Audit of the Acquisition and Payment Cycle

Identify the accounts and the classes of transactions in the acquisition and payment cycle. Describe the business functions and the related documents and records in the acquisition and payment cycle. Understand internal control and design and perform tests of controls for acquisitions. Understand internal control and design and perform tests of controls for cash disbursements.

Identify the accounts and the classes of transactions in the Learning Objective 1 Identify the accounts and the classes of transactions in the acquisition and payment cycle.

Accounts in the Acquisition and Payment Cycle Cash in Bank Purchase Returns and Allowances Purchase Discounts Cash disbursements returns and allowances discounts Acquisitions of goods and services Raw Material Purchases Property, Plant and Equipment Accounts Payable

Describe the business functions and the related documents Learning Objective 2 Describe the business functions and the related documents and records in the acquisition and payment cycle.

Voucher System of Control Check Cashier’s Office Supplier (Vendor) Accounting Dept. Invoice Approval Cashier’s Office Receiving Dept. Receiving Report Accounting, Requesting, Purchasing Depts. Supplier (Vendor) Invoice Accounting Dept. Purchasing Dept. Purchase Order Supplier (Vendor) Purchase Requisition Purchasing and Accounting Depts. Requesting Dept. Voucher

Requesting Department Copy 2 Purchasing Accounting One copy of purchase requisition used to prepare the voucher. Requesting Department

Retained in Purchasing Requesting Dept. Copy 3 Accounting Copy 2 Vendor Copy 1 Retained in Purchasing

   Seller Invoice date Purchaser Order number Credit terms Freight terms Goods Invoice amount     

Dec 2006 2bi Procurement systems Ordering department All orders are raised on pre-numbered purchase requisitions and sent to the ordering department. In the ordering department, each requisition is signed by the chief buyer. A purchasing clerk transfers the order information onto an order form and identifies the appropriate supplier for the goods.

Part one of the two part order form is sent to the supplier and part two to the accounts department. The requisition is thrown away. Goods inwards department All goods received are checked for damage. Damaged items are returned to the supplier and a damaged goods note completed.

For undamaged items a two-part pre-numbered Goods Received Note (GRN) is raised. – Part one is sent to the ordering department with the damaged goods notes. – Part two is filed in order of the reference number for the goods being ordered (obtained from the supplier’s goods despatched documentation), in the goods inwards department.

Ordering department GRNs are separated from damaged goods notes, which are filed. The GRN is forwarded to the accounts department. Accounts department GRNs matched with the order awaiting the receipt of the invoice. Required: (i) Identify and explain the internal control weaknesses and provide a recommendation to overcome each weakness. (10 marks)

Understand internal control and design and perform tests of Learning Objective 3 Understand internal control and design and perform tests of controls for acquisitions.

Applies to occurrence as well Control objective Key internal control Common Test of Control Acquisition transactions are recorded. (completeness) Purchase orders are prenumbered and accounted for. Account for integrity of numerical sequence of purchase orders. Receiving reports are prenumbered and accounted for. Account for integrity of numerical sequence of receiving reports. Vouchers are prenumbered and accounted for. Account for integrity of numerical sequence of vouchers. Trace from purchase requisitions, purchase orders, receiving reports and vendors’ invoices in voucher package to acquisitions journal. Applies to occurrence as well

Control objective Key internal control Common Test of Control Recorded acquisitions are valid and for goods and services received. (occurrence) Purchase requisition, purchase order, receiving report, and vendor’s invoice are attached to the voucher. Trace from acquisitions journal to voucher package. Examine documents in voucher package for existence. Acquisitions are approved for prices and vendors at the proper level. Examine indication of approval. Computer accepts entry of purchases only from authorized vendors in the vendor master file. Attempt to input transactions with valid and invalid vendors. Documents are cancelled to prevent their reuse. Examine indication of cancellation. Vendors’ invoices, receiving reports, purchase orders, and purchase requisitions are internally verified. Examine indication of internal verification.

Control objective Key internal control Common Test of Control Acquisitions are accurately recorded. (accuracy) Calculations and amounts on documents are internally verified. Examine indication of internal verification. Batch totals are compared with computer summary reports. Examine file of batch totals for initials of data control clerk. compare totals to summary reports. Accounts payable master file contents are internally verified. Accounts payable master files are reconciled with general ledger balances. Examine payable trial balance and observe their preparation. Prepare payable trial balance independently. Supplier statements are reconciled to purchase ledger regularly. Discuss with personnel and observe activities. Prepare reconciliations of accounts payable independently. Compare recorded transactions in the acquisitions journal with purchase requisitions, purchase orders, receiving reports and vendors’ invoices.

Control objective Key internal control Common Test of Control Acquisitions are correctly classified. (classification) An adequate chart of accounts is used. Review chart of accounts for adequacy by reference to vendor’s invoices. Internal verification of journalizing and posting. Examine the indications of internal verification on the affected records. Acquisitions transactions are recorded on the correct dates. (cut-off) Procedures require recording transactions as soon as possible after the goods and services have been received. Examine procedures manual and observe whether vendor’s invoices are unrecorded promptly. Dates are internally verified. Examine the indications of internal verification on the affected documents and record. Compare dates of receiving reports and vendor’s invoices with dates in the acquisitions journal.

Understand internal control and design and perform tests of Learning Objective 4 Understand internal control and design and perform tests of controls for disbursements.

Applies to occurrence as well Control objective Key internal control Common Test of Control cash disbursement transactions are recorded. (completeness) Checks are prenumbered and accounted for. Account for integrity of numerical sequence of checks. prohibitions over signing of blank checks. examine checks to verify there is no signed blank checks. prompt dispatch of signed checks. obtaining of cancelled checks from bank. payments recorded promptly in cash disbursement journal. Examine procedures manual and observe whether signed checks are unrecorded promptly. The bank reconciliation is prepared monthly by an employee independent of recording cash disbursements or custody of cash. Examine bank reconciliation and observe their preparation. Trace a sample of cash disbursement transactions from cancelled checks to the corresponding cash disbursement journal entries. Applies to occurrence as well

Control objective Key internal control Common Test of Control Recorded cash disbursements are for goods and services actually received. (occurrence) There is adequate segregation of duties between accounts payable and custody of signed checks. Discuss with personnel and observe activities. Supporting documents are examined before signing of checks and stamped ‘paid’ after signing of checks Approval of payment at the time checks are signed. Examine indication of approval. Trace a sample of cash disbursement transactions from acquisitions journal entries to the related cancelled checks and the related acquisition journal entries.

Applies to occurrence and completeness as well Control objective Key internal control Common Test of Control Related cash disbursement transactions are accurate. (accuracy) Calculations and amounts are internally verified. Examine indication of internal verification. Bank reconciliation is prepared monthly by an employee independent of recording cash disbursements or custody assets. Examine bank reconciliations and observe their preparation. Prepare bank reconciliations independently. Supplier statements are reconciled to purchase ledger regularly. Discuss with personnel and observe activities. Examine reconciliations for a sample of payable accounts. Applies to occurrence and completeness as well

Control objective Key internal control Common Test of Control Cash disbursement transactions are properly classified. (classification) An adequate chart of accounts is used. Examine procedures manual and chart of accounts for adequacy. Supplier statements are reconciled to purchase ledgers regularly. Discuss with personnel and observe activities. Examine reconciliations for a sample of payable accounts. Agreement of monthly cash disbursements journal to purchase ledgers. Examine indications of internal verification. Cash disbursement transactions are recorded on the correct dates. (cut-off) Procedures require recording of transactions as soon as possible after the check has been signed. Examine procedures manual and observe whether signed checks are recorded promptly. Dates are internal verified. Compare dates on cancelled checks with the bank cancellation dates. Compare dates on cancelled checks with the cash disbursements journal.

Dec 2006 Q2b Dec 2007 Q3b June 2010 Q3b Dec 2010 Q1b