Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable Chapter 18 http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Identify the accounts and the classes of transactions in the acquisition and payment cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Transactions in the Acquisition and Payment Cycle Three classes of transactions: Acquisitions of goods and services Cash disbursements Purchase returns and allowances and purchase discounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Accounts in the Acquisition and Payment Cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Learning Objective Describe the business functions and the related documents and records in the acquisition and payment cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Classes of Transactions and Accounts Acquisitions: Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements Accounts payable Manufacturing expenses Selling and administrative expenses ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Classes of Transactions and Accounts Cash disbursements: Cash in bank (from cash disbursements) Accounts payable Purchase discounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Business Functions in the Cycle Processing Purchase Orders Receiving Goods and Services Recognizing the Liability Processing & Recording cash disbursements ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Related Documents and Reports Processing purchase orders: Purchase requisition Purchase order Receiving goods and services: Receiving report ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - Related Documents and Reports Recognizing the liability: Vendor’s invoice Debit memo Voucher Acquisitions transaction file ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 10 Methodology for Designing Tests of Balances for Accounts Payable Design and perform analytical procedures Phase III for accounts payable balance Design tests of Audit procedures details of accounts Sample size payable balance to satisfy balanceItems to select related audit Timing objectives ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Phase III 18 - 25 Learning Objective Design and perform analytical procedures for accounts payable ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 26 Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Possible misstatement Compare acquisitionrelated expense account balances with prior years Misstatement of accounts payable and expenses Review list of accounts payable for unusual, nonvendor, and interestbearing payables Classification misstatement for nontrade liabilities ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 27 Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Possible misstatement 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 28 Learning Objective Design and perform tests of details of balances for accounts payable, including out-of-period liability tests ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 29 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 year-end to related vendors’ invoices ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 30 Out-of-Period Liability Tests Trace vendors’ statements that show a balance due to the accounts payable trial balance Send confirmations to vendors with whom the client does business ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 31 Cutoff Tests Relationship of cutoff to physical observation of inventory Inventory in transit FOB destination FOB origin ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 32 Learning Objective Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations of accounts payable as audit evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 33 Reliability of Evidence Distinction between vendors’ invoices and vendors’ statements Difference between vendors’ statements and confirmations ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 34 Accounts Payable Confirmation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 35 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 for accounts receivable ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 36 Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Cash in Bank Acquisition Expenses Payments Expenses Audited by TOC, STOT, and AP Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 37 Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Acquisition Assets Acquisition of assets Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 18 - 38 End of Chapter 18 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... Auditing 14/e, Arens/ Elder/Beasley 18 - 12 Learning Objective Understand internal control, and design and perform tests of controls and substantive tests of transactions for the acquisition and. .. Acquisitions of goods and services Cash disbursements Purchase returns and allowances and purchase discounts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 18 - Accounts... Acquisition and Payment Cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 18 - Learning Objective Describe the business functions and the related documents and records