Audit of the Acquisition and Payment Cycle Tests

  • Slides: 39
Download presentation
Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions,

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable. Chapter 18 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 1

Learning Objective 1 Identify the accounts and the classes of transactions in the acquisition

Learning Objective 1 Identify the accounts and the classes of transactions in the acquisition and payment cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 2

Transactions in the Acquisition and Payment Cycle 1. Acquisitions of goods and services 2.

Transactions in the Acquisition and Payment Cycle 1. Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances and purchase discounts © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 3

Accounts in the Acquisition and Payment Cycle Cash in Bank Purchase Returns and Allowances

Accounts in the Acquisition and Payment Cycle Cash in Bank Purchase Returns and Allowances Purchase Discounts Accounts Payable Cash Acquisitions disbursements of goods and services Purchase returns and allowances Purchase discounts © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Raw Material Purchases Property, Plant and Equipment Prepaid Expenses 18 - 4

Accounts in the Acquisition and Payment Cycle Manufacturing Expense Control Account Subsidiary accounts Repair

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 Subsidiary accounts Commissions Travel, delivery expenses Repairs, Advertising Acquisitions of goods and services Administrative Expense Control Account © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Subsidiary accounts Supplies, Officers’ travel Legal fees Auditing fees, Taxes 18 - 5

Learning Objective 2 Describe the business functions and the related documents and records in

Learning Objective 2 Describe the business functions and the related documents and records in the acquisition and payment cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 6

Classes of Transactions and Accounts Acquisitions: Ø Inventory Property, plant, and equipment Ø Prepaid

Classes of Transactions and Accounts Acquisitions: Ø Inventory Property, plant, and equipment Ø Prepaid expenses Ø Leasehold improvements Ø Accounts payable Ø Manufacturing expenses Ø Ø Selling and administrative expenses © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 7

Classes of Transactions and Accounts Cash disbursements: Ø Cash in bank (from cash disbursements)

Classes of Transactions and Accounts Cash disbursements: Ø Cash in bank (from cash disbursements) Accounts payable Ø Purchase discounts Ø © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 8

Business Functions in the Cycle Ø Processing purchase orders Ø Receiving goods and services

Business Functions in the Cycle Ø Processing purchase orders Ø Receiving goods and services Ø Recognizing the liability Ø Processing and recording cash disbursements © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 9

Related Documents and Reports Processing purchase orders: Ø Purchase requisition Ø Purchase order Receiving

Related Documents and Reports Processing purchase orders: Ø Purchase requisition Ø Purchase order Receiving goods and services: Ø Receiving report © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 10

Related Documents and Reports Recognizing the liability: Ø Vendor’s invoice Ø Debit memo Ø

Related Documents and Reports Recognizing the liability: Ø Vendor’s invoice Ø Debit memo Ø Voucher Ø Acquisitions transaction file © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 11

Related Documents and Reports Recognizing the liability: Ø Acquisitions journal or listing Ø Accounts

Related Documents and Reports Recognizing the liability: Ø Acquisitions journal or listing Ø Accounts payable master file Ø Accounts payable trial balance Ø Vendor’s statement © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 12

Related Documents and Reports Processing and recording cash disbursements: Ø Check Ø Cash disbursements

Related Documents and Reports Processing and recording cash disbursements: Ø Check Ø Cash disbursements transaction file Ø Cash disbursements journal or listing © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 13

Learning Objective 3 Understand internal control, and design and perform tests of controls and

Learning Objective 3 Understand internal control, and design and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 14

Methodology for Designing Controls and Substantive Tests Understand internal control – acquisitions and cash

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 Design tests of controls and Audit procedures substantive tests of transactions Sample size for acquisitions and cash Items to select disbursements to meet Timing transaction-related audit objectives © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 15

Understand Internal Control Ø Study the client’s flowcharts Ø Review internal control questionnaires Ø

Understand Internal Control Ø Study the client’s flowcharts Ø Review internal control questionnaires Ø Perform walk-through tests © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 16

Assess Planned Control Risk Ø Authorization of purchases Ø Separation of asset custody from

Assess Planned Control Risk Ø Authorization of purchases Ø Separation of asset custody from other functions Ø Timely recording and independent review of transactions Ø Authorization of payments © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 17

Determine Extent of Testing of Controls Ø The auditor identifies the key internal controls

Determine Extent of Testing of Controls Ø The auditor identifies the key internal controls and weaknesses and assesses control risk Ø The auditor performs tests of controls to obtain evidence that controls are operating effectively © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 18

Controls and Substantive Tests of Transactions for Acquisitions Ø Recorded acquisitions are for goods

Controls and Substantive Tests of Transactions for Acquisitions Ø Recorded acquisitions are for goods and services received (occurrence) Ø Existing acquisitions are recorded (completeness) Ø Acquisitions are accurately recorded (accuracy) © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 19

Controls and Substantive Tests of Transactions for Acquisitions Ø Acquisitions are correctly included in

Controls and Substantive Tests of Transactions for Acquisitions Ø Acquisitions are correctly included in the master files (posting and summarization) Ø Acquisitions are correctly classified (classification) Ø Acquisitions are recorded on the correct dates (timing) © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 20

Attributes Sampling Because of the importance of tests of controls and substantive tests of

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. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 21

Important Differences Ø Larger number of transactions Ø Significant judgment Ø Wide range of

Important Differences Ø Larger number of transactions Ø Significant judgment Ø Wide range of dollar amount © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 22

Learning Objective 4 Describe the methodology for designing tests of details of balances for

Learning Objective 4 Describe the methodology for designing tests of details of balances for accounts payable using the audit risk model. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 23

Methodology for Designing Tests of Balances for Accounts Payable Identify client business risks affecting

Methodology for Designing Tests of Balances for Accounts Payable Identify client business risks affecting accounts payable Phase I Set tolerable misstatement and assess inherent risk Phase I for accounts payable Assess control risk for the acquisition and payment cycle Phase I © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 24

Methodology for Designing Tests of Balances for Accounts Payable Design and perform tests of

Methodology for Designing Tests of Balances for Accounts Payable Design and perform tests of controls and substantive tests Phase II of transactions for the acquisition and payment cycle © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 25

Methodology for Designing Tests of Balances for Accounts Payable Design and perform analytical procedures

Methodology for Designing Tests of Balances for Accounts Payable Design and perform analytical procedures Phase III for accounts payable balance Design tests of Audit procedures details of accounts Sample size payable balance to satisfy balance. Items to select related audit Timing objectives © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Phase III 18 - 26

Learning Objective 5 Design and perform analytical procedures for accounts payable. © 2010 Prentice

Learning Objective 5 Design and perform analytical procedures for accounts payable. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 27

Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Possible misstatement Compare acquisition-related

Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Possible misstatement Compare acquisition-related expense account balances with prior years. Misstatement of accounts payable and expenses Review list of accounts payable Classification misstatement for nontrade liabilities for unusual, nonvendor, and interest-bearing payables © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 28

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

Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Possible misstatement Compare individual accounts payable with previous years Unrecorded or nonexistent accounts, or misstatements Calculate ratios, such as Unrecorded or nonexistent purchases divided by accounts, or misstatements payable, and accounts payable divided by current liabilities © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 29

Learning Objective 6 Design and perform tests of details of balances for accounts payable,

Learning Objective 6 Design and perform tests of details of balances for accounts payable, including out-of-period liability tests. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 30

Out-of-Period Liability Tests Ø Examine underlying documentation for subsequent cash disbursements Ø Examine underlying

Out-of-Period Liability Tests Ø Examine underlying documentation for subsequent cash disbursements Ø Examine underlying documentation for bills not paid several weeks after the year-end Ø Trace receiving reports issued before year-end to related vendors’ invoices © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 31

Out-of-Period Liability Tests Ø Trace vendors’ statements that show a balance due to the

Out-of-Period Liability Tests Ø Trace vendors’ statements that show a balance due to the accounts payable trial balance Ø Send confirmations to vendors with which the client does business © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 32

Cutoff Tests Ø Relationship of cutoff to physical observation of inventory Ø Inventory in

Cutoff Tests Ø Relationship of cutoff to physical observation of inventory Ø Inventory in transit Ø FOB destination Ø FOB origin © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 33

Learning Objective 7 Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations of

Learning Objective 7 Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations of accounts payable as audit evidence. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 34

Reliability of Evidence Ø Distinction between vendors’ invoices and vendors’ statements Ø Difference between

Reliability of Evidence Ø Distinction between vendors’ invoices and vendors’ statements Ø Difference between vendors’ statements and confirmations © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 35

Sample Size Sample sizes for accounts payable tests vary considerably, depending on many factors.

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. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 36

Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Cash in

Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Cash in Bank Acquisition Expenses Payments Expenses Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 37

Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Acquisition Assets

Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Acquisition Assets Acquisition of assets Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18 - 38

End of Chapter 18 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 18

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