Modern Auditing Assurance Services and the Integrity of

Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 15 – Auditing the Expenditure Cycle

Chapter Overview

The Expenditure Cycle

Develop Audit Objectives

Understanding the Entity and Environment

Inherent Risk, Including the Risk of Fraud • Management Misstatement of Expenditures – Understate expenses – Understate payables • Other Misstatement Factors – High volume of transactions – Unauthorized purchases – Misappropriation – Duplication of payments

Analytical Procedures

Consideration of Internal Control Components • Control Environment • Risk Assessment • Information and Communication • Monitoring

Study Break 1. The expenditure cycle consists of all of the following activities, except: A. B. C. D. Purchase transactions Cash disbursement transactions Sales transactions Purchase adjustments C. Sales transactions

Study Break 2. This analytical procedure calculates the average number of days it takes to retire accounts payables. A. B. C. D. Current ratio Quick ratio Cost of Goods Sold to Accounts Payable Turn Days D. Accounts Payable Turn Days

Purchase Transactions – Documents and Records • Purchase requisition • Purchase order • Approved vendor master file • Open purchase order file • Receiving report • Receiving file • Vendor Invoice

Purchase Transactions – Common Documents and Records • Voucher • Exception reports • Voucher summary • Voucher register • Purchase transactions file • Accounts payable master file • Suspense files

Purchase Transactions – Functions and Control Activities • Initiating Purchases – Placing vendors on an authorized vendor list – Requisitioning goods and services – Preparing purchase orders • Receipt of Goods and Services – Receiving the goods – Storing goods received for inventory – Returning goods to vendor • Recording Liabilities

Systems Flowchart – Purchase Transaction

Systems Flowchart – Purchase Transaction

Systems Flowchart – Purchase Transaction

Study Break 3. This item is a written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order. A. B. C. D. Purchase requisition Purchase order Receiving report Receiving file B. Purchase order

Study Break 4. This function of processing of purchase transaction includes placing vendors on an authorized vendor list and preparing purchase orders. A. B. C. D. Initiating purchases Receipt of goods and services Recording liabilities Paying liabilities A. Initiating purchases

Cash Disbursement Transactions– Common Documents and Records • Check Summary • Cash Disbursements Transaction File • Cash Disbursements Journal or Check Register

Cash Disbursement Transactions. Function and Control Activities • Computerized System – Paying the Liability – Recording the Disbursement • Manual System – Paying the Liability – Recording the Disbursement

Systems Flowchart – Cash Disbursement Transactions

Study Break 5. This record is a report of total checks issued in a batch or during a day. A. B. C. D. Check summary Cash disbursements transaction file Check register B. Check summary

Purchase Adjustment Transactions– Common Documents and Records • Purchase Return Authorization • Shipping Report • Debit Memo

Purchase Adjustment Function and Controls • Purchase Returns and Allowances • Other Controls • Tests of Controls

Substantive Tests of Accounts Payable Balances • Determining Detection Risk for Tests of Details – Existence and Occurrence – Completeness – Rights and Obligations – Valuation and Allocation – Presentation and Disclosure

Designing Substantive Tests • Initial Procedures • Analytical Procedures

Designing Substantive Tests • Tests of Details of Transactions – Vouch Recorded Payables to Supporting Documentation – Perform Cutoff Tests • Purchases cutoff tests • Cash disbursement cutoff tests • Purchase return cutoff tests – Perform Search for Unrecorded Payables • Subsequent payments

Designing Substantive Tests • Tests of Details of Balances – Accounts Payable Confirmations – Reconcile Unconfirmed Payables to Vendor Statements • Tests of Details of Disclosures

Study Break 6. This is a report prepared on the shipment of goods to vendors showing the kinds and quantities of goods shipped. A. B. C. D. Purchase Return Authorization Shipping Report Debit Memo Check Summary B. Shipping Report

Study Break 7. These items include all checks issued or vouchers paid after the balance sheet date. A. B. C. D. Purchase return cutoff tests Check summary Subsequent payments Confirmation of accounts payable C. Subsequent payments