Audit of the Acquisition and Payment
Audit of the Acquisition and Payment
Cycle: Tests of Controls, Substantive
Cycle: Tests of Controls, Substantive
Tests of Transactions, and Accounts
Tests of Transactions, and Accounts
Payable.
Payable.
Chapter 18
Learning Objective 1
Learning Objective 1
Identify the accounts and the
Identify the accounts and the
classes of transactions in the
classes of transactions in the
acquisition and payment cycle.
Transactions in the Acquisition
Transactions in the Acquisition
and Payment Cycle
and Payment Cycle
1. Acquisitions of goods and services 2. Cash disbursements
Accounts in the Acquisition
Accounts in the Acquisition
and Payment Cycle
and Payment Cycle
Cash in Bank
Purchase Returns and Allowances
Purchase
Cash disbursements
Purchase returns and allowances Purchase discounts
Acquisitions of goods and services
Raw Material Purchases
Property, Plant and Equipment
Accounts in the Acquisition
Accounts in the Acquisition
and Payment Cycle
and Payment Cycle
Acquisitions of goods and services
Accounts Payable
Manufacturing Expense Control Account Subsidiary accounts
Repair and maintenance Taxes, Supplies
Freight in, Utilities Selling Expense Control Account
Subsidiary accounts Commissions
Learning Objective 2
Learning Objective 2
Describe the business functions
Describe the business functions
and the related documents and
and the related documents and
records in the acquisition and
records in the acquisition and
payment cycle.
Classes of Transactions
Classes of Transactions
and Accounts
and Accounts
Inventory
Property, plant, and equipment Prepaid expenses
Leasehold improvements Accounts payable
Classes of Transactions
Classes of Transactions
and Accounts
and Accounts
Cash in bank (from cash disbursements) Accounts payable
Purchase discounts
Business Functions in the Cycle
Business Functions in the Cycle
Processing purchase orders
Receiving goods and services
Recognizing the liability
Related Documents
Related Documents
and Reports
and Reports
Purchase requisition Purchase order
Receiving report
Processing purchase orders:
Related Documents
Related Documents
and Reports
and Reports
Vendor’s invoice
Voucher
Debit memo
Recognizing the liability:
Related Documents
Related Documents
and Reports
and Reports
Acquisitions journal or listing Accounts payable master file Accounts payable trial balance Vendor’s statement
Related Documents
Related Documents
and Reports
and Reports
Cash disbursements transaction file Check
Cash disbursements journal or listing
Learning Objective 3
Learning Objective 3
Understand internal control, and
Understand internal control, and
design and perform tests of
design and perform tests of
controls and substantive tests
controls and substantive tests
of transactions for the acquisition
of transactions for the acquisition
and payment cycle.
Methodology for Designing Controls
Methodology for Designing Controls
and Substantive Tests
and Substantive Tests
Understand internal control –
acquisitions and cash disbursements
Assess planned control risk –
acquisitions and cash disbursements
Determine extent of testing controls
Understand Internal Control
Understand Internal Control
Perform walk-through tests Study the client’s flowcharts
Assess Planned Control Risk
Assess Planned Control Risk
Authorization of purchases
Separation of asset custody from
other functions
Timely recording and independent
Determine Extent of Testing
Determine Extent of Testing
of Controls
of Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk
The auditor performs tests of controls to obtain
Controls and Substantive Tests
Controls and Substantive Tests
of Transactions for Acquisitions
of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Controls and Substantive Tests
Controls and Substantive Tests
of Transactions for Acquisitions
of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and summarization)
Acquisitions are correctly classified
(classification)
Attributes Sampling
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
Important Differences
Important Differences
Larger number of transactions
Significant judgment
Learning Objective 4
Learning Objective 4
Describe the methodology for
Describe the methodology for
designing tests of details of
designing tests of details of
balances for accounts payable
balances for accounts payable
using the audit risk model.
Identify client business risks affecting
accounts payable
Methodology for Designing Tests
Methodology for Designing Tests
of Balances for Accounts Payable
of Balances for Accounts Payable
Set tolerable misstatement and assess inherent risk
for accounts payable
Assess control risk for
Phase I
Methodology for Designing Tests
Methodology for Designing Tests
of Balances for Accounts Payable
of Balances for Accounts Payable
Design and perform tests of controls and
substantive tests of transactions for the acquisition and payment cycle
Items to select Sample size Audit procedures
Methodology for Designing Tests
Methodology for Designing Tests
of Balances for Accounts Payable
of Balances for Accounts Payable
Design and perform analytical procedures
for accounts payable balance
Design tests of details of accounts payable balance to
Learning Objective 5
Learning Objective 5
Design and perform analytical
Design and perform analytical
procedures for accounts payable.
Analytical Procedures for the
Analytical Procedures for the
Acquisition and Payment Cycle
Acquisition and Payment Cycle
Review list of accounts payable for unusual, nonvendor, and
interest-bearing payables
Classification misstatement for nontrade liabilities
Analytical procedure
Compare acquisition-related expense account balances with prior years.
Misstatement of accounts payable and expenses
Analytical Procedures for the
Analytical Procedures for the
Acquisition and Payment Cycle
Acquisition and Payment Cycle
Analytical procedure
Compare individual accounts payable with previous years
Unrecorded or nonexistent accounts, or misstatements
Calculate ratios, such as
purchases divided by accounts payable, and accounts payable divided by current liabilities
Unrecorded or nonexistent accounts, or misstatements
Learning Objective 6
Learning Objective 6
Design and perform tests of
Design and perform tests of
details of balances for accounts
details of balances for accounts
payable, including out-of-period
payable, including out-of-period
liability tests.
Out-of-Period Liability Tests
Out-of-Period Liability Tests
Examine underlying documentation for
subsequent cash disbursements
Examine underlying documentation for bills
not paid several weeks after the year-end
Trace receiving reports issued before
Out-of-Period Liability Tests
Out-of-Period Liability Tests
Trace vendors’ statements that show a balance
due to the accounts payable trial balance
Send confirmations to vendors with which
Cutoff Tests
Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Learning Objective 7
Learning Objective 7
Distinguish the reliability of
Distinguish the reliability of
vendors’ invoices, vendors’
vendors’ invoices, vendors’
statements, and confirmations
statements, and confirmations
of accounts payable as audit
of accounts payable as audit
evidence.
Reliability of Evidence
Reliability of Evidence
Distinction between vendors’ invoices
and vendors’ statements
Difference between vendors’ statements
Sample Size
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
Types of Audit Tests for the
Types of Audit Tests for the
Acquisition and Payment Cycle
Acquisition and Payment Cycle
Cash in
Bank AccountsPayable AcquisitionExpenses
Payments Expenses
Audited by
TOC, STOT, and AP
Ending
balance balanceEnding
Audited by
Types of Audit Tests for the
Types of Audit Tests for the
Acquisition and Payment Cycle
Acquisition and Payment Cycle
Accounts
Payable AcquisitionAssets Acquisition
of assets
Ending balance
Audited by
TOC, STOT, and AP
