Audit of PurchaseAudit of Purchaseand Payment Cycleand Payment Cycle

Syaffiq Ubaidillah b BorhanudinSyaffiq Ubaidillah b Borhanudin

Taufiq b RahmatTaufiq b Rahmat

Izzaz Naqiuddin b Zamrose NasriIzzaz Naqiuddin b Zamrose Nasri

Mohd Hazmi b Abu KassimMohd Hazmi b Abu Kassim

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 Transactions in the Acquisition and Payment Acquisition and Payment

CycleCycle

1.1. Acquisitions of goods and servicesAcquisitions of goods and services2.2. Cash disbursementsCash disbursements3.3. Purchase returns and allowancesPurchase returns and allowances

and purchase discountsand purchase discounts

Accounts in the Accounts in the AcquisitionAcquisition

and Payment Cycleand Payment CycleCash in BankCash in Bank

Purchase ReturnsPurchase Returnsand Allowancesand Allowances

PurchasePurchaseDiscountsDiscounts

CashCashdisbursementsdisbursements

PurchasePurchasereturns andreturns andallowancesallowances

PurchasePurchasediscountsdiscounts

AcquisitionsAcquisitionsof goods andof goods andservicesservices

Raw MaterialRaw MaterialPurchasesPurchases

Property, PlantProperty, Plantand Equipmentand Equipment

PrepaidPrepaidExpensesExpenses

Accounts PayableAccounts Payable

Accounts in the Accounts in the AcquisitionAcquisition

and Payment Cycleand Payment Cycle

AcquisitionsAcquisitionsof goods andof goods andservicesservices

Accounts PayableAccounts Payable

Manufacturing Expense Control AccountSubsidiary accountsRepair and maintenanceTaxes, SuppliesFreight in, Utilities

Administrative Expense Control AccountSubsidiary accountsSupplies, Officers’ travelLegal feesAuditing fees, Taxes

Selling Expense Control AccountSubsidiary accountsCommissionsTravel expenseRepairs, Advertising

Describe the business functionsDescribe the business functions

and the related documentsand the related documents

and records in the acquisitionand records in the acquisition

and payment cycle.and payment cycle.

Classes of TransactionsClasses of Transactionsand Accountsand Accounts

InventoryInventoryProperty, plant, and equipmentProperty, plant, and equipmentPrepaid expensesPrepaid expensesLeasehold improvementsLeasehold improvementsAccounts payableAccounts payableManufacturing expensesManufacturing expensesSelling and administrative expensesSelling and administrative expenses

Classes of TransactionsClasses of Transactionsand Accountsand Accounts

Cash in bankCash in bank (from cash disbursements)(from cash disbursements)Accounts payableAccounts payablePurchase discountsPurchase discounts

BusinessBusiness Functions Functionsin the Cyclein the Cycle

Processing purchase ordersProcessing purchase orders

Receiving goods and servicesReceiving goods and services

Recognizing the liabilityRecognizing the liability

Processing and recording cash disbursementsProcessing and recording cash disbursements

Related DocumentsRelated Documentsand Reportsand Reports

Purchase requisitionPurchase requisition Purchase orderPurchase order

Receiving reportReceiving report

Processing purchase ordersProcessing purchase orders

Receiving goods and servicesReceiving goods and services

Related DocumentsRelated Documentsand Reportsand Reports

Acquisitions transaction fileAcquisitions transaction file

Acquisitions journal or listingAcquisitions journal or listing

Vendor’sVendor’s invoiceinvoice

VoucherVoucher

A/P trial balanceA/P trial balance

Debit memoDebit memo

A/P master fileA/P master file

Vendor’s statementVendor’s statement

Recognizing the liabilityRecognizing the liability

Related DocumentsRelated Documentsand Reportsand Reports

Cash disbursements transaction fileCash disbursements transaction file

ChequeCheque

Cash disbursements journal or listingCash disbursements journal or listing

Processing and recording cash disbursementsProcessing and recording cash disbursements

Major Internal Control and Major Internal Control and Related Audit ProceduresRelated Audit Procedures

Transaction-related audit objective

Key internal control Common test of control Common substantive tests of transactions

Existence Purchase requisition, purchase order, receiving report, and vendor’s invoice are attached to the voucher

Examine documents in voucher package for existence

Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts

Completeness Purchase orders are prenumbered and accounted for

Account for sequence of purchase order

Trace from a file of receiving reports to the acquisitions journal

Accuracy Calculations and amounts are internally verified

Examine indication of internal verification

Compare recorded transactions in the acquisitions journal with the vendor’s invoice, receiving report, and other supporting documentation

Classification An adequate chart of accounts is used

Examine procedures manual and chart of accounts

Compare classification with chart of accounts by reference to vendor’s invoices

Timing Procedures require recording transactions as soon as possible after goods and services have been received

Examine procedures manual and observe whether unrecorded vendors’ invoices exist

Compare dates of receiving reports and vendors’ invoices, with dates in the acquisitions journal

Posting and summarization Accounts payable master file contents are internally verified

Examine indication of internal verification

Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable and inventory master files

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 theof transactions for the

acquisition and payment cycle.acquisition and payment cycle.

Methodology for Designing Methodology for Designing Tests ofTests of

Balances – Accounts Balances – Accounts ReceivableReceivable

Understand internalUnderstand internalcontrol – acquisitionscontrol – acquisitions

and cash disbursements.and cash disbursements.

AuditAuditproceduresprocedures

Items toItems toselectselect

SampleSamplesizesize TimingTiming

Assess planned controlAssess planned controlrisk – acquisitions andrisk – acquisitions andcash disbursements.cash disbursements.

Design tests of controls and substantive tests ofDesign tests of controls and substantive tests oftransactions for acquisitions and cash disbursementstransactions for acquisitions and cash disbursements

to meet transaction-related audit objectives.to meet transaction-related audit objectives.

Evaluate cost-benefit of testing controls.Evaluate cost-benefit of testing controls.

Understand Internal Understand Internal ControlControl

The auditor gains an understanding of internalThe auditor gains an understanding of internalcontrol for the acquisition and paymentcontrol for the acquisition and payment

cycle by studying the client’s flowcharts,cycle by studying the client’s flowcharts,preparing internal control questionnaires,preparing internal control questionnaires,

and performing walk-through tests forand performing walk-through tests foracquisitions and cash disbursements.acquisitions and cash disbursements.

Assess Planned Control Assess Planned Control RiskRisk

Authorization of purchasesAuthorization of purchases

Separation of asset custodySeparation of asset custodyfrom other functionsfrom other functions

Timely recording and independentTimely recording and independentreview of transactionsreview of transactions

Authorization of paymentsAuthorization of payments

Evaluate Cost-Benefit of Evaluate Cost-Benefit of Testing ControlsTesting Controls

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

The auditor decides whether substantive testsThe auditor decides whether substantive testswill be reduced sufficiently to justify the costwill be reduced sufficiently to justify the cost

of performing tests of controls.of performing tests of controls.

Controls and Substantive Controls and Substantive Tests ofTests of

Transactions for AcquisitionsTransactions for Acquisitions

Recorded acquisitions are for goods andRecorded acquisitions are for goods andservices received, consistent with theservices received, consistent with thebest interests of the client (existence).best interests of the client (existence).

Existing acquisitions are recorded (completeness).Existing acquisitions are recorded (completeness).

Acquisitions are accurately recorded (accuracy).Acquisitions are accurately recorded (accuracy).

Acquisitions are correctly classified (classification).Acquisitions are correctly classified (classification).

Controls and Substantive Controls and Substantive Tests ofTests of

Transactions for AcquisitionsTransactions for Acquisitions

Acquisitions transactions are recordedAcquisitions transactions are recordedon the correct dates (timing).on the correct dates (timing).

Acquisitions transactions are properlyAcquisitions transactions are properlyincluded in the accounts payable andincluded in the accounts payable and

inventory master files and are properlyinventory master files and are properlysummarized (posting and summarization).summarized (posting and summarization).

Controls and Substantive Controls and Substantive Tests ofTests of

Transactions for Cash Transactions for Cash DisbursementsDisbursements

The assumption underlying these controlsThe assumption underlying these controlsand audit procedures is separate cashand audit procedures is separate cash

disbursements and acquisitions journals.disbursements and acquisitions journals.

The acquisitions and cash disbursementsThe acquisitions and cash disbursementstests are typically performed concurrently.tests are typically performed concurrently.

Attributes SamplingAttributes Sampling

Because of the importance of tests ofBecause of the importance of tests ofcontrols and substantive tests ofcontrols and substantive tests of

transactions for acquisitions and cashtransactions for acquisitions and cashdisbursements, the use of attributesdisbursements, the use of attributes

sampling is common in this audit area.sampling is common in this audit area.

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 risks affectingIdentify client risks affectingaccounts payable.accounts payable.

Methodology for Designing Methodology for Designing TestsTests

of Details of Balances for of Details of Balances for A/PA/P

Phase IPhase I

Set tolerable misstatement and assessSet tolerable misstatement and assessinherent risk for accounts payable.inherent risk for accounts payable.

Assess control risk for accounts payable.Assess control risk for accounts payable.

Methodology for Designing Methodology for Designing TestsTests

of Details of Balances for of Details of Balances for A/PA/P

Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions for thesubstantive tests of transactions for the

acquisition and payment cycle.acquisition and payment cycle.

Phase IIPhase II

Methodology for Designing Methodology for Designing TestsTests

of Details of Balances for of Details of Balances for A/PA/P

Design and perform analytical proceduresDesign and perform analytical proceduresfor the acquisition and payment cycle.for the acquisition and payment cycle.

Phase IIIPhase III

AuditAuditproceduresprocedures

Items toItems toselectselect

SampleSamplesizesize TimingTiming

Design tests of details of accounts payable balanceDesign tests of details of accounts payable balanceto satisfy balance-related audit objectives.to satisfy balance-related audit objectives.

Design and perform analyticalDesign and perform analytical

procedures for accounts payable.procedures for accounts payable.

Analytical Procedures for Analytical Procedures for the Acquisition and the Acquisition and

Payment CyclePayment Cycle

Review list of accounts payableReview list of accounts payablefor unusual, non-vender, andfor unusual, non-vender, and

interest-bearing payables.interest-bearing payables.

Classification misstatementClassification misstatementfor nontrade liabilities.for nontrade liabilities.

Analytical procedureAnalytical procedure

Compare acquisition-relatedCompare acquisition-relatedexpense account balancesexpense account balances

with prior years.with prior years.

Misstatement of accountsMisstatement of accountspayable and expenses.payable and expenses.

Possible misstatementPossible misstatement

Analytical Procedures for Analytical Procedures for the Acquisition and the Acquisition and

Payment CyclePayment CycleAnalytical procedureAnalytical procedure

Compare individual accountsCompare individual accountspayable with previous years.payable with previous years.

Unrecorded or nonexistentUnrecorded or nonexistentaccounts, or misstatements.accounts, or misstatements.

Calculate ratios, such asCalculate ratios, such aspurchases divided by accountspurchases divided by accountspayable, and accounts payablepayable, and accounts payabledivided by current liabilities.divided by current liabilities.

Unrecorded or nonexistentUnrecorded or nonexistentaccounts, or misstatements.accounts, or misstatements.

Possible misstatementPossible misstatement

Design and perform testsDesign and perform tests

of details of balances forof details of balances for

accounts payable, includingaccounts payable, including

out-of-period liability tests.out-of-period liability tests.

Out-of-Period Liability Out-of-Period Liability TestsTests

Examine underlying documentation forExamine underlying documentation forsubsequent cash disbursements.subsequent cash disbursements.

Examine underlying documentation for billsExamine underlying documentation for billsnot paid several weeks after the year-end.not paid several weeks after the year-end.

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

Out-of-Period Liability Out-of-Period Liability TestsTests

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

Send confirmations to vendors with whichSend confirmations to vendors with whichthe client does business.the client does business.

Cutoff TestsCutoff Tests

Relationship of cutoff to physicalRelationship of cutoff to physicalobservation of inventoryobservation of inventory

Inventory in transitInventory in transit

Distinguish the reliability ofDistinguish the reliability of

vendors’ invoices, vendors’vendors’ invoices, vendors’

statements, and confirmationsstatements, and confirmations

of accounts payableof accounts payable

as audit evidence.as audit evidence.

Reliability of EvidenceReliability of Evidence

Distinction between vendors’Distinction between vendors’invoices and vendors’ statements.invoices and vendors’ statements.

Difference between vendors’Difference between vendors’statements and confirmations.statements and confirmations.

Sample SizeSample Size

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

Statistical sampling is less commonly usedStatistical sampling is less commonly usedfor the audit of accounts payable thanfor the audit of accounts payable than

for accounts receivable.for accounts receivable.

End of Chapter 19End of Chapter 19

Thank you for timeThank you for time