topic 9 audit of purchase and payment cycle + acc payables (1)
TRANSCRIPT
AUDITING AND ASSURANCE SERVICES
IN MALAYSIA
TOPIC 9: AUDIT OF PURCHASE AND PAYMENTS
CYCLE + ACCOUNT RECEIVABLES
References: Chapter 9
AUD390 2011
LEARNING OUTCOMES Overview of the accounts & classes of
transactions Business functions &documents Financial report assertions Major internal control & related audit
procedures Substantive tests for account payable
AUD390 2011
AUD390 AUDITING DIA
AUDIT OF PURCHASEAND PAYMENT CYCLE
OVERVIEW OFPURCHASE &
PAYMENT CYCLE
KEY CONTROLACTIVITIES
TYPES OF AUDITTESTS PERFORMED
OVERVIEW OF PURCHASE & PAYMENT CYCLE
Objective to audit:To evaluate whether the account affected
by the purchase of goods and services and the cash payment for those purchased are fairly presented in accordance with generally accepted accounting principles
AUD390 AUDITING DIA
ACCOUNTS IN THE CYCLE
Cash Purchase: Cash/Bank Acc vs. Purchase Acc
Credit Purchase: Acc Payable vs. Purchase Acc
Purchase Return & Allowance: Purchase Return Acc vs. Acc Payable vs. Cash/Bank Acc
AUD390 AUDITING DIA
CLASSES OF TRANSACTIONS
1. Acquisition / Purchase of goods & services2. Cash disbursements3. Purchase returns and allowances and
purchase discounts
AUD390 AUDITING DIA
AUD390 AUDITING DIA
CLASSES OF TRANSACTIONS
ACCOUNTS BUSINESS FUNCTIONS
DOCUMENTS & RECORDS
1. Acquisition /Purchase InventoryProperty, Plant & EquipmentPrepaid ExpensesLeasehold ImprovementsAccounts PayableManufacturing ExpensesSelling ExpensesAdministrative Expenses
1. Processing purchase order
2. Receiving goods & services
3. Recognizing the liability
Purchase requisitionPurchase orderReceiving report
Acquisition transaction fileAcquisitions journal or listingVendor’s invoiceDebit memoVoucherAccounts payable master fileAccounts payable trial balanceVendor’s statement
2. Cash disbursements/ Payment
Cash in bankAccounts PayablePurchase Discount
4. Processing & recording cash disbursements
ChequeCash disbursements transaction fileCash disbursements journal or listing
KEY CONTROL ACTIVITIES
1. Authorization of purchases2. Separation of asset custody from other
functions3. Timely recording4. Independent review of transaction5. Authorization of payment
AUD390 AUDITING DIA
1. AUTHORIZATION OF PURCHASES Purpose:
To ensure that the goods & services purchase are for authorized company purposes
To avoid the purchase of excessive or unnecessary items
E.g. Established approval authority i.e.
purchase of capital assets above RM1 million may require approval from BOD
AUD390 AUDITING DIA
CONT… Issued relevant documents to authorize
the transaction occur i.e. After the purchase requisition have
been approved, a purchase order to purchase the good must be initiated
Purchase order issued should be prenumbered and should include sufficient column and spaces to minimize the likelihood of unintentional omission on the form when goods are ordered
AUD390 AUDITING DIA
2. SEPARATION OF ASSET CUSTODY FROM OTHER FUNCTIONS
Separate the receiving department, storeroom unit and accounting function
To prevent theft or misuse of goods
AUD390 AUDITING DIA
3. TIMELY RECORDING Method of recording:
Upon the receipt of the goods & services OR
Upon the vendor’s invoice is received Proper recording involves verifying goods
received against relevant documents i.e. details on the purchase order, the receiving report & vendor’s invoice, to determine all information are correct
AUD390 AUDITING DIA
4. INDEPENDENT REVIEW OF TRANSACTION
Independent party check on information recorded in the system is required to ensure proper procedure of record keeping
AUD390 AUDITING DIA
5.AUTHORIZATION OF PAYMENT Establish List of Approval authority
Different ranking of personnel responsible to approve different amount of payment
E.g.
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Amount of Payment (RM)
Approval Authority
Above RM1,000,000
Board of Directors
500,000 – 1,000,000
Senior Managers
100,000 – 500,0000
Head of Administration
Department
CONT… Separation of responsibilities between
those:Recording the transactionPreparer of the chequeApproval of the payment
Proper documentationCheque should be in sequence of numberPrinted on special paper that makes it
difficult to alter the payee or amountEstablish a special physical control over
blank, voided and signed chequeAUD390 AUDITING DIA
AUDIT OF ACCOUNT PAYABLES
Using Tests of Details of Balance1. Detail Tie-in2. Existence3. Completeness4. Accuracy5. Classification6. Cutoff7. Obligations8. Presentation and disclosures
AUD390 AUDITING DIA
ACCOUNTS PAYABLEDETAIL TIE-IN
To determine:Account Payable (AP) in the AP list agree with
related master fileThe total is correctly added, and agrees with the
general ledger (GL) Examples of Audit Tests:
Re-add the total of AP listsTrace the total to GL
AUD390 AUDITING DIA
ACCOUNTS PAYABLEEXISTENCE
To determine:AP is the AP List exist
Examples of Audit Tests:Trace from AP List to vendors’ invoices and
statementsConfirm AP, emphasizing large and unusual
amounts
AUD390 AUDITING DIA
ACCOUNTS PAYABLECOMPLETENESS
To determine:Existing AP are included in the AP list
Examples of Audit Tests:Perform out-of-period liability tests
AUD390 AUDITING DIA
ACCOUNTS PAYABLEACCURACY
To determine:Account Payable (AP) in the AP list are accurate
Examples of Audit Tests:Trace from AP List to vendors’ invoices and
statements
AUD390 AUDITING DIA
ACCOUNTS PAYABLECLASSIFICATION
To determine:Account Payable (AP) in the AP list are
properly classified Examples of Audit Tests:
Review the list and master file for related parties, notes or other interest-bearing liabilities, long term liabilities and debit balances
AUD390 AUDITING DIA
ACCOUNTS PAYABLECUTOFF
To determine:Transactions in the acquisition and payment
cycle are recorded in the proper period Examples of Audit Tests:
Perform out-of-period liability testsPerform detailed tests as part of physical
observation of inventoryTest for inventory in transit
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ACCOUNTS PAYABLEOBLIGATIONS
To determine:The company has an obligation to pay the
liabilities included in accounts payable Examples of Audit Tests:
Examine vendors’ statements and confirm accounts payable
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ACCOUNT PAYABLESPRESENTATION &
DISCLOSURE To determine:
Accounts in the acquisition and payment cycle are properly presented and disclosed
Examples of Audit Tests:Review statements to make sure material
related parties and long-term and interest-bearing liabilities are segregated
AUD390 AUDITING DIA