Topic 9 audit of purchase and payment cycle + acc payables

1. TOPIC 9: AUDIT OF PURCHASE AND
PAYMENTS CYCLE + ACCOUNT
PAYABLES
References: Chapter 18
AUD390 2014
AUDITING AND ASSURANCE
SERVICES
IN MALAYSIA

2. LEARNING OUTCOMES
AUD390 2014
 OVERVIEW OF THE ACCOUNTS & CLASSES OF
TRANSACTIONS
 BUSINESS FUNCTIONS &DOCUMENTS
 FINANCIAL REPORT ASSERTIONS
 MAJOR INTERNAL CONTROL & RELATED AUDIT
PROCEDURES
 SUBSTANTIVE TESTS FOR ACCOUNT PAYABLE

3. OVERVIEW OF PURCHASE &
PAYMENT CYCLE
AUD390 2014
 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

4. Accounts In The Cycle
AUD390 2014
 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

5. Classes Of Transactions
AUD390 2014
1. Acquisition / Purchase of goods & services
2. Cash disbursements
3. Purchase returns and allowances and purchase
discounts

6. AUD390 2014
CLASSES OF
TRANSACTIONS
ACCOUNTS BUSINESS
FUNCTIONS
DOCUMENTS &
RECORDS
1. Acquisition
/Purchase
Inventory
Property, Plant &
Equipment
Prepaid Expenses
Leasehold
Improvements
Accounts Payable
Manufacturing
Expenses
Selling Expenses
Administrative
Expenses
1. Processing
purchase order
2. Receiving
goods &
services
3. Recognizing the
liability
Purchase requisition
Purchase order
Receiving report
Acquisition
transaction file
Acquisitions journal
or listing
Vendor’s invoice
Debit memo
Voucher
Accounts payable
master file
Accounts payable
trial balance
Vendor’s statement
2. Cash
disbursements/
Payment
Cash in bank
Accounts Payable
Purchase Discount
4. Processing &
recording cash
disbursements
Cheque
Cash disbursements
transaction file
Cash disbursements
journal or listing

7. KEY CONTROL ACTIVITIES
AUD390 2014
1. Authorization of purchases
2. Separation of asset custody from other functions
3. Timely recording
4. Independent review of transaction
5. Authorization of payment

8. 1. Authorization Of Purchases
AUD390 2014
 Purpose:
1. To ensure that the goods & services purchase are for
authorized company purposes
2. To avoid the purchase of excessive or unnecessary items
 For example, company to established approval authority
i.e. purchase of capital assets above RM1 million may
require approval from BOD
 Internal control issues:
After the purchase requisition have been approved, a
purchase order to purchase the good must be initiated.
Purchase order issued should be pre-numbered and
should include sufficient column and spaces to minimize
the likelihood of unintentional omission on the form when
goods are ordered.

9. 2. Separation Of Asset
Custody From Other Functions
AUD390 2014
 Separate the receiving department, storeroom unit
and accounting function
 To prevent theft or misuse of goods

10. 3. Timely Recording
AUD390 2014
 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

11. 4. Independent Review Of Transaction
AUD390 2014
 Independent party check on information recorded in the
system is required to ensure proper procedure of
record keeping

12. 5.Authorization Of Payment
AUD390 2014
 Establish List of Approval authority
 Different ranking of personnel responsible to approve
different amount of payment
 For example:
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

13. Cont…
AUD390 2014
 Separation of responsibilities between those:
 Recording the transaction
 Preparer of the cheque
 Approval of the payment
 Proper documentation
 Cheque should be in sequence of number
 Printed on special paper that makes it difficult to alter
the payee or amount
 Establish a special physical control over blank, voided
and signed cheque

14. AUDIT OF
ACCOUNT PAYABLES
AUD390 2014
 Using Tests of Details of Balance
1. Detail Tie-in
2. Existence
3. Completeness
4. Accuracy
5. Classification
6. Cutoff
7. Obligations
8. Presentation and disclosures

15. Accounts Payable Detail Tie-In
AUD390 2014
 To determine:
 Account Payable (AP) in the AP list agree with related
master file
 The total is correctly added, and agrees with the
general ledger (GL)
 Examples of Audit Tests:
 Re-add the total of AP lists
 Trace the total to GL

16. Accounts Payable Existence
AUD390 2014
 To determine:
 AP is the AP List exist
 Examples of Audit Tests:
 Trace from AP List to vendors’ invoices and
statements
 Confirm AP, emphasizing large and unusual
amounts

17. Accounts Payable Completeness
AUD390 2014
 To determine:
 Existing AP are included in the AP list
 Examples of Audit Tests:
 Perform out-of-period liability tests

18. Accounts Payable Accuracy
AUD390 2014
 To determine:
 Account Payable (AP) in the AP list are accurate
 Examples of Audit Tests:
 Trace from AP List to vendors’ invoices and statements

19. Accounts Payable Classification
AUD390 2014
 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

20. Accounts Payable Cutoff
AUD390 2014
 To determine:
 Transactions in the acquisition and payment cycle
are recorded in the proper period
 Examples of Audit Tests:
 Perform out-of-period liability tests
 Perform detailed tests as part of physical
observation of inventory
 Test for inventory in transit

21. Accounts Payable Obligations
AUD390 2014
 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

22. Account Payables
Presentation & Disclosure
AUD390 2014
 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