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Audit of the acquisition and payment cycle
- 1. Audit of the Acquisition and
Payment Cycle: Tests of
Controls, Substantive Tests
of Transactions, and
Accounts Payable.
Chapter 19
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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
Accounts Payable
Cash
disbursements
Purchase
returns and
allowances
Purchase
discounts
Acquisitions
of goods and
services
Raw Material
Purchases
Property, Plant
and Equipment
Prepaid
Expenses
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- 5. Accounts in the Acquisition
and Payment Cycle
Accounts Payable
Acquisitions
of goods and
services
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities
Selling Expense Control Account
Subsidiary accounts
Commissions
Travel, delivery expenses
Repairs, Advertising
Administrative Expense Control Account
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
Acquisitions:
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 disbursements:
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:
Vendor’s invoice
Debit memo
Voucher
Acquisitions transaction file
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- 12. Related Documents
and Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendor’s statement
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- 13. Related Documents
and Reports
Processing and recording cash disbursements:
Check
Cash disbursements transaction file
Cash disbursements journal or listing
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- 14. Learning Objective 3
Describe how e-commerce
affects the acquisition of
goods and service.
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- 15. How E-Commerce Affects the
Acquisition and Payment Cycle
Internet-based technologies allow for electronic
linkages between suppliers and customers.
Information about products is available over
the Internet.
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- 16. How E-Commerce Affects the
Acquisition and Payment Cycle
Some companies use extranets which allow
companies to communicate and conduct
business in a secure setting.
Other companies use business-to-business
auctions hosted on the Internet to
negotiate purchases.
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- 17. 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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- 18. Methodology for Designing Controls
and Substantive Tests
Understand internal control –
acquisitions and cash disbursements
Assess planned control risk –
acquisitions and cash disbursements
Determine extent of testing controls
Audit procedures
Sample size
Items to select
Timing
Design tests of controls and
substantive tests of transactions
for acquisitions and cash
disbursements to meet
transaction-related audit objectives
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- 19. Understand Internal Control
Study the client’s flowcharts
Review internal control questionnaires
Perform walk-through tests
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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. Determine Extent of Testing
of Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk
The auditor performs tests of controls to obtain
evidence that controls are operating effectively
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- 22. Controls and Substantive Tests
of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Acquisitions are accurately recorded
(accuracy)
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- 23. Controls and Substantive Tests
of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and
summarization)
Acquisitions are correctly classified
(classification)
Acquisitions are recorded on the
correct dates (timing)
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- 24. Attributes Sampling
Because of the importance of tests of controls
and substantive tests of transactions for
acquisitions and cash disbursements, the use
of attributes sampling is common in this
audit area.
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- 25. Important Differences
Larger number of transactions
Significant judgment
Wide range of dollar amount
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- 26. 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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- 27. Methodology for Designing Tests
of Balances for Accounts Payable
Identify client business
risks affecting
accounts payable
Set tolerable misstatement
and assess inherent risk
for accounts payable
Assess control risk for
the acquisition and
payment cycle
Phase I
Phase I
Phase I
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- 28. Methodology for Designing Tests
of Balances for Accounts Payable
Design and perform
tests of controls and
substantive tests
of transactions
for the acquisition
and payment cycle
Phase II
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- 29. Methodology for Designing Tests
of Balances for Accounts Payable
Phase III
Audit procedures
Sample size
Items to select
Timing
Design and perform
analytical procedures
for accounts
payable balance
Design tests of
details of accounts
payable balance to
satisfy balance-related
audit
objectives
Phase III
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- 30. Learning Objective 6
Design and perform analytical
procedures for accounts payable.
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- 31. Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Compare acquisition-related
expense account balances
with prior years.
Review list of accounts payable
for unusual, nonvendor, and
interest-bearing payables
Possible misstatement
Misstatement of accounts
payable and expenses
Classification misstatement
for nontrade liabilities
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- 32. Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Compare individual accounts
payable with previous years
Possible misstatement
Unrecorded or nonexistent
accounts, or misstatements
Calculate ratios, such as
purchases divided by accounts
payable, and accounts payable
divided by current liabilities
Unrecorded or nonexistent
accounts, or misstatements
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- 33. Learning Objective 7
Design and perform tests of
details of balances for accounts
payable, including out-of-period
liability tests.
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- 34. 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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- 35. 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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- 36. Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit
FOB destination
FOB origin
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- 37. Learning Objective 8
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable as audit
evidence.
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- 38. Reliability of Evidence
Distinction between vendors’ invoices
and vendors’ statements
Difference between vendors’ statements
and confirmations
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- 39. 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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- 40. Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Payments Expenses
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and
TDB
TOC + STOT + AP + TDB
Cash in
Bank
Acquisition
Expenses
Ending
balance
Audited
by AP
= Sufficient appropriate evidence per GAAS
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- 41. Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Acquisition
of assets
Audited by
TOC, STOT, and AP
TOC + STOT + AP + TDB
Acquisition
Assets
Ending
balance
Audited by
AP and
TDB
= Sufficient appropriate evidence per GAAS
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- 42. End of Chapter 19
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