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19 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive.

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Presentation on theme: "19 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive."— Presentation transcript:

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2 19 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions and Accounts Payable. Chapter 19

3 19 - 2 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 1 Identify the accounts and the classes of transactions in the acquisition and payment cycle.

4 19 - 3 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Transactions in the Acquisition and Payment Cycle 1.Acquisitions of goods and services 2.Cash disbursements 3.Purchase returns and allowances and purchase discounts

5 19 - 4 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Accounts in the Acquisition and Payment Cycle Cash in Bank Purchase Returns and Allowances PurchaseDiscounts Cashdisbursements Purchase returns and allowances Purchasediscounts Acquisitions of goods and services Raw Material Purchases Property, Plant and Equipment PrepaidExpenses Accounts Payable

6 19 - 5 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Accounts in the Acquisition and Payment Cycle Acquisitions of goods and services Accounts Payable Manufacturing Expense Control Account Subsidiary accounts Repair and maintenance Taxes, Supplies Freight in, Utilities Administrative Expense Control Account Subsidiary accounts Supplies, Officers’ travel Legal fees Auditing fees, Taxes Selling Expense Control Account Subsidiary accounts Commissions Travel, delivery expenses Repairs, Advertising

7 19 - 6 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 2 Describe the business functions and the related documents and records in the acquisition and payment cycle.

8 19 - 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Classes of Transactions and Accounts  Inventory  Property, plant, and equipment  Prepaid expenses  Leasehold improvements  Accounts payable  Manufacturing expenses  Selling and administrative expenses

9 19 - 8 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Classes of Transactions and Accounts  Cash in bank (from cash disbursements)  Accounts payable  Purchase discounts

10 19 - 9 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Business Functions in the Cycle Processing purchase orders Receiving goods and services Recognizing the liability Processing and recording cash disbursements

11 19 - 10 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Related Documents and Reports Purchase requisition Purchase order Receiving report Processing purchase orders Receiving goods and services

12 19 - 11 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Related Documents and Reports Acquisitions transaction file Acquisitions journal or listing Vendor’s invoice Voucher Debit memo A/P master file A/P trial balance Vendor’s statement Recognizing the liability

13 19 - 12 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Related Documents and Reports Cash disbursements transaction file Check Cash disbursements journal or listing Processing and recording cash disbursements

14 19 - 13 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 3 Describe how e-commerce affects the acquisition of goods and service.

15 19 - 14 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder How E-Commerce Affects the Acquisition and Payment Cycle SuppliersCustomers Internet-based technologies allow for electronic linkages between suppliers and customers. Purchaseorders Customerorders EDIEDI

16 19 - 15 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder How E-Commerce Affects the Acquisition and Payment Cycle Some companies use extranets which allow companies to communicate and conduct business in a secure setting. Other companies use business-to-business auctions hosted on the Internet to negotiate purchases. Information about products is available over the Internet.

17 19 - 16 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 4 Understand internal control, and design and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle.

18 19 - 17 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Methodology for Designing Tests of Balances: Accounts Receivable Understand internal control – acquisitions and cash disbursements. Auditprocedures Items to selectSamplesizeTiming Assess planned control risk – acquisitions and cash disbursements. Design tests of controls and substantive tests of transactions for acquisitions and cash disbursements to meet transaction-related audit objectives. Determine extent of testing controls.

19 19 - 18 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Understand Internal Control The auditor gains an understanding of internal control for the acquisition and payment cycle by studying the client’s flowcharts, preparing internal control questionnaires, and performing walk-through tests for acquisitions and cash disbursements.

20 19 - 19 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Assess Planned Control Risk Authorization of purchases Separation of asset custody from other functions Timely recording and independent review of transactions Authorization of payments

21 19 - 20 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Evaluate Cost-Benefit of Testing Controls The auditor identifies the key internal controls and weaknesses and assesses control risk. The auditor decides whether substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.

22 19 - 21 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Controls and Substantive Tests of Transactions for Acquisitions Recorded acquisitions are for goods and services received, consistent with the best interests of the client (existence). Existing acquisitions are recorded (completeness). Acquisitions are accurately recorded (accuracy). Acquisitions are correctly classified (classification).

23 19 - 22 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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 audit area.

24 19 - 23 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 5 Describe the methodology for designing tests of details of balances for accounts payable using the audit risk model.

25 19 - 24 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Identify client business risks affecting accounts payable. Methodology for Designing Tests of Details of Balances for A/R Phase I Set tolerable misstatement and assess inherent risk for accounts payable. Assess control risk for accounts payable.

26 19 - 25 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Methodology for Designing Tests of Details of Balances for A/R Design and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle. Phase II

27 19 - 26 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Methodology for Designing Tests of Details of Balances for A/R Design and perform analytical procedures for the acquisition and payment cycle. Phase III Timing Items to selectSamplesizeAuditprocedures Design tests of details of accounts payable balance to satisfy balance-related audit objectives.

28 19 - 27 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 6 Design and perform analytical procedures for accounts payable.

29 19 - 28 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Analytical Procedures for the Acquisition and Payment Cycle Review list of accounts payable for unusual, nonvender, and interest-bearing payables. Classificationmisstatement for nontrade liabilities. Analytical procedure Compare acquisition-related expense account balances with prior years. Misstatement of accounts payable and expenses. Possible misstatement

30 19 - 29 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Analytical Procedures for the 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. Possible misstatement

31 19 - 30 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 7 Design and perform tests of details of balances for accounts payable, including out-of-period liability tests.

32 19 - 31 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

33 19 - 32 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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 the client does business.

34 19 - 33 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cutoff Tests Relationship of cutoff to physical observation of inventory Inventory in transit FOB destination FOB origin

35 19 - 34 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 8 Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations of accounts payable as audit evidence.

36 19 - 35 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Reliability of Evidence Distinction between vendors’ invoices and vendors’ statements. Difference between vendors’ statements and confirmations.

37 19 - 36 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

38 19 - 37 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Audit Tests for the Acquisition and Payment Cycle TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS Cash in BankAccountsPayableAcquisitionExpensesPaymentsExpenses Audited by TOC, STOT, and AP EndingbalanceEndingbalance Audited by AP and TDB Audited by TOC, STOT, and AP

39 19 - 38 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Audit Tests for the Acquisition and Payment Cycle TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS AccountsPayableAcquisitionAssetsAcquisition of assets Endingbalance Audited by TOC, STOT, and AP Audited by AP and TDB

40 19 - 39 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder End of Chapter 19


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