Chapter 11: Auditing The purchasing cycle

occurrence and rights and obligations

inquire about ap and accrued expenses to ensure that they are properly disclosed

Major functions

-Requisitioning -purchasing -receiving invoice processing -disbursements accounts payable - general ledger

typical procedures

-compare the size and trend in the tax provision and related balance sheet accounts over time -perform walkthroughs and test the design and operating effectiveness of internal controls o

reasons to involve tax specialist

-multiple locations with significant foreign operations and related foreign tax credits/ deductions -business combinations and / or subsidiary dispositions -material uncertain income tax positions with a governmental authority -significant changes in ownership, business operations, or tax status -significant deferred tax assets for which the future realization of the recorded value is in question

Accounts Payable Confirmations

-primary assertion is completeness -blank or zero balance confirmation -generally mailed at year end rather than at an interim date because of concern of unrecorded liabilites

Types of transactions

-purchase of goods or and services for cash or credit -payment of liabilities -return of goods to suppliers for cash or credit.

unrecorded liability procedures

1. ask management about control activities used to identify unrecorded liabilities 2. vouch large dollar items from purchases journal and cash disbursements journal for limited time after year end 3. examine files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities

Assertions about account balances

Existence rights and obligations completeness valuation and allocation

purchase order

description, quality , and quantity of and other information on the goods or services being purchased

Periods Costs

administrative, salaries, rent expense

Authorization of purchase transactions

all purchases are authorized. use of authorization schedule that tells amount employees are allowed to purchase. tests of controls: examination of purchase requisitions and purchase orders for proper approval consistent with authorization table.

Accuracy of Cash disbursement transactions

amount is recorded correctly recorded . disbursements are not properly recorded in cash disbursements journal. test of controls: checking postings to the general ledger and reviewing various reconciliations

Auditing Accounts Payable and Accrued Expenses

assessment of the risk of material misstatement for the purchasing process is used to determine the level of detection risk for conducting substantive procedures for accounts payable and accrued expenses.

Vendor Invoice

bill for the vendor. includes description and quantity of the goods shipped or services provided, the price including freight, date billed

allocated by systematic and rational procedures

depreciation for example

Completeness of cash disbursement transactions

cash disbursement is made but not recorded. test of controls: reviewing and testing the entity's procedures for accounting for the sequence of cash disbursements and reviewing entity's reconciliation procedures.

Classification of Purchase transactions

chart of accounts.

Cash disbursements Journal/ Check Register

check register. records disbursements made by check and electronic funds transfer

cutoff

compare dates on a sample of vouchers with the dates transactions were recorded in the purchases journal.

occurrence of cash disbursements transactions

concern: cash disbursement is recorded but no payment actually made auditor can review the entity's procedures for reconciling vendor statements and monthly bank statements.

Check or Electronic Funds Transer

disbursements, approved by an authorized individual, pay for goods or services

General Ledger

ensure that all purchases, cash disbursements, and payables are properly accumulated, classified, and summarized in the accounts

deferred taxes

estimate of the tax to be paid or recovered in future periods as a result of reversals of existing temporary book/tax differences

Substantive analytical Procedures

examine the reasonableness of accounts payable and accrued expenses.

purchasing

executes properly authorized purchase orders. purchasing manager, and buyers.

completeness of accounts payable

foot the listing and agree it to GL

debit memo

for return of purchase to vendor.

Authorization of cash disbursement transactions

he who approves should not have access to cash.

Product Costs

i.e. cost of goods sold. recognized upon recognition of revenue

completeness

obtain listing of accounts payable and agree total to general ledger

Assertions a out classes of transactions

occurrence completeness authorization accuracy cutoff classification

assertions about presentation and disclosure

occurrence and rights and obligations classification and understandability accuracy and valuation

Control risk: control environment

organizational structure method of assigning authority and responsibility

Disbursements

preparing and signing checks for paying vendors and authorizing electronic funds transfers.

invoice processing

processes invoices to ensure that all goods and services received are recorded as assets or expenses and that the corresponding liability is recognized.

Completeness of purchase transactions

purchases are recorded. controls: accounting for numerical sequence of purchase orders, receiving reports, and vouchers and matching receiving reports with vendor invoices test of controls: trace a sample of receiving reports to their corresponding vendor invoices and vouchers. the voucher can then be traced to the voucher register to ensure that all vouchers were recorded.

Accuracy of Purchase Transactions

purchases recorded at correct amounts test of controls: reperforming the account payable clerk's duties on a sample of voucher packets.

accuracy and valuation

read footnotes

Receiving

receiving, counting, and inspecting goods received from vendors

accuracy

recompute the mathematical accuracy of a sample of vendors invoices

cutoff of purchase transactions

recorded in proper period control: all receiving reports are forwarded to the accounts payable department daily test of controls: -compare date on receiving report with the date on the voucher. -compare dates on vouchers with the dates the vouchers were recorded in the voucher register.

Receiving Report

records the receipt of goods. normally a copy of the purchase order with the quantities omitted.

other presentation and disclosure assertions

related party transactions identified purchase commitments

Purchase requisition

request for goods or services

requisitioning

request for goods or services by an authorized individual. request meets the authorization procedures implemented by the entity.

Key segregation of duties

requisitioning, purchasing, and receiving should be segregated from the invoice-processing, accounts payable, and general ledger functions

Accounts Payable

responsible for ensuring that all vendor invoices, cash disbursements and adjustments are recorded in the accounts payable records

classification and understandability

review listing of accounts payable for material debits, long term payables, and nontrade payables. determine whether such items require seperate disclosures on the balance sheet

rights and obligations

review voucher packets for presence of purchase requisition, purchase order, receiving report, and vendor invoice.

valuation and allocation

schedule for accruals, listing of AP.

Vendor Statement

statement sent monthly by the vendor to indicate the beginning balance, current - period purchases and payments , and ending balance.

inherent risk

supply of raw materials is adequate. how volatile prices of raw materials are.

authorization

test a sample of purchase requisitions for proper authorization

Classification of Cash Disbursement Transactions

test of controls: review the CD journal for reasonableness of account distribution as well as the account codes on a sample of voucher packets

occurrence

test sample of vouchers for the presence of authorized purchase order and receiving report.

Cutoff of cash disbursement transactions

tests of controls: -reviewing the reconciliation of cash disbursements with postings to the CD journal and AP sub records.

completeness

tracing of a sample of vouchers to the purchases journal

Occurrence of Purchase transactions

transaction actually happened. concern is that. concern is that fictitious or nonexistent purchases may have been recorded in the records controls to test: - critical segregation of duties: separation of requisitioning and purchasing functions from accounts payable and disbursements -purchase transactions are not recorded without an approved purchase order and receiving report

voucher

used to control payment for acquired goods and services

classification

verify classification of charges for a sample of purchases transactions

existence

vouch selected amounts from the accounts payable listing and schedule for accruals to voucher packets or other supporting documents

Voucher Register/ Purchase Journal

voucher is used to record the vouchers for goods and services. some companies use purchases journal. major differences are. when a voucher register is used the details of accounts payable are normally represented by a list of unpaid vouchers. with purchases journal vendor is maintained like ar sub ledger.

uncertain tax benefit

when determined that it should not be recognized, the entity records a liability for the amount of the uncertain tax benefit included in the return.

Accounts Payable subsidiary ledger

when purchases journal is utilized, this sub ledger records the transactions with, and the balances owed to, a vendor