Chapter 11 Auditing the Purchasing Process McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All...

Chapter 11Chapter 11

Auditing the Purchasing Process

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

11-2

Expense and Liability Recognition

Expenses are outflows or Expenses are outflows or other using up of assets other using up of assets or incurrences of liabilities or incurrences of liabilities from delivering or from delivering or producing goods, producing goods, rendering services or rendering services or carrying out other carrying out other activities that constitute activities that constitute the entity’s ongoing major the entity’s ongoing major or central operations.or central operations.

Expenses are outflows or Expenses are outflows or other using up of assets other using up of assets or incurrences of liabilities or incurrences of liabilities from delivering or from delivering or producing goods, producing goods, rendering services or rendering services or carrying out other carrying out other activities that constitute activities that constitute the entity’s ongoing major the entity’s ongoing major or central operations.or central operations.

Liabilities are probable Liabilities are probable future sacrifices of future sacrifices of economic benefits arising economic benefits arising from present obligations from present obligations of a particular entity to of a particular entity to transfer assets or provide transfer assets or provide services to other entities services to other entities in the future as a result of in the future as a result of past transactions or past transactions or events.events.

Liabilities are probable Liabilities are probable future sacrifices of future sacrifices of economic benefits arising economic benefits arising from present obligations from present obligations of a particular entity to of a particular entity to transfer assets or provide transfer assets or provide services to other entities services to other entities in the future as a result of in the future as a result of past transactions or past transactions or events.events.

LO# 1

11-3

Expense Categories

Product costs

Period costs

Systematic and rational allocation

11-4

Overview of the Purchasing Process

A purchase transaction usually begins with aA purchase transaction usually begins with a purchase requisitionpurchase requisition generated by the user generated by the user

department. The purchasing departmentdepartment. The purchasing department prepares aprepares a purchase orderpurchase order that is sent to the that is sent to the vendor. When the goods are received or thevendor. When the goods are received or the

services rendered, aservices rendered, a liability is recordedliability is recorded. . Finally, the entityFinally, the entity pays the vendorpays the vendor..

A purchase transaction usually begins with aA purchase transaction usually begins with a purchase requisitionpurchase requisition generated by the user generated by the user

department. The purchasing departmentdepartment. The purchasing department prepares aprepares a purchase orderpurchase order that is sent to the that is sent to the vendor. When the goods are received or thevendor. When the goods are received or the

services rendered, aservices rendered, a liability is recordedliability is recorded. . Finally, the entityFinally, the entity pays the vendorpays the vendor..

Purchase requisition

Purchase requisition

Purchase order

Purchase order

Receivingreport and

liability recorded

Receivingreport and

liability recorded

Vendor

LO# 2

11-5

Types of Transactions and Financial Statement Accounts Affected

Three types of transactions are processed Three types of transactions are processed through the purchasing process:through the purchasing process:

1.1. Purchase of goods and services for cash or credit.Purchase of goods and services for cash or credit.

2.2. Payment of the liabilities arising from such Payment of the liabilities arising from such purchases.purchases.

3.3. Return of goods to suppliers for cash or credit.Return of goods to suppliers for cash or credit.

LO# 3

11-6

Type of Transaction Account AffectedPurchase Transaction Accounts payable

InventoryPurchases or cost of goods soldVarious asset and expense accounts

Cash disbursement transaction CashAccounts payableCash discountsVarious asset and expense accounts

Purchase return transaction Purchase returnsPurchase allowancesAccounts payableVarious asset and expense accounts

LO# 3

Types of Transactions and Financial Statement Accounts Affected

11-7

Flowchart of the Purchasing Process – EarthWear Clothiers

Requesting Purchasing IT

DepartmentDepartment

Purchaserequisition

Approvedpurchaserequisitionreceived

Input

Errorcorrections

Purchaseorder

program

Purchaseorder file

Accountspayable

master file

Errorreport

Purchaseorder

(4 part)

Purchasing

Vendor

A/P

ReceivingPO #2Filed

Numerically

LO# 3

11-8

DepartmentDepartmentReceiving Accounts Payable (A/P)PO #1

Goodsreceived,

counted, andinspected

Receivingreport (RR)

Enter vendor,quantity, and

PO #

Dailyreceiving log

PO #3

Receivingreport

Vendorinvoice

Compare invoiceto PO and RR

Reviewaccount

distribution

Voucherpacket

Input

Errorcorrection

To IT

From IT

LO# 3


11-9

DepartmentDepartmentIT

Accountspayableupdate

Purchaseorder file

A/P masterfile

Generalledger file

Errorreport

Inputfrom A/P

Reportto A/P

A/P reportingWeeklyMonthly

A/P listing

Cashdisbursement

report

Daily

Daily

Monthlyreports

Generalledger

Open PO report

A/P expensedistribution report

Voucher register

Cash disbursementsjournal

LO# 3


11-10


DepartmentDepartmentAccounts Payable (A/P) IT Cashier

Cashdisbursement

report

Review documentsand authorize payment

Cashdisbursement

report

Input

A/P masterfile

Cashdisbursement

program

Checks

Checks

Review checksand mail to

vendors

Checks

To Vendors

LO# 3

11-11

Types of Documents and Records

Purchasing documents and records . . .Purchasing documents and records . . .1.1. Purchase Requisition – request to purchase goods or services.Purchase Requisition – request to purchase goods or services.

2.2. Purchase Order – includes description, quality, and quantity or Purchase Order – includes description, quality, and quantity or goods or services being purchased.goods or services being purchased.

3.3. Receiving Report – records the receipt of goods.Receiving Report – records the receipt of goods.

4.4. Vendor Invoice – the bill from the vendor.Vendor Invoice – the bill from the vendor.

5.5. Voucher – serves as the basis for recording a vendor’s invoice.Voucher – serves as the basis for recording a vendor’s invoice.

6.6. Voucher Register – used to record vouchers for goods and services.Voucher Register – used to record vouchers for goods and services.

7.7. Accounts Payable Subsidiary Ledger – includes amount owed to Accounts Payable Subsidiary Ledger – includes amount owed to individual vendors.individual vendors.

8.8. Vendor Statement – represents the purchase activity with vendor.Vendor Statement – represents the purchase activity with vendor.

9.9. Check – pays for goods or services.Check – pays for goods or services.

10.10. Check Register – contains columns to record credits to cash and Check Register – contains columns to record credits to cash and debits to accounts payable and cash discounts.debits to accounts payable and cash discounts.

Purchasing documents and records . . .Purchasing documents and records . . .1.1. Purchase Requisition – request to purchase goods or services.Purchase Requisition – request to purchase goods or services.

2.2. Purchase Order – includes description, quality, and quantity or Purchase Order – includes description, quality, and quantity or goods or services being purchased.goods or services being purchased.

3.3. Receiving Report – records the receipt of goods.Receiving Report – records the receipt of goods.

4.4. Vendor Invoice – the bill from the vendor.Vendor Invoice – the bill from the vendor.

5.5. Voucher – serves as the basis for recording a vendor’s invoice.Voucher – serves as the basis for recording a vendor’s invoice.

6.6. Voucher Register – used to record vouchers for goods and services.Voucher Register – used to record vouchers for goods and services.

7.7. Accounts Payable Subsidiary Ledger – includes amount owed to Accounts Payable Subsidiary Ledger – includes amount owed to individual vendors.individual vendors.

8.8. Vendor Statement – represents the purchase activity with vendor.Vendor Statement – represents the purchase activity with vendor.

9.9. Check – pays for goods or services.Check – pays for goods or services.

10.10. Check Register – contains columns to record credits to cash and Check Register – contains columns to record credits to cash and debits to accounts payable and cash discounts.debits to accounts payable and cash discounts.

LO# 4

11-12

The Major FunctionsFunctions of the Purchasing Process

RequisitioningInitiation and approval of requests for goods and services by authorized individuals consistent with management criteria.

PurchasingApproval of purchase orders and proper execution as to price, quantity, quality, and vendor.

Receiving Receipt of properly authorized goods and services.

Invoice processingProcessing of vendor invoices for goods and services received; also, processing of adjustments for allowances, discounts, and returns.

Disbursements Processing of payment to vendors.

Accounts payableRecording of all vendor invoices, cash disbursements, and adjustments in individual vendor accounts.

General ledgerProper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general ledger.

LO# 5

11-13

Key Functions and DutiesSegregation of Duties Possible Errors or Fraud

The purchasing function should be segregated from the requisitioning and receiving functions.

If one individual is responsible for the requisition, purchasing, and receiving functions, fictitious purchases can be made. This can result in the theft of goods and possibly payment for unauthorized purchases.

The invoice-processing function should be segregated from the accounts payable function.

If one individual is responsible for the invoice-processing and accounts payable function, purchase transactions can be processed at the wrong price or terms, or a cash disbursement can be processed for goods not received. This can result in overpayment of goods or the theft of cash.

The disbursement function should be segregated from the accounts payable function.

If one individual is responsible for the disbursement function and also has access to the accounts payable records, unauthorized checks supported by fictitious documents can be issued, and unauthorized transactions can be recorded. This can result in theft of the entity's cash.

The accounts payable function should be segregated from the general ledger function.

If one individual isresponsible for the accounts payable records and also for the general ledger, that individual can conceal any defalcation that would normally be detected by reconciling subsidiary records with the general ledger control account.

LO# 6

11-14

The Key Segregation of Duties

Purchasing and Accounts Payable Purchasing Receiving

Accounts Payable Cashier's IT

Preparation and approval of purchase order XReceipt, counting, and inspection

of purchased materials XReceipt of vendor invoices/matching to supporting documents XCoding of account distributions XUpdating of accounts payable records X XPreparation of vendor checks XSigning and mailing of vendor checks XPreparation of the voucher register XReconciliation of voucher register to general ledger X

Department

LO# 6

11-15

Inherent Risk Assessment

Industry-Related FactorsIndustry-Related Factors

1.1.Is the supply of rawIs the supply of rawmaterials adequatematerials adequate

??

2.2.How volatile areHow volatile are

raw materialraw materialpricesprices

??

LO# 7

11-16

Inherent Risk Assessment

Misstatements Detected in Prior AuditsMisstatements Detected in Prior AuditsGenerally, the purchasing process is not difficult Generally, the purchasing process is not difficult

to audit and does not present contentious to audit and does not present contentious accounting issues. However, the auditor’s accounting issues. However, the auditor’s

experience in past audits must be considered experience in past audits must be considered when assessing inherent risk.when assessing inherent risk.

Generally, the purchasing process is not difficult Generally, the purchasing process is not difficult to audit and does not present contentious to audit and does not present contentious accounting issues. However, the auditor’s accounting issues. However, the auditor’s

experience in past audits must be considered experience in past audits must be considered when assessing inherent risk.when assessing inherent risk.

LO# 7

11-17

Control Risk Assessment

Major steps in setting the control risk in the Major steps in setting the control risk in the purchasing process.purchasing process.

Understanding and documenting the purchasing Understanding and documenting the purchasing process based on a reliance strategy. process based on a reliance strategy.

Understanding and documenting the purchasing Understanding and documenting the purchasing process based on a reliance strategy. process based on a reliance strategy.

Planning and performing tests of controls of Planning and performing tests of controls of purchase transactions.purchase transactions.

Planning and performing tests of controls of Planning and performing tests of controls of purchase transactions.purchase transactions.

Setting and documenting the control risk for the Setting and documenting the control risk for the purchasing process.purchasing process.

Setting and documenting the control risk for the Setting and documenting the control risk for the purchasing process.purchasing process.

LO# 8

11-18

Control Risk AssessmentInformation Systems and CommunicationInformation Systems and Communication

For each major class of transactions in the For each major class of transactions in the purchasing process, the auditor must obtain the purchasing process, the auditor must obtain the following information:following information:1.1. How purchase, cash disbursements, and purchase return How purchase, cash disbursements, and purchase return

transactions are initiated.transactions are initiated.

2.2. The accounting records, supporting documents, and accounts The accounting records, supporting documents, and accounts involved in processing purchases, cash disbursements, and involved in processing purchases, cash disbursements, and purchase returns.purchase returns.

3.3. The flow of each type of transaction from initiation to inclusion The flow of each type of transaction from initiation to inclusion in the financial statements, including computer processing.in the financial statements, including computer processing.

4.4. The process used to estimate accrued liabilities.The process used to estimate accrued liabilities.

LO# 8

11-19

Control Risk Assessment

After testing controls, the auditor sets the level of control risk. When tests of controls support the

planned level of control risk, no modifications are necessary to detection risk. The auditor may proceed

with the substantive procedures as planned.

When tests do not support When tests do not support the planned control risk, the the planned control risk, the auditor lowers the level of auditor lowers the level of detection risk leading to detection risk leading to

more substantive more substantive procedures.procedures.

When tests do not support When tests do not support the planned control risk, the the planned control risk, the auditor lowers the level of auditor lowers the level of detection risk leading to detection risk leading to

more substantive more substantive procedures.procedures.

LO# 8

11-20

Control Activities and Tests of Controls – Purchase Transactions

Assertions about Classes of Transactions and Events for the Period under Audit

OccurrenceAll purchases and cash disbursements have been recorded and have occurred and pertain to the entity.

Completeness All purchases and cash disbursements that should have been recorded have been recorded.

AuthorizationAll purchase and cash disbursements are properly authorized.

AccuracyAmounts relating to recorded purchases and cash disbursements have been recorded properly.

Cutoff Purchases and cash disbursements have been recorded in the correct accounting period.

Classification Purchases and cash disbursements have been recorded in the proper account.

OccurrenceAll purchases and cash disbursements have been recorded and have occurred and pertain to the entity.

Completeness All purchases and cash disbursements that should have been recorded have been recorded.

AuthorizationAll purchase and cash disbursements are properly authorized.

AccuracyAmounts relating to recorded purchases and cash disbursements have been recorded properly.

Cutoff Purchases and cash disbursements have been recorded in the correct accounting period.

Classification Purchases and cash disbursements have been recorded in the proper account.

LO# 9

11-21

Control Activities and Tests of Controls – Purchase Transactions

Assertions Substantive Tests of Controls

Occurrence

Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation.

Completeness

Review procedures for accounting for numerical sequence of purchase orders, receiving reports and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal.

AuthorizationExamine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process.

Accuracy

Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report.

CutoffCompare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal.

ClassificationReview purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification.

Assertions Substantive Tests of Controls

Occurrence

Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation.

Completeness

Review procedures for accounting for numerical sequence of purchase orders, receiving reports and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal.

AuthorizationExamine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process.

Accuracy

Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report.

CutoffCompare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal.

ClassificationReview purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification.

LO# 9

11-22

Control Activities and Tests of Controls – Cash Disbursement

Transactions

Occurrence of Cash Disbursement TransactionsOccurrence of Cash Disbursement Transactions

The auditor is concerned with a misstatement The auditor is concerned with a misstatement caused by a cash disbursement being recorded in caused by a cash disbursement being recorded in the client’s record when no payment was made. the client’s record when no payment was made. The primary control procedures to prevent such The primary control procedures to prevent such

misstatements include proper misstatements include proper segregation of segregation of dutiesduties, independent , independent reconciliation and review of reconciliation and review of

vendor statementsvendor statements, and monthly , and monthly bank bank reconciliationsreconciliations..

The auditor is concerned with a misstatement The auditor is concerned with a misstatement caused by a cash disbursement being recorded in caused by a cash disbursement being recorded in the client’s record when no payment was made. the client’s record when no payment was made. The primary control procedures to prevent such The primary control procedures to prevent such

misstatements include proper misstatements include proper segregation of segregation of dutiesduties, independent , independent reconciliation and review of reconciliation and review of

vendor statementsvendor statements, and monthly , and monthly bank bank reconciliationsreconciliations..

LO# 9

11-23


Transactions

Completeness of Cash Disbursement TransactionsCompleteness of Cash Disbursement TransactionsThe major audit concern is that a cash disbursementThe major audit concern is that a cash disbursement is made but not recorded in the records. The auditoris made but not recorded in the records. The auditor

should account for theshould account for the numerical sequencenumerical sequence ofof checks andchecks and reconcile the daily cash disbursementsreconcile the daily cash disbursements

with posting to the accounts payable subsidiary with posting to the accounts payable subsidiary records.records.

The major audit concern is that a cash disbursementThe major audit concern is that a cash disbursement is made but not recorded in the records. The auditoris made but not recorded in the records. The auditor

should account for theshould account for the numerical sequencenumerical sequence ofof checks andchecks and reconcile the daily cash disbursementsreconcile the daily cash disbursements

with posting to the accounts payable subsidiary with posting to the accounts payable subsidiary records.records.

LO# 9

11-24


Transactions

Authorization of Cash Disbursement TransactionsAuthorization of Cash Disbursement Transactions

Proper segregation of duties reduces the likelihood Proper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. that unauthorized cash disbursements are made. The individual who approves a purchase should The individual who approves a purchase should

not have direct access to the cash disbursement.not have direct access to the cash disbursement.

Proper segregation of duties reduces the likelihood Proper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. that unauthorized cash disbursements are made. The individual who approves a purchase should The individual who approves a purchase should

not have direct access to the cash disbursement.not have direct access to the cash disbursement.

LO# 9

11-25


Transactions

Accuracy of Cash Disbursement TransactionsAccuracy of Cash Disbursement TransactionsOne of the major audit concerns is that the

payment amount is recorded incorrectly. To detect such an error, client personnel should reconcile the total of the checks issued each day with the

daily cash disbursements report.

LO# 9

11-26


Transactions

Cutoff of Cash Disbursement TransactionsCutoff of Cash Disbursement TransactionsThe auditor’s tests of controls include reviewing the reconciliation of checks with postings to the cash

disbursements journal and accounts payable subsidiary records. The auditor also tests cash

disbursements before and after year-end to ensure that transactions are recorded in the proper period.

LO# 9

11-27


Transactions

Classification of Cash Disbursement TransactionsClassification of Cash Disbursement Transactions

The auditor is concerned that a cash disbursement The auditor is concerned that a cash disbursement may be charged to the wrong general ledger account. may be charged to the wrong general ledger account.

The use of a chart of accounts, as well as The use of a chart of accounts, as well as independent approval and review of the account code independent approval and review of the account code

on the voucher should provide adequate control.on the voucher should provide adequate control.

The auditor is concerned that a cash disbursement The auditor is concerned that a cash disbursement may be charged to the wrong general ledger account. may be charged to the wrong general ledger account.

The use of a chart of accounts, as well as The use of a chart of accounts, as well as independent approval and review of the account code independent approval and review of the account code

on the voucher should provide adequate control.on the voucher should provide adequate control.

LO# 9

11-28

Control Activities and Tests of Controls – Purchase Return

Transactions

Generally, the number and magnitude of purchase return transactions are not material. The auditor

normally does not test controls relating to purchase returns. Substantive testing is used to test the

reasonableness of the amount.

LO# 9

11-29

Relating the Assessed Level of Control Risk to Substantive

Procedures

If the results of the tests of controls support the If the results of the tests of controls support the achieved level of control risk, the auditor conducts achieved level of control risk, the auditor conducts substantive procedures at the planned level. If the substantive procedures at the planned level. If the results do not support the achieved level of control results do not support the achieved level of control risk, the auditor reduces the detection risk, which risk, the auditor reduces the detection risk, which

will increase substantive procedures.will increase substantive procedures.

If the results of the tests of controls support the If the results of the tests of controls support the achieved level of control risk, the auditor conducts achieved level of control risk, the auditor conducts substantive procedures at the planned level. If the substantive procedures at the planned level. If the results do not support the achieved level of control results do not support the achieved level of control risk, the auditor reduces the detection risk, which risk, the auditor reduces the detection risk, which

will increase substantive procedures.will increase substantive procedures.

LO# 10

11-30

Auditing Accounts Payable and Accrued Expenses

Assertions about Account Balances at the Period End:Existence. Accounts payable and accrued expenses are vaild liabilities.

Rights and obligations. Accounts payable and accrued expenses are obligations of the entity.

Completeness . All accounts payable and accrued expenses have been recorded.

Valuation and allocation. Accounts payable and accrued expenses are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about Account Balances at the Period End:Existence. Accounts payable and accrued expenses are vaild liabilities.

Rights and obligations. Accounts payable and accrued expenses are obligations of the entity.

Completeness . All accounts payable and accrued expenses have been recorded.

Valuation and allocation. Accounts payable and accrued expenses are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.

LO# 10

11-31


Assertions about Presentation and Disclosure:Occurrence and rights and obligations. All disclosed events, transactions, and other matters relating to accounts payable and accrued expenses have occurred and pertain to the entity.

Completeness. All disclosures relating to accounts payable and accrued expenses that should have been included in the financial statements have been included.

Classification and understandability. Financial information relating to accounts payable and accrued expenses is appropriately presented and described, and disclosures are clearly expressed.

Accuracy and valuation. Financial and other information relating to accounts payable and accrued expenses are disclosed fairly and at appropriate amounts.

LO# 10

11-32


Substantive Analytical ProceduresSubstantive Analytical ProceduresSubstantive Analytical Procedure Possible Misstatement DetectedCompare payables turnover and days outstanding in accounts payable to previous years' and industry data.

Under- or overstatment of liabilities and expenses.

Compare current-year balances in accounts payable and accruals with prior years' balances.


Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior


Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years' and industry data.

Under- or overstatement of purchase returns.

LO# 11

11-33

Tests of Details of Transactions, Account Balances, and Disclosures

CompletenessCompletenessObtain a listing of accounts payable, foot the listing, and agree it to the general ledger control account. Selected vouchers or vendor accounts should be traced to the supporting documents or subsidiary

accounts payable records to verify the accuracy of the details.

LO# 12 & 13

11-34


CompletenessCompletenessThe auditor should conduct a test for unrecorded The auditor should conduct a test for unrecorded liabilities that include the following procedures:liabilities that include the following procedures:The auditor should conduct a test for unrecorded The auditor should conduct a test for unrecorded liabilities that include the following procedures:liabilities that include the following procedures:1.1. Ask management about control procedures used to identify Ask management about control procedures used to identify

unrecorded liabilities at the end of the period.unrecorded liabilities at the end of the period.

2.2. Obtain copies of vendors’ monthly statements and reconcile Obtain copies of vendors’ monthly statements and reconcile the amounts to the client’s accounts payable records.the amounts to the client’s accounts payable records.

3.3. Confirm vendor accounts, including accounts with small or Confirm vendor accounts, including accounts with small or zero balances.zero balances.

4.4. Vouch large-dollar items from the purchases journal and Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end.cash disbursements journal for a limited time after year-end.

5.5. Examine the files of unmatched purchase orders, receiving Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities.reports, and vendor invoices for any unrecorded liabilities.

1.1. Ask management about control procedures used to identify Ask management about control procedures used to identify unrecorded liabilities at the end of the period.unrecorded liabilities at the end of the period.

2.2. Obtain copies of vendors’ monthly statements and reconcile Obtain copies of vendors’ monthly statements and reconcile the amounts to the client’s accounts payable records.the amounts to the client’s accounts payable records.

3.3. Confirm vendor accounts, including accounts with small or Confirm vendor accounts, including accounts with small or zero balances.zero balances.

4.4. Vouch large-dollar items from the purchases journal and Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end.cash disbursements journal for a limited time after year-end.

5.5. Examine the files of unmatched purchase orders, receiving Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities.reports, and vendor invoices for any unrecorded liabilities.

LO# 12 & 13

11-35


ExistenceExistenceThe auditor’s major concern is whether the recorded

liabilities are valid obligations of the entity. The auditor should vouch a sample of items on the listing of

accounts payable to other supporting documents.

LO# 12 & 13

11-36


CutoffCutoffThe auditor attempts to determine if all purchase

transactions are recorded in the proper period. On most audits, the purchase cutoff is coordinated with the client’s physical inventory count. Proper cutoff

should also be determined for purchase return transactions.

The auditor attempts to determine if all purchase transactions are recorded in the proper period. On

most audits, the purchase cutoff is coordinated with the client’s physical inventory count. Proper cutoff

should also be determined for purchase return transactions.

LO# 12 & 13

11-37


Rights and ObligationsRights and ObligationsThere is little risk related to this assertion because clients seldom have an incentive to record liabilities

that are not obligations of the entity.

LO# 12 & 13

11-38


ValuationValuationAccounts payable are recorded at either the gross

amount of the invoice or net of cash discount amount. The valuation of accruals depends upon the type and nature of the accrued expense. Most

accruals are relatively easy to value.

LO# 12 & 13

11-39


Classification, Presentation, and DisclosureClassification, Presentation, and DisclosureMajor classification issues include . . .Major classification issues include . . .

1.1. Identifying and reclassifying any material debits Identifying and reclassifying any material debits contained in accounts payable.contained in accounts payable.

2.2. Segregating short-term and long-term payables.Segregating short-term and long-term payables.

3.3. Ensuring that different types of payables are properly Ensuring that different types of payables are properly classified.classified.

Major classification issues include . . .Major classification issues include . . .

1.1. Identifying and reclassifying any material debits Identifying and reclassifying any material debits contained in accounts payable.contained in accounts payable.

2.2. Segregating short-term and long-term payables.Segregating short-term and long-term payables.

3.3. Ensuring that different types of payables are properly Ensuring that different types of payables are properly classified.classified.

LO# 12 & 13

11-40


Disclosure Items for the Purchasing ProcessDisclosure Items for the Purchasing ProcessPayables by type (trade, Payables by type (trade, employees, etc.).employees, etc.).Payables by type (trade, Payables by type (trade, employees, etc.).employees, etc.).

Short- and long-term Short- and long-term payables.payables.Short- and long-term Short- and long-term payables.payables.

Long-term purchase Long-term purchase contracts, including any contracts, including any unusual purchase unusual purchase commitments.commitments.

Long-term purchase Long-term purchase contracts, including any contracts, including any unusual purchase unusual purchase commitments.commitments.

Purchases from and Purchases from and payables to related parties.payables to related parties.Purchases from and Purchases from and payables to related parties.payables to related parties.

Dependence on a single Dependence on a single vendor or a small number vendor or a small number of vendors.of vendors.

Dependence on a single Dependence on a single vendor or a small number vendor or a small number of vendors.of vendors.

Costs by reportable Costs by reportable segment of the business.segment of the business.Costs by reportable Costs by reportable segment of the business.segment of the business.

LO# 12 & 13

11-41


Other Presentation Disclosure AssertionOther Presentation Disclosure AssertionThe auditor must ensure that all related party

transactions have been identified. When the client has entered into formal long-term purchase

contracts, adequate disclosure of the terms must be made.

LO# 12 & 13

11-42

Accounts Payable Confirmation

Accounts payable confirmations are used less Accounts payable confirmations are used less often than accounts receivable confirmations. The often than accounts receivable confirmations. The

auditor is able to examine externally created auditor is able to examine externally created source documents relating to accounts payable. source documents relating to accounts payable. When confirmations are used they are usually When confirmations are used they are usually

positive and referred to as positive and referred to as blank confirmationsblank confirmations. The . The vendor is asked to supply the balance owed by the vendor is asked to supply the balance owed by the

client.client.

Accounts payable confirmations are used less Accounts payable confirmations are used less often than accounts receivable confirmations. The often than accounts receivable confirmations. The

auditor is able to examine externally created auditor is able to examine externally created source documents relating to accounts payable. source documents relating to accounts payable. When confirmations are used they are usually When confirmations are used they are usually

positive and referred to as positive and referred to as blank confirmationsblank confirmations. The . The vendor is asked to supply the balance owed by the vendor is asked to supply the balance owed by the

client.client.

LO# 14

11-43

Evaluating the Audit Findings

All identified misstatements should be aggregated. All identified misstatements should be aggregated. The likely misstatement is then compared to The likely misstatement is then compared to

tolerable misstatement. If the likely misstatement is tolerable misstatement. If the likely misstatement is less thanless than the tolerable misstatement, the auditor has the tolerable misstatement, the auditor has

evidence that the account is fairly presented. evidence that the account is fairly presented. Conversely, it the likely misstatement Conversely, it the likely misstatement exceedsexceeds the the

tolerable, the auditor should conclude that the tolerable, the auditor should conclude that the account is not fairly presented.account is not fairly presented.

All identified misstatements should be aggregated. All identified misstatements should be aggregated. The likely misstatement is then compared to The likely misstatement is then compared to

tolerable misstatement. If the likely misstatement is tolerable misstatement. If the likely misstatement is less thanless than the tolerable misstatement, the auditor has the tolerable misstatement, the auditor has

evidence that the account is fairly presented. evidence that the account is fairly presented. Conversely, it the likely misstatement Conversely, it the likely misstatement exceedsexceeds the the

tolerable, the auditor should conclude that the tolerable, the auditor should conclude that the account is not fairly presented.account is not fairly presented.

LO# 15

11-44

End of Chapter 11

Date post:	22-Dec-2015
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