Audit of the acquisition and payment cycle

1. Audit of the Acquisition
and Payment Cycle
Chapter 18
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2. Learning Objective 1
Identify the accounts and the
classes of transactions in the
acquisition and payment cycle.
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3. Transactions in the Acquisition
and Payment Cycle
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances
and purchase discounts
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4. Accounts in the Acquisition
and Payment Cycle
Cash in Bank
Purchase Returns
and Allowances
Purchase
Discounts
Raw Material
Purchases
Property, Plant,
and Equipment
Prepaid
Expenses
Accounts Payable
Cash Acquisitions
disbursements of goods and
services
Purchase
returns and
allowances
Purchase
discounts
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5. Accounts in the Acquisition
and Payment Cycle
Accounts Payable
Acquisitions
of goods and
services
Manufacturing
Expense Control
Administrative
Expense Control
Subsidiary
accounts
Repair and
maint.
Taxes
Supplies
Freight in
Utilities
Selling Expense
Control
Subsidiary
accounts
Commissions
Travel expense
Delivery expense
Repairs
Advertising
Subsidiary
Accounts
Supplies
Officers’
travel
Legal fees
Auditing fees
Taxes
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6. Learning Objective 2
Describe the business functions
and the related documents
and records in the acquisition
and payment cycle.
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7. Classes of Transactions
and Accounts
Inventory
Property, plant, and equipment
Prepaid expenses
Leasehold improvements
Accounts payable
Manufacturing expenses
Selling and administrative expenses
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8. Classes of Transactions
and Accounts
Cash in bank (from cash disbursements)
Accounts payable
Purchase discounts
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9. Business Functions
in the Cycle
Processing Purchase Orders
Receiving Goods and Services
Recognizing the Liability
Processing and Recording Cash Disbursements
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10. Related Documents
and Reports
Processing Purchase Orders
Purchase requisition Purchase order
Receiving Goods and Services
Receiving report
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11. Related Documents
and Reports
Recognizing the Liability
Acquisitions transaction file
Acquisitions journal or listing
Vendor’s invoice
Voucher
A/P trial balance
Debit memo
A/P master file
Vendor’s statement
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12. Related Documents
and Reports
Processing and Recording Cash Disbursements
Check
Cash disbursements transaction file
Cash disbursements journal or listing
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13. Learning Objective 3
Describe how e-commerce
affects the acquisition of
goods and services.
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14. How E-Commerce Affects the
Acquisition and Payment Cycle
Electronic data interchange (EDI) is the
electronic exchange of information between
companies and their suppliers and consumers.
Suppliers Customers
EDI EDI
Purchase
orders
Customer
orders
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15. How E-Commerce Affects the
Acquisition and Payment Cycle
Information about products is
available over the Internet.
Some companies use extranets which link
the intranets of two or more companies.
Other companies use business-to-
business auctions hosted on the
Internet to negotiate purchases.
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16. Learning Objective 4
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for the
acquisition and payment cycle.
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17. Methodology for Designing Tests
of
Balances – Accounts Receivable
Understand internal control –
acquisitions and cash disbursements.
Assess planned control risk –
acquisitions and cash disbursements.
Evaluate cost-benefit
of testing controls.
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18. Methodology for Designing Tests
of
Balances – Accounts Receivable
Design tests of controls
and substantive tests
of transactions for
acquisitions and cash
disbursements to meet
transaction-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
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19. Understand Internal Control
The auditor gains an understanding of internal
control for the acquisition and payment
cycle by studying the client’s flowcharts,
preparing internal control questionnaires,
and performing walk-through tests for
acquisitions and cash disbursements.
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20. Assess Planned Control Risk
Authorization of purchases
Separation of asset custody
from other functions
Timely recording and
independent review
of transactions
Authorization of payments
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21. Evaluate Cost-Benefit of
Testing Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk.
The auditor decides whether substantive tests
will be reduced sufficiently to justify the cost
of performing tests of controls.
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22. Controls and Substantive Tests
of
Transactions for Acquisitions
Recorded acquisitions are for goods and services
received, consistent with the best interests
of the client (existence).
Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy).
Acquisitions are correctly classified (classification).
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23. Controls and Substantive Tests of
Transactions for Cash
Disbursements
The assumption underlying these controls
and audit procedures is separate cash
disbursements and acquisitions journals.
The acquisitions and cash disbursements
tests are typically performed concurrently.
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24. Learning Objective 5
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
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25. Methodology for Designing
Tests
of Details of Balances for A/P
Phase I
Set tolerable misstatement and assess inherent risk.
Identify client risks affecting
accounts payable.
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26. Methodology for Designing
Tests
of Details of Balances for A/P
Phases I and II
Assess control risk and design and
perform tests of controls and substantive
tests of transactions.
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27. Methodology for Designing
Tests
of Details of Balances for A/P
Phase III
Design and perform analytical procedures.
Design and perform tests of details of
accounts payable balance.
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28. Learning Objective 6
Design and perform analytical
procedures for accounts payable.
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29. Analytical Procedures for the
Acquisition and Payment Cycle
Analytical Procedure Possible Misstatement
Compare acquisition- Misstatement of
related expense account accounts payable
balances with prior years. and expenses
Review list of accounts Classification
payable for unusual, misstatement for
nonvender, and interest- nontrade liabilities
bearing payables.
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30. Analytical Procedures for the
Acquisition and Payment Cycle
Analytical Procedure Possible Misstatement
Compare individual Unrecorded or
accounts payable with nonexistent accounts,
previous years. or misstatements
Calculate ratios such as Unrecorded or
purchases divided by nonexistent accounts,
accounts payable, and or misstatements
accounts payable divided
by current liabilities.
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31. Learning Objective 7
Design and perform tests
of details of balances for
accounts payable, including
out-of-period liability tests.
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32. Out-of-Period Liability Tests
Examine underlying documentation for
subsequent cash disbursements.
Examine underlying documentation for bills
not paid several weeks after the year end.
Trace receiving reports issued before
year-end to related vendors’ invoices.
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33. Out-of-Period Liability Tests
Trace vendors’ statements that show a balance
due to the accounts payable trial balance.
Send confirmations to vendors with which
the client does business.
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34. Cutoff Tests
 Relationship of cutoff to physical
observation of inventory
 Inventory in transit
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35. Learning Objective 8
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable
as audit evidence.
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36. Reliability of Evidence
Distinction between vendors’
invoices and vendors’ statements
Difference between vendors’
statements and confirmations
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37. Sample Size
Sample sizes for accounts payable tests vary
considerably, depending on many factors.
Statistical sampling is less commonly used
for the audit of accounts payable than for
accounts receivable.
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38. Types of Audit Tests for the
Acquisition and Payment Cycle
Cash in
Accounts
Bank
Payable
Acquisition
Expenses
Payments Expenses
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by
AP and TDP
Audited by
TOC, STOT, and AP
TOC + STOT + AP + TDP
Audited by
AP
= Sufficient competent evidence per GAAS
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39. Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Acquisition
Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and TDP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
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40. End of Chapter 18
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