19 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of the...

19 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit of the Acquisition Audit of the Acquisition and Payment Cycle: Tests and Payment Cycle: Tests of Controls, Substantive of Controls, Substantive Tests of Transactions and Tests of Transactions and Accounts Payable.Accounts Payable.

Chapter 19Chapter 19


Learning Objective 1Learning Objective 1

Identify the accounts and theIdentify the accounts and the

classes of transactions in theclasses of transactions in the

acquisition and payment cycle.acquisition and payment cycle.


Transactions in the Acquisition Transactions in the Acquisition and Payment Cycleand Payment Cycle

1.1. Acquisitions of goods and servicesAcquisitions of goods and services2.2. Cash disbursementsCash disbursements3.3. Purchase returns and allowancesPurchase returns and allowances

and purchase discountsand purchase discounts


Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle

Cash in BankCash in Bank

Purchase ReturnsPurchase Returnsand Allowancesand Allowances

PurchasePurchaseDiscountsDiscounts

CashCashdisbursementsdisbursements

PurchasePurchasereturns andreturns andallowancesallowances

PurchasePurchasediscountsdiscounts

AcquisitionsAcquisitionsof goods andof goods andservicesservices

Raw MaterialRaw MaterialPurchasesPurchases

Property, PlantProperty, Plantand Equipmentand Equipment

PrepaidPrepaidExpensesExpenses

Accounts PayableAccounts Payable


Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle

AcquisitionsAcquisitionsof goods andof goods andservicesservices

Accounts PayableAccounts Payable

Manufacturing Expense Control AccountManufacturing Expense Control Account

Subsidiary accountsSubsidiary accountsRepair and maintenanceRepair and maintenanceTaxes, SuppliesTaxes, SuppliesFreight in, UtilitiesFreight in, Utilities

Administrative Expense Control AccountAdministrative Expense Control Account

Subsidiary accountsSubsidiary accountsSupplies, Officers’ travelSupplies, Officers’ travelLegal feesLegal feesAuditing fees, TaxesAuditing fees, Taxes

Selling Expense Control AccountSelling Expense Control Account

Subsidiary accountsSubsidiary accountsCommissionsCommissionsTravel, delivery expensesTravel, delivery expensesRepairs, AdvertisingRepairs, Advertising



Describe the business functionsDescribe the business functions

and the related documents andand the related documents and

records in the acquisition andrecords in the acquisition and

payment cycle.payment cycle.


Classes of TransactionsClasses of Transactionsand Accountsand Accounts

InventoryInventory Property, plant, and equipmentProperty, plant, and equipment Prepaid expensesPrepaid expenses Leasehold improvementsLeasehold improvements Accounts payableAccounts payable Manufacturing expensesManufacturing expenses Selling and administrative expensesSelling and administrative expenses


Classes of TransactionsClasses of Transactionsand Accountsand Accounts

Cash in bank (from cash disbursements)Cash in bank (from cash disbursements) Accounts payableAccounts payable Purchase discountsPurchase discounts


Business Functions in the CycleBusiness Functions in the Cycle

Processing purchase ordersProcessing purchase orders

Receiving goods and servicesReceiving goods and services

Recognizing the liabilityRecognizing the liability

Processing and recording cash disbursementsProcessing and recording cash disbursements


Related Documents and ReportsRelated Documents and Reports

Purchase requisitionPurchase requisition

Purchase orderPurchase order

Receiving reportReceiving report

Processing purchase ordersProcessing purchase orders

Receiving goods and servicesReceiving goods and services



Acquisitions transaction fileAcquisitions transaction file

Acquisitions journal or listingAcquisitions journal or listing

Vendor’s invoiceVendor’s invoice

VoucherVoucher

Debit memoDebit memo

A/P master fileA/P master file

A/P trial balanceA/P trial balance Vendor’s statementVendor’s statement

Recognizing the liabilityRecognizing the liability



Cash disbursements transaction fileCash disbursements transaction file

CheckCheck

Cash disbursements journal or listingCash disbursements journal or listing

Processing and recording cash disbursementsProcessing and recording cash disbursements



Describe how e-commerceDescribe how e-commerce

affects the acquisition ofaffects the acquisition of

goods and service.goods and service.


How E-Commerce Affects the How E-Commerce Affects the Acquisition and Payment CycleAcquisition and Payment Cycle

SuppliersSuppliers CustomersCustomers

Internet-based technologiesInternet-based technologiesallow for electronic linkagesallow for electronic linkagesbetween suppliers and customers.between suppliers and customers.

PurchasePurchaseordersorders

CustomerCustomerordersorders

EDIEDIEDIEDI


How E-Commerce Affects the How E-Commerce Affects the Acquisition and Payment CycleAcquisition and Payment Cycle

Some companies use extranets which allowSome companies use extranets which allowcompanies to communicate and conduct companies to communicate and conduct business in a secure setting.business in a secure setting.

Other companies use business-to-businessOther companies use business-to-businessauctions hosted on the Internet toauctions hosted on the Internet tonegotiate purchases.negotiate purchases.

Information about products is available overInformation about products is available overthe Internet.the Internet.



Understand internal control, andUnderstand internal control, and

design and perform tests ofdesign and perform tests of

controls and substantive testscontrols and substantive tests

of transactions for the acquisitionof transactions for the acquisition

and payment cycle.and payment cycle.


Methodology for Designing Tests Methodology for Designing Tests of Balances: Accounts Receivableof Balances: Accounts Receivable

Understand internalUnderstand internalcontrol – acquisitionscontrol – acquisitionsand cash disbursements.and cash disbursements.

AuditAuditproceduresprocedures

Items toItems toselectselect

SampleSamplesizesize TimingTiming

Assess planned controlAssess planned controlrisk – acquisitions andrisk – acquisitions andcash disbursements.cash disbursements.

Design tests of controls and substantive tests ofDesign tests of controls and substantive tests oftransactions for acquisitions and cash disbursementstransactions for acquisitions and cash disbursementsto meet transaction-related audit objectives.to meet transaction-related audit objectives.

Determine extent of testing controls.Determine extent of testing controls.


Understand Internal ControlUnderstand Internal Control

The auditor gains an understanding of internalThe auditor gains an understanding of internalcontrol for the acquisition and payment cyclecontrol for the acquisition and payment cycleby studying the client’s flowcharts, preparingby studying the client’s flowcharts, preparinginternal control questionnaires, and performinginternal control questionnaires, and performingwalk-through tests for acquisitions and cashwalk-through tests for acquisitions and cashdisbursements.disbursements.


Assess Planned Control RiskAssess Planned Control Risk

Authorization of purchasesAuthorization of purchases

Separation of asset custody fromSeparation of asset custody fromother functionsother functions

Timely recording and independentTimely recording and independentreview of transactionsreview of transactions

Authorization of paymentsAuthorization of payments


Evaluate Cost-Benefit of Testing Evaluate Cost-Benefit of Testing ControlsControls

The auditor identifies the key internal controlsThe auditor identifies the key internal controlsand weaknesses and assesses control risk.and weaknesses and assesses control risk.

The auditor decides whether substantive testsThe auditor decides whether substantive testswill be reduced sufficiently to justify the costwill be reduced sufficiently to justify the costof performing tests of controls.of performing tests of controls.


Controls and Substantive Tests ofControls and Substantive Tests ofTransactions for AcquisitionsTransactions for Acquisitions

Recorded acquisitions are for goods and servicesRecorded acquisitions are for goods and servicesreceived, consistent with the best interests of thereceived, consistent with the best interests of theclient (existence).client (existence).

Existing acquisitions are recorded (completeness).Existing acquisitions are recorded (completeness).

Acquisitions are accurately recorded (accuracy).Acquisitions are accurately recorded (accuracy).

Acquisitions are correctly classified (classification).Acquisitions are correctly classified (classification).


Attributes SamplingAttributes Sampling

Because of the importance of tests of controlsBecause of the importance of tests of controlsand substantive tests of transactions forand substantive tests of transactions foracquisitions and cash disbursements,acquisitions and cash disbursements,the use of attributes sampling isthe use of attributes sampling iscommon in this audit area.common in this audit area.



Describe the methodology forDescribe the methodology for

designing tests of details ofdesigning tests of details of

balances for accounts payablebalances for accounts payable

using the audit risk model.using the audit risk model.


Identify client business risks affecting accountsIdentify client business risks affecting accountspayable.payable.

Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R

Phase IPhase I

Set tolerable misstatement and assess inherentSet tolerable misstatement and assess inherentrisk for accounts payable.risk for accounts payable.

Assess control risk for accounts payable.Assess control risk for accounts payable.



Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions for thesubstantive tests of transactions for theacquisition and payment cycle.acquisition and payment cycle.

Phase IIPhase II



Design and perform analytical procedures forDesign and perform analytical procedures forthe acquisition and payment cycle.the acquisition and payment cycle.

Phase IIIPhase III

TimingTimingItems toItems toselectselect

SampleSamplesizesize

AuditAuditproceduresprocedures

Design tests of details of accounts payableDesign tests of details of accounts payablebalance to satisfy balance-related audit objectives.balance to satisfy balance-related audit objectives.



Design and perform analyticalDesign and perform analytical

procedures for accounts payable.procedures for accounts payable.


Analytical Procedures for the Analytical Procedures for the Acquisition and Payment CycleAcquisition and Payment Cycle

Review list of accounts payableReview list of accounts payablefor unusual, nonvender, andfor unusual, nonvender, andinterest-bearing payables.interest-bearing payables.

ClassificationClassificationmisstatementmisstatementfor nontrade liabilities.for nontrade liabilities.

Analytical procedureAnalytical procedure

Compare acquisition-relatedCompare acquisition-relatedexpense account balancesexpense account balanceswith prior years.with prior years.

Misstatement of accountsMisstatement of accountspayable and expenses.payable and expenses.

Possible misstatementPossible misstatement


Analytical Procedures for the Analytical Procedures for the Acquisition and Payment CycleAcquisition and Payment Cycle

Analytical procedureAnalytical procedure

Compare individual accountsCompare individual accountspayable with previous years.payable with previous years.

Unrecorded orUnrecorded ornonexistent accounts,nonexistent accounts,or misstatements.or misstatements.

Calculate ratios, such asCalculate ratios, such aspurchases divided by accountspurchases divided by accountspayable, and accounts payablepayable, and accounts payabledivided by current liabilities.divided by current liabilities.

Unrecorded orUnrecorded ornonexistent accounts,nonexistent accounts,or misstatements.or misstatements.

Possible misstatementPossible misstatement



Design and perform tests ofDesign and perform tests of

details of balances for accountsdetails of balances for accounts

payable, including out-of-periodpayable, including out-of-period

liability tests.liability tests.


Out-of-Period Liability TestsOut-of-Period Liability Tests

Examine underlying documentation forExamine underlying documentation forsubsequent cash disbursements.subsequent cash disbursements.

Examine underlying documentation for bills notExamine underlying documentation for bills notpaid several weeks after the year-end.paid several weeks after the year-end.

Trace receiving reports issued before year-endTrace receiving reports issued before year-endto related vendors’ invoices.to related vendors’ invoices.


Out-of-Period Liability TestsOut-of-Period Liability Tests

Trace vendors’ statements that show a balanceTrace vendors’ statements that show a balancedue to the accounts payable trial balance.due to the accounts payable trial balance.

Send confirmations to vendors with whichSend confirmations to vendors with whichthe client does business.the client does business.


Cutoff TestsCutoff Tests

Relationship of cutoff to physicalRelationship of cutoff to physicalobservation of inventoryobservation of inventory

Inventory in transitInventory in transit

FOB destinationFOB destination FOB originFOB origin



Distinguish the reliability ofDistinguish the reliability of

vendors’ invoices, vendors’vendors’ invoices, vendors’

statements, and confirmationsstatements, and confirmations

of accounts payable as auditof accounts payable as audit

evidence.evidence.


Reliability of EvidenceReliability of Evidence

Distinction between vendors’Distinction between vendors’invoices and vendors’ statements.invoices and vendors’ statements.

Difference between vendors’Difference between vendors’statements and confirmations.statements and confirmations.


Sample SizeSample Size

Sample sizes for accounts payable tests varySample sizes for accounts payable tests varyconsiderably, depending on many factors.considerably, depending on many factors.

Statistical sampling is less commonly usedStatistical sampling is less commonly usedfor the audit of accounts payable thanfor the audit of accounts payable thanfor accounts receivable.for accounts receivable.


Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment CycleAcquisition and Payment Cycle

TOCTOC + + STOTSTOT + + APAP + + TDBTDB= Sufficient competent evidence per GAAS= Sufficient competent evidence per GAAS

Cash inCash inBankBank

AccountsAccountsPayablePayable

AcquisitionAcquisitionExpensesExpenses

PaymentsPayments ExpensesExpenses

Audited byAudited byTOCTOC,, STOTSTOT, and , and APAP

EndingEndingbalancebalance


Audited by Audited by APAP and and TDBTDB

Audited byAudited byTOCTOC, , STOTSTOT, and , and APAP


Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment CycleAcquisition and Payment Cycle

TOCTOC + + STOTSTOT + + APAP + + TDBTDB= Sufficient competent evidence per GAAS= Sufficient competent evidence per GAAS

AccountsAccountsPayablePayable

AcquisitionAcquisitionAssetsAssets

AcquisitionAcquisitionof assetsof assets


Audited byAudited byTOCTOC, , STOTSTOT, and , and APAP

Audited byAudited byAPAP and and TDBTDB


End of Chapter 19End of Chapter 19

Date post:	27-Dec-2015
Category:	Documents
Upload:	edwin-curtis
View:	215 times
Download:	3 times