©2003 prentice hall business publishing, auditing and assurance services 9/e, arens/elder/beasley...
TRANSCRIPT
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 1
Audit of the Acquisitionand Payment Cycle
Chapter 18
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 2
Learning Objective 1
Identify the accounts and the
classes of transactions in the
acquisition and payment cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 3
Transactions in the Acquisition and Payment Cycle
1. Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances
and purchase discounts
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 4
Accounts in the Acquisitionand Payment Cycle
Cash in Bank
Purchase Returnsand Allowances
PurchaseDiscounts
Raw MaterialPurchases
Property, Plant,and Equipment
PrepaidExpenses
Accounts PayableCash Acquisitionsdisbursements of goods and
services
Purchasereturns andallowances
Purchasediscounts
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 5
Accounts in the Acquisitionand Payment Cycle
Accounts PayableAcquisitionsof goods andservices
ManufacturingExpense Control
AdministrativeExpense Control
SubsidiaryaccountsRepair and maint.TaxesSuppliesFreight inUtilities
Selling ExpenseControl
SubsidiaryaccountsCommissionsTravel expenseDelivery expenseRepairsAdvertising
SubsidiaryAccountsSuppliesOfficers’ travelLegal feesAuditing feesTaxes
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 6
Learning Objective 2
Describe the business functions
and the related documents
and records in the acquisition
and payment cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 7
Classes of Transactionsand Accounts
InventoryProperty, plant, and equipment
Prepaid expensesLeasehold improvements
Accounts payableManufacturing expenses
Selling and administrative expenses
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 8
Classes of Transactionsand Accounts
Cash in bank (from cash disbursements)Accounts payablePurchase discounts
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 9
Business Functionsin the Cycle
Processing Purchase Orders
Receiving Goods and Services
Recognizing the Liability
Processing and Recording Cash Disbursements
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 10
Related Documentsand Reports
Purchase requisition Purchase order
Receiving report
Processing Purchase Orders
Receiving Goods and Services
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 11
Related Documentsand Reports
Acquisitions transaction file
Acquisitions journal or listing
Vendor’s invoice
Voucher
A/P trial balance
Debit memo
A/P master file
Vendor’s statement
Recognizing the Liability
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 12
Related Documentsand Reports
Cash disbursements transaction file
Check
Cash disbursements journal or listing
Processing and Recording Cash Disbursements
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 13
Learning Objective 3
Describe how e-commerce
affects the acquisition of
goods and services.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 14
How E-Commerce Affects the Acquisition and Payment Cycle
Suppliers Customers
Electronic data interchange (EDI) is theelectronic exchange of information between
companies and their suppliers and consumers.
Purchaseorders
Customerorders
EDIEDI
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 15
How E-Commerce Affects the Acquisition and Payment Cycle
Some companies use extranets which linkthe intranets of two or more companies.
Other companies use business-to-business auctions hosted on the
Internet to negotiate purchases.
Information about products isavailable over the Internet.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 16
Learning Objective 4
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for the
acquisition and payment cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 17
Methodology for Designing Tests of
Balances – Accounts Receivable
Understand internal control –acquisitions and cash disbursements.
Assess planned control risk –acquisitions and cash disbursements.
Evaluate cost-benefitof testing controls.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 18
Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of controlsand substantive testsof transactions for
acquisitions and cashdisbursements to meet
transaction-relatedaudit objectives.
Audit procedures
Sample size
Items to select
Timing
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 19
Understand Internal Control
The auditor gains an understanding of internalcontrol for the acquisition and payment
cycle by studying the client’s flowcharts,preparing internal control questionnaires,
and performing walk-through tests foracquisitions and cash disbursements.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 20
Assess Planned Control Risk
Authorization of purchases
Separation of asset custodyfrom other functions
Timely recording andindependent review
of transactions
Authorization of payments
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 21
Evaluate Cost-Benefit of Testing Controls
The auditor identifies the key internal controlsand weaknesses and assesses control risk.
The auditor decides whether substantive testswill be reduced sufficiently to justify the cost
of performing tests of controls.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 22
Controls and Substantive Tests of
Transactions for Acquisitions
Recorded acquisitions are for goods and servicesreceived, consistent with the best interests
of the client (existence).
Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy).
Acquisitions are correctly classified (classification).
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 23
Controls and Substantive Tests ofTransactions for Cash
Disbursements
The assumption underlying these controlsand audit procedures is separate cash
disbursements and acquisitions journals.
The acquisitions and cash disbursementstests are typically performed concurrently.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 24
Learning Objective 5
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 25
Identify client risks affectingaccounts payable.
Methodology for Designing Tests
of Details of Balances for A/P
Phase I
Set tolerable misstatement and assess inherent risk.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 26
Methodology for Designing Tests
of Details of Balances for A/P
Phases I and II
Assess control risk and design and perform tests of controls and substantive
tests of transactions.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 27
Methodology for Designing Tests
of Details of Balances for A/P
Phase III
Design and perform analytical procedures.
Design and perform tests of details of accounts payable balance.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 28
Learning Objective 6
Design and perform analytical
procedures for accounts payable.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 29
Analytical Procedures for the Acquisition and Payment Cycle
Analytical Procedure Possible MisstatementCompare acquisition- Misstatement ofrelated expense account accounts payablebalances with prior years. and expenses
Review list of accounts Classificationpayable for unusual, misstatement fornonvender, and interest- nontrade liabilitiesbearing payables.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 30
Analytical Procedures for the Acquisition and Payment Cycle
Analytical Procedure Possible MisstatementCompare individual Unrecorded oraccounts payable with nonexistent accounts,previous years. or misstatementsCalculate ratios such as Unrecorded orpurchases divided by nonexistent accounts,accounts payable, and or misstatementsaccounts payable dividedby current liabilities.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 31
Learning Objective 7
Design and perform tests
of details of balances for
accounts payable, including
out-of-period liability tests.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 32
Out-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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 33
Out-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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 34
Cutoff Tests
Relationship of cutoff to physicalobservation of inventory
Inventory in transit
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 35
Learning Objective 8
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable
as audit evidence.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 36
Reliability of Evidence
Distinction between vendors’invoices and vendors’ statements
Difference between vendors’statements and confirmations
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 37
Sample Size
Sample sizes for accounts payable tests varyconsiderably, depending on many factors.
Statistical sampling is less commonly usedfor the audit of accounts payable than for
accounts receivable.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 38
Types of Audit Tests for theAcquisition and Payment Cycle
Cash inBank
AccountsPayable
AcquisitionExpenses
Endingbalance
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
Audited byAP
Payments Expenses
Endingbalance
Audited byAP and TDP
Audited byTOC, STOT, and AP
Audited byTOC, STOT, and AP
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 39
Types of Audit Tests for theAcquisition and Payment Cycle
AccountsPayable
AcquisitionAssets
Endingbalance
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
Acquisitionof assets
Audited byTOC, STOT, and AP
Audited byAP and TDP
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 40
End of Chapter 18