19 - 1 Prentice Hall Business Publishing, Prentice Hall Business Publishing, Auditing 11/e, Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder Audit of the Audit of the Acquisition and Acquisition and Payment Cycle: Tests Payment Cycle: Tests of Controls, of Controls, Substantive Tests of Substantive Tests of Transactions and Transactions and Accounts Payable. Accounts Payable. Chapter 19 Chapter 19
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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.
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
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
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.
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.
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.
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).
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.
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
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.
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
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.
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.
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.
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.
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.
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.