances for accounts payable using the audit risk model.
4-2
3. Chapter 4 Learning Objectives
4-5 Design and perform substantive analytical procedures for
accounts payable.
4-6 Design and perform tests of details of balances for accounts
payable, including out-of-period liability tests.
4-7 Distinguish the reliability of vendors’ invoices, vendors’
statements, and confirmations of accounts payable as audit
evidence.
4-3
5. Accounts and classes of transactions in the
acquisition and payment cycle
There are three classes of transactions in the acquisition
and payment cycle:
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances and purchase
discounts
The typical accounts involved in the acquisition and payment
cycle are shown in Figure 18-1.
4-5
7. 4-7
OBJECTIVE 4-2
Describe the business functions and the related
documents and records in the acquisition and
payment cycle.
8. Business functions in the cycle and related
documents and records
There are four business functions involved in the acquisitions
and payment cycle: These business functions and the
related documents are detailed in Table 18-1.
1. Processing Purchase Orders—Includes a purchase
requisition which is used to request authorization for
goods or services and a purchase order which is used
for the order after it has been authorized.
2. Receiving Goods and Services—Includes a receiving
report which is prepared at the time the goods are
received.
4-8
9. Business functions in the cycle and related
documents and records(cont.)
3. Recognizing the Liability—Proper recognition requires
prompt and accurate recording. Documents that may
be involved:
• Vendor’s Invoice—Document from the vendor that shows the
amount owed for an acquisition.
• Debit Memo—Also from the vendor; indicates a reduction in
the amount owed.
• Voucher—A formal means of recording and controlling
acquisitions.
• Acquisitions Transaction File—Computer-generated file
including all acquisitions transactions.
4-9
10. Business functions in the cycle and related
documents and records(cont.)
3. Recognizing the Liability (cont.) Documents involved:
• Acquisitions Journal or Listing—Often referred to as the purchases
journal; includes vendor name, date, amount, and account
classification.
• Accounts Payable Master File—Records acquisitions, cash
disbursements, and acquisition returns and allowances for each
vendor.
• Accounts Payable Trial Balance—A listing of the amount owed each
vendor at a point in time.
• Vendor’s Statement—A document prepared monthly by the vendor
that indicates the beginning balance, acquisitions, returns and
allowances, payments to the vendor, and ending balance.
4-10
11. Business functions in the cycle and related
documents and records(cont.)
4. Processing and Recording Cash Disbursements—The payment for
goods and services represent a significant activity for all entities.
Documents that auditors examine associated with this activity:
• Check—Document used to pay for an acquisition; may be paper or
an electronic funds transfer (EFT).
• Cash Disbursements Transaction File—A computer-generated file
that includes all cash disbursement transactions processed during a
period.
• Cash Disbursements Journal or Listing—Includes all disbursement
transactions for a period.
4-11
13. 4-13
OBJECTIVE 18-3
Understand internal control, and design and perform tests of
controls and substantive tests of transactions for the acquisition
and payment cycle.
14. Methodology for designing tests of controls
and substantive tests of transactions
The most time-consuming accounts to verify by tests of details of
balances are accounts receivable, inventory, fixed assets, accounts
payable, and expense accounts. Four of these are directly related to
the acquisition and payment cycle.
– If the auditor can reduce the tests of details of the account
balances by using tests of controls and substantive tests of
transactions for acquisitions and cash disbursements, the time
saved can be dramatic.
The methodology for designing tests of controls and substantive tests
of transactions is illustrated in Figure 18-2.
4-14
16. Methodology for designing tests of controls and
substantive tests of transactions (cont.)
Understand Internal Control: The auditor gains an understanding
of internal control for the acquisition and payment cycle as part
of performing risk assessment procedures.
Assess Planned Control Risk: Key internal controls for the
business functions in this cycle are:
– Authorization of purchases
– Separation of asset custody from other functions
– Timely recording and independent review of transactions
– Authorization of payments
4-16
17. Methodology for designing tests of controls and
substantive tests of transactions (cont.)
Determine Extent of Tests of Controls:
– If the auditor intends to rely on controls to support a preliminary
control risk assessment below maximum, the auditor performs tests
of controls to obtain evidence that controls are operating
effectively.
Design Tests of Controls and Substantive Tests of Transactions
for Acquisitions:
– Key internal controls, common tests of controls, and common
substantive tests of transactions for each transaction-related
audit objective are summarized in Table 18-2 on page 612.
4-17
18. Methodology for designing tests of controls and
substantive tests of transactions (cont.)
Design Tests of Controls and Substantive Tests of Transactions for
Acquisitions (cont): Four of the six transaction-related audit
objectives should be examined more closely:
1. Recorded acquisitions are for goods and services received,
consistent with the best interests of the client (Occurrence).
2. Existing acquisitions are recorded (Completeness).
3. Acquisitions are accurately recorded (Accuracy).
4. Acquisitions are correctly classified (Classification).
4-18
19. Methodology for designing tests of controls and
substantive tests of transactions (cont.)
Design Tests of Controls and Substantive Tests of Transactions
for Cash Disbursements:
– Key internal controls, common tests of controls, and common substantive
tests of transactions for each transaction-related audit objective are
summarized in Table 18-3 on page 615.
Attributes Sampling for Tests of Controls and Substantive Tests
of Transactions: Important differences in acquisition and payment
cycle:
– a larger number of accounts involved in this cycle, including both income
statement and balance sheet accounts.
– more common for transactions to require significant judgment, such as
for leases and construction costs.
– dollar amounts of individual transactions in the cycle cover a wide range.
4-19
20. 4-20
OBJECTIVE 4-4
Describe the methodology for designing tests of details of
balances for accounts payable using the audit risk model.
21. Methodology for designing tests of details of
balances for accounts payable
Because all acquisition and payment cycle transactions typically
flow through accounts payable, it is critical to any audit.
The methodology for designing tests of details for accounts
payable is summarized in Figure 18-3.
• Identify Significant Risks and Assess the Risk of Material
Misstatement for Accounts Payable (Phase I).
• Set Performance Materiality (Phase I).
• Assess Control Risk and Design and Perform Tests of Controls
and Substantive Tests of Transactions (Phases I and II).
4-21
24. Design and perform substantive Analytical
Procedures (phase III)
The use of analytical procedures is as important in the
acquisition and payment cycle as it is in every other
cycle, especially for uncovering misstatements in
accounts payable.
Analytical procedures for the balance sheet and income
statement accounts in the acquisition and payment cycle
that are useful in uncovering areas in which additional
investigation is desirable are illustrated in Table 18-4.
4-24
26. 4-26
OBJECTIVE 4-6
Design and perform tests of details of balances for accounts
payable, including out-of-period liability tests.
27. Design and perform tests of details of
accounts payable balance (phase III)
The overall objective in the audit of accounts payable is to determine
whether the accounts payable balance is fairly stated and properly
disclosed.
Balance-related audit objectives and common tests of details of
balances procedures for accounts payable are included in Table 18-5.
Difference in the emphasis in auditing assets and liabilities: In
auditing assets, auditors are concerned about overstatements; for
liabilities, auditors are concerned about understatements.
2-27
29. Design and perform tests of details of accounts
payable balance (cont.)
Because auditors are concerned with understatement of liabilities, the
following tests are performed:
Out-of-Period Liability Tests: Also called search for unrecorded
accounts payable
– Examine underlying documentation for subsequent cash disbursements.
– Examine underlying documentation for bills not paid several weeks after
year-end.
– Trace receiving reports issued before year-end to related vendor’s
invoices.
– Trace vendor’s statements that show a balance due to the accounts
payable trial balance.
18-29
30. Design and perform tests of details of accounts
payable balance (cont.)
Out-of-Period Liability Tests (cont):
– Send confirmations to vendors with which the client does
business.
– Cutoff Tests—To determine whether transactions recorded a few
days before and after the balance sheet date are included in
the correct period.
– Relationship of cutoff to physical observation of inventory—
Cutoff tests must be coordinated with the physical observation
of inventory to determine that both the asset and liability are
recorded in the proper period.
– Inventory in Transit—Determine whether inventory in transit at
year-end was FOB destination or FOB origin.
18-30
32. Reliability of evidence
Distinction Between Vendors’ Invoices and Vendors’
Statements:
Vendors’ invoices and supporting documents provide reliable evidence
about individual transactions .
The vendor’s statement is superior for verifying accounts payable
because it includes the ending balance.
Difference between Vendors’ Statements and Confirmations:
– Vendors’ statements have been prepared by the vendor, but is
in the hands of the client.
– Confirmations (example shown in Figure 18-4) are sent by the
auditor and responses from the vendor are sent directly to the
auditor, and are therefore more reliable.
18-32
