Arens_Chapter18 Auditing

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 18 - 1

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

Payable.Payable.

Chapter 18Chapter 18

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 18 - 18 - 22

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. Acquisitions of goods and services

2. Cash disbursements

3. Purchase returns and allowancesand purchase discounts


Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle

Cash in Bank

Purchase Returnsand Allowances

PurchaseDiscounts

Cashdisbursements

Purchasereturns andallowances

Purchasediscounts

Acquisitionsof goods andservices

Raw MaterialPurchases

Property, Plantand Equipment

PrepaidExpenses

Accounts Payable


Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle

Acquisitionsof goods andservices

Accounts Payable

Manufacturing Expense Control Account

Subsidiary accountsRepair and maintenanceTaxes, SuppliesFreight in, Utilities

Administrative Expense Control Account

Subsidiary accountsSupplies, Officers’ travelLegal feesAuditing fees, Taxes

Selling Expense Control Account

Subsidiary accountsCommissionsTravel, delivery expensesRepairs, 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

Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements Accounts payable Manufacturing expenses Selling and administrative expenses

Acquisitions:


Classes of TransactionsClasses of Transactionsand Accountsand Accounts

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

Cash disbursements:


Business Functions in the CycleBusiness Functions in the Cycle

Processing purchase orders

Receiving goods and services

Recognizing the liability

Processing and recording cash disbursements


Related DocumentsRelated Documentsand Reportsand Reports

Purchase requisition

Purchase order

Receiving report

Processing purchase orders:

Receiving goods and services:



Vendor’s invoice

Voucher

Debit memo

Recognizing the liability:

Acquisitions transaction file



Acquisitions journal or listing

Accounts payable master file

Accounts payable trial balance

Vendor’s statement

Recognizing the liability:



Cash disbursements transaction file

Check

Cash disbursements journal or listing

Processing and recording cash disbursements:



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 Controls Methodology for Designing Controls and Substantive Testsand 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 andsubstantive tests of transactions

for acquisitions and cashdisbursements to meet

transaction-related audit objectives


Understand Internal ControlUnderstand Internal Control

Perform walk-through tests

Study the client’s flowcharts

Review internal control questionnaires


Assess Planned Control RiskAssess Planned Control Risk

Authorization of purchases

Separation of asset custody fromother functions

Timely recording and independentreview of transactions

Authorization of payments


Determine Extent of TestingDetermine Extent of Testingof Controlsof Controls

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

The auditor performs tests of controls to obtainevidence that controls are operating effectively


Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions

Recorded acquisitions are for goodsand services received (occurrence)

Existing acquisitions are recorded(completeness)

Acquisitions are accurately recorded(accuracy)


Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions

Acquisitions are correctly includedin the master files (posting andsummarization)

Acquisitions are correctly classified(classification)

Acquisitions are recorded on thecorrect dates (timing)


Attributes SamplingAttributes Sampling

Because of the importance of tests of controlsand substantive tests of transactions foracquisitions and cash disbursements, the useof attributes sampling is common in thisaudit area.


Important DifferencesImportant Differences

Larger number of transactions

Significant judgment

Wide range of dollar amount



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 businessrisks affecting

accounts payable

Methodology for Designing TestsMethodology for Designing Testsof Balances for Accounts Payableof Balances for Accounts Payable

Set tolerable misstatementand assess inherent risk

for accounts payable

Assess control risk forthe acquisition and

payment cycle

Phase I

Phase I

Phase I



Design and performtests of controls and

substantive testsof transactions

for the acquisitionand payment cycle

Phase II


Timing

Items to select

Sample size

Audit procedures


Design and performanalytical procedures

for accountspayable balanceDesign tests of

details of accountspayable balance to

satisfy balance-related auditobjectives

Phase III

Phase III



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 payablefor unusual, nonvendor, andinterest-bearing payables

Classification misstatementfor nontrade liabilities

Analytical procedure

Compare acquisition-relatedexpense account balanceswith prior years.

Misstatement of accountspayable and expenses

Possible misstatement


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

Analytical procedure

Compare individual accountspayable with previous years

Unrecorded or nonexistentaccounts, or misstatements

Calculate ratios, such aspurchases divided by accountspayable, and accounts payabledivided by current liabilities

Unrecorded or nonexistentaccounts, or misstatements

Possible 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 forsubsequent cash disbursements

Examine underlying documentation for billsnot paid several weeks after the year-end

Trace receiving reports issued beforeyear-end to related vendors’ invoices


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

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

Send confirmations to vendors with whichthe client does business


Cutoff TestsCutoff Tests

Relationship of cutoff to physicalobservation of inventory

Inventory in transit FOB destination

FOB 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’ invoicesand vendors’ statements

Difference between vendors’ statementsand confirmations


Sample SizeSample Size

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

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


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

TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS

Cash inBank

AccountsPayable

AcquisitionExpenses

Payments Expenses

Audited byTOC, STOT, and AP

Endingbalance

Endingbalance


Audited byAP and

TDB

Auditedby AP and

TDB


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

TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS

AccountsPayable

AcquisitionAssets

Acquisitionof assets

Endingbalance


Audited byAP and

TDB

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 18 - 39

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