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Audit of the Acquisition

and Payment Cycle: Tests


of Controls, Substantive
Tests of Transactions and
Accounts Payable.

Chapter 19

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Learning Objective 1

Identify the accounts and the


classes of transactions in the
acquisition and payment cycle.

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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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Accounts in the Acquisition
and Payment Cycle
Raw Material
Cash in Bank Accounts Payable Purchases
Cash Acquisitions
disbursements of goods and
services
Purchase Returns Property, Plant
and Allowances Purchase and Equipment
returns and
allowances

Purchase
Purchase discounts Prepaid
Discounts Expenses

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Accounts in the Acquisition
and Payment Cycle
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities

Accounts Payable Selling Expense Control Account


Acquisitions Subsidiary accounts
of goods and Commissions
services Travel, delivery expenses
Repairs, Advertising

Administrative Expense Control Account


Subsidiary accounts
Supplies, Officers travel
Legal fees
Auditing fees, Taxes
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Learning Objective 2

Describe the business functions


and the related documents and
records in the acquisition and
payment cycle.

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Classes of Transactions
and Accounts

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

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Classes of Transactions
and Accounts

Cash in bank (from cash disbursements)


Accounts payable
Purchase discounts

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Business Functions in the Cycle

Processing purchase orders

Receiving goods and services

Recognizing the liability

Processing and recording cash disbursements

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Related Documents and Reports

Processing purchase orders

Purchase requisition

Purchase order

Receiving goods and services

Receiving report

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Related Documents and Reports
Recognizing the liability

Acquisitions transaction file

Acquisitions journal or listing

Vendors invoice Debit memo

Voucher A/P master file

A/P trial balance Vendors statement


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Related Documents and Reports

Processing and recording cash disbursements

Check

Cash disbursements transaction file

Cash disbursements journal or listing

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Learning Objective 3

Describe how e-commerce


affects the acquisition of
goods and service.

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How E-Commerce Affects the
Acquisition and Payment Cycle
Internet-based technologies
allow for electronic linkages
between suppliers and customers.

Suppliers Customers

EDI EDI
Purchase Customer
orders orders

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How E-Commerce Affects the
Acquisition and Payment Cycle
Information about products is available over
the Internet.

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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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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Methodology for Designing Tests
of Balances: Accounts Receivable
Understand internal Assess planned control
control acquisitions risk acquisitions and
and cash disbursements. cash disbursements.

Determine extent of testing controls.

Design tests of controls and substantive tests of


transactions for acquisitions and cash disbursements
to meet transaction-related audit objectives.

Audit Sample Items to


Timing
procedures size select

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Understand Internal Control

The auditor gains an understanding of internal


control for the acquisition and payment cycle
by studying the clients flowcharts, preparing
internal control questionnaires, and performing
walk-through tests for acquisitions and cash
disbursements.

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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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Evaluate Cost-Benefit of Testing
Controls

The auditor identifies the key internal controls


and weaknesses and assesses control risk.

The auditor decides whether substantive tests


will be reduced sufficiently to justify the cost
of performing tests of controls.

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Controls and Substantive Tests of
Transactions for Acquisitions
Recorded acquisitions are for goods and services
received, consistent with the best interests of the
client (existence).

Existing acquisitions are recorded (completeness).

Acquisitions are accurately recorded (accuracy).

Acquisitions are correctly classified (classification).

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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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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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Methodology for Designing Tests
of Details of Balances for A/R
Phase I

Identify client business risks affecting accounts


payable.

Set tolerable misstatement and assess inherent


risk for accounts payable.

Assess control risk for accounts payable.


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Methodology for Designing Tests
of Details of Balances for A/R
Phase II

Design and perform tests of controls and


substantive tests of transactions for the
acquisition and payment cycle.

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Methodology for Designing Tests
of Details of Balances for A/R
Phase III

Design and perform analytical procedures for


the acquisition and payment cycle.

Design tests of details of accounts payable


balance to satisfy balance-related audit objectives.

Audit Sample Items to


Timing
procedures size select
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Learning Objective 6

Design and perform analytical


procedures for accounts payable.

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Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure Possible misstatement

Compare acquisition-related
Misstatement of accounts
expense account balances
payable and expenses.
with prior years.

Review list of accounts payable Classification


for unusual, nonvender, and misstatement
interest-bearing payables. for nontrade liabilities.

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Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure Possible misstatement
Unrecorded or
Compare individual accounts
nonexistent accounts,
payable with previous years.
or misstatements.

Calculate ratios, such as


Unrecorded or
purchases divided by accounts
nonexistent accounts,
payable, and accounts payable
or misstatements.
divided by current liabilities.

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Learning Objective 7

Design and perform tests of


details of balances for accounts
payable, including out-of-period
liability tests.

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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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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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Cutoff Tests

Relationship of cutoff to physical


observation of inventory

Inventory in transit

FOB destination FOB origin

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Learning Objective 8

Distinguish the reliability of


vendors invoices, vendors
statements, and confirmations
of accounts payable as audit
evidence.

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Reliability of Evidence

Distinction between vendors


invoices and vendors statements.

Difference between vendors


statements and confirmations.

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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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Types of Audit Tests for the
Acquisition and Payment Cycle
Cash in Accounts Acquisition
Bank Payable Expenses
Payments Expenses
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP

Ending Ending
balance balance
Audited by AP and TDB

TOC + STOT + AP + TDB


= Sufficient competent evidence per GAAS
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Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts Acquisition
Payable Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
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End of Chapter 19

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