ACC 421 - Chp 18: Audit of the Acqusition & Payment Cycle

purchase order

a document prepared or electronically issued by the purchasing department indicating the description, quantity, & related info for goods & services that the company intends to purchase

voucher

a document used to establish a formal means of recording & controlling acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered

acquisitions journal

a journal or listing generated from the acquisitions transaction file that typically includes information such as vendor name, date, amount, & account classification for each transaction

accounts payable trial balance

a listing of the amount owed to each vendor at a point in time - prepared directly from the AP master file

controls & STOT for cash disbursements

assumption underlying these controls & audit procedures - assumption is that there are 2 types of journals (1) acquisition journal (2) cash disbursement journal when to perform the tests - typically perform the acquisitions & cash disbursements tests at the same time

______ sampling is common in this cycle

attribute

duplicate payments

necessary to get check before it is mailed

purchase requisition

request by an authorized employee to the purchasing department to place an order for inventory & other items used by an entity

vendor's statement

a statement prepared monthly by the vendor that indicates the customer's beginning balance, acquisitions, payments, & ending balance

3 classes of transactions included in the cycle

(1) acquisitions of goods & services (2) cash disbursements (3) purchase returns & allowances and purchase discounts

classes of transactions -- cash disbursements

Accounts: - cash in bank - AP - purchase discounts Business Functions: - processing & recording cash disbursements Documents & Records: - check or electronic payment - cash disbursements transaction file - cash disbursements journal or listing

classes of transactions -- acquisitions

Accounts: - inventory - PPE - prepaid expenses - leasehold improvements - AP - manufacturing expenses - selling expenses - administrative expenses Business Functions: - processing purchase orders - receiving goods & services - recognizing the liability Documents & Records (1) processing purchase orders - purchase requisition - purchase order (2) receiving goods & services - receiving report (3) recognizing the liability - vendor's invoice - debit memo - voucher - acquisitions transaction file - acquisitions journal or listing - AP master file - AP trial balance - vendor's statement

cash disbursements transaction file

this is a computer-generated file that includes all cash disbursements transactions processed by the accounting system for a period, such as a day, week, or month - includes same info as the acquisitions transaction file

cash disbursements journal or listing

this is a listing or report generated from the cash disbursements transaction file that includes all transactions for any time period - same transactions, including all relevant info, are included in the AP master file & general ledger

FOB shipping point

title passes at shipping date - recorded at shipping date

FOB destination

title passes when you receive it - record it then

acquisition & payment cycle

the transaction cycle that includes the acquisition of & payment for goods/services from suppliers outside the organization

check

this document is commonly used to pay for the acquisition when payment is due

acquisition transaction file

this is a computer-generated file that includes all acquisitions transactions processed by the accounting system for a period, such as a day, week, or month - contains all info entered into the system - includes info for each transaction

methodology for designing TODB for AP

- all acquisitions & payment cycle transactions typically flow through AP, this account is critical to any audit of the acquisition & payment cycle - AP tend to be material for most companies, & auditors almost always perform some TODB - identify significant risks & assess the risk of material misstatement for AP - set performance materiality - assess control risk & design & perform TOC & STOT

methodology for designing controls & substantive tests

1. understand IC -- acquisitions & cash disbursements 2. assess planned control risk -- acquisitions & cash disbursements 3. determine extent of testing controls 4. design TOC & STOT for acquisitions & cash disbursements to meet transaction-related audit objectives - audit procedures - sample size - items to select - timing

out-of-period liability tests

(1) examine underlying documentation for subsequent cash disbursements • after the end of the year -- we generally check the next period for unusual items that should've been included in prior year (2) examine underlying documentation for bills not paid several weeks after the year-end • applicable to mid-size to smaller companies -- do not pay liabilities so that income is higher ? (3) trace receiving reports issued before year-end to related vendors' invoices • to ensure all invoices have been recorded -- completeness (4) trace vendors' statements that show a balance due to the AP trial balance • make sure AP exist -- existence/occurrence (5) send confirmations to vendors with which the client does business • for sending confirmation, balance is not that important • for AP, we send confirmations of a sample of large balance & a representative sample of other AP items

cutoff tests

(1) relationship of cutoff to physical observation of inventory • when we go for inventory observation at end of year we note the last receiving report & last shipping document • we want to know that nothing after these were included in PY & nothing before wasn't included (2) inventory in transit • when we purchase inventory, there are 2 types of shipping: 1. FOB shipping point 2. FOB destination

TOC & STOT for the acquisition & payment cycle are divided into 2 broad areas:

(1) tests of acquisitions (2) tests of payments

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? (1) Completeness (2) Occurrence (3) Valuation and allocation (4) Rights and obligations

(2) Occurrence

Which of the following tests would an auditor be least likely to perform during an audit of accounts payable? (1) Examine open vouchers, receiving reports, and vendor invoices shortly after the year end (2) Trace a sample of vouchers to the purchase journal (3) Send out accounts payable confirmations (4) Select cash disbursements made shortly after year end and examine supporting documentation such as receiving reports and vendor invoices

(2) Trace a sample of vouchers to the purchase journal

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? (1) Examining unusual relationships between monthly accounts payable balances and recorded cash payments (2) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date (3) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period (4) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports

(3) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of (1) existence. (2) realizable value. (3) completeness. (4) valuation and allocation.

(3) completeness.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to (1) identify unusually large purchases that should be investigated further. (2) verify that cash disbursements were for goods actually received. (3) determine that purchases were properly recorded. (4) test whether payments were for goods actually ordered.

(3) determine that purchases were properly recorded.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all (1) vendor's invoices. (2) purchase orders. (3) receiving reports. (4) cancelled checks.

(3) receiving reports.

Mailing disbursement checks and remittance advices should be controlled by the person who (1) approves the vouchers for payment. (2) matches the receiving reports, purchase orders, and vendors invoices. (3) signs the checks last. (4) maintains control over a mechanical check-signing machine.

(3) signs the checks last.

Which of the following questions would be best to include in an internal control questionnaire concerning the completeness assertion for purchases? (1) Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? (2) Are purchase requisitions prenumbered and independently matched with vendor invoices? (3) Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? (4) Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

(4) Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

While auditing a client's purchase transactions, an auditor selects a sample of vouchers and then compares the dates on the vouchers to the dates on which the corresponding transactions were actually recorded in the client's purchase journal. The audit procedure is most likely designed to test the (1) occurrence assertion. (2) completeness assertion. (3) accuracy assertion. (4) cutoff assertion.

(4) cutoff assertion.

acquisitions fraud schemes employee fraud

- fictitious invoices - excess purchasing of property & services - overbilling schemes - checks payable to employees or to companies which they control - duplicate payments - conflict of interest

understand internal control

- study the client's flowcharts - review internal control questionnaires - perform walk-through tests

the most time-consuming accounts to verify by substantive TODB are:

1. AR 2. inventory 3. fixed assets 4. AP 5. expense accounts 4 of these 5 are directly related to the acquisition & payment cycle

controls & STOT for acquisitions

1. acquisitions are accurately recorded (*accuracy*) 2. acquisitions are correctly classified (*classification*) 3. existing acquisitions are recorded (*completeness*) 4. recorded acquisitions are for goods & services received (*occurrence*) 5. acquisitions are correctly included in the master files (*posting & summarization*) 6. acquisitions are recorded on the correct dates (*timing*) *ACCEPT*

substantive analytical procedures for the acquisition & payment cycle and possible misstatement

1. compare acquisition-related expense account balances with prior years ==> misstatement of AP & expenses 2. review list of AP for unusual, non vendor, & interest-bearing payables ==> classification misstatement for nontrade liabilities 3. compare individual AP with previous years ==> unrecorded or nonexistent accounts, or misstatements 4. calculate ratios, such as purchases divided by AP, & AP divided by current liabilities ==> unrecorded or nonexistent accounts, or misstatements

accounts payable master file

a computer file for maintaining a record for each vendor of individual acquisitions, cash disbursements, acquisition returns & allowances, & vendor balances

debit memo

a document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted

receiving report

a document or record prepared by the receiving department at the time tangible goods are received, indicating the description of the goods, the quantity received, the date received, & other relevant data - it is part of the documentation necessary for payment to be made

vendor's invoice

a document or record that specifies the details of an acquisition transaction & amount of money owed to the vendor for an acquisition

fictitious invoices

can take many forms - e.g. vendor might not exist

conflict of interest

employee has a business that sells to the company - necessarily may not suffer damages - damage happens when no services are rendered

the least time-consuming accounts to verify by substantive TODB:

leases

sample size

sample sizes for AP tests vary considerably, depending on many factors: (1) materiality (2) # of accounts (3) assessed control risk (4) PY audit results (5) 1st time client -- least important statistical sampling is less commonly used for the audit of AP than for AR - AP generally uses attribute sampling

overbilling schemes

shared with employees by vendor - client employee & vendor employee scheme together & pocket money

excess purchasing of property & services

supplies & inventory = directly delivered to perpetrator's home services - more difficult to detect bc no receiving reports, e.g. legal fees - a more sever case is phantom services where no services are rendered