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Auditing the Purchasing Process

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1 Auditing the Purchasing Process
Chapter 11 Auditing the Purchasing Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Expense and Liability Recognition
LO# 1 Expense and Liability Recognition Expenses are outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. 11-2

3 Overview of the Purchasing Process
LO# 2 Overview of the Purchasing Process A purchase transaction usually begins with a purchase requisition generated by the user department. The purchasing department prepares a purchase order that is sent to the vendor. When the goods are received or the services rendered, a liability is recorded. Finally, the entity pays the vendor. Purchase requisition Purchase order Receiving report and liability recorded Vendor 11-3

4 Types of Transactions and Financial Statement Accounts Affected
LO# 3 Types of Transactions and Financial Statement Accounts Affected Three types of transactions are processed through the purchasing process: 11-4

5 Types of Documents and Records
LO# 4 Types of Documents and Records Purchasing documents and records . . . Purchase Requisition – request to purchase goods or services. Purchase Order – includes description, quality, and quantity of goods or services being purchased. Receiving Report – records the receipt of goods. Vendor Invoice – the bill from the vendor. Voucher – serves as the basis for recording a vendor’s invoice. Voucher Register – used to record vouchers for goods and services. Accounts Payable Subsidiary Ledger – includes amount owed to individual vendors. Vendor Statement – represents the purchase activity with vendor. Check – pays for goods or services. Check Register – contains columns to record credits to cash and debits to accounts payable and cash discounts. 11-5

6 LO# 5 The Major Functions 11-6

7 Key Segregation of Duties
LO# 6 11-7

8 Inherent Risk Assessment
LO# 7 Inherent Risk Assessment Industry Related Factors Is the supply of raw materials adequate? How volatile are raw materials prices? Misstatements Detected in Prior Audits Generally, the purchasing process is not difficult to audit and does not present contentious accounting issues. However, the auditor’s experience in past audits must be considered when assessing inherent risk. 11-8

9 Control Risk Assessment
LO# 8 Control Risk Assessment Major steps in setting the control risk in the purchasing process. Understand and document the purchasing process based on a reliance strategy. Plan and perform tests of controls on purchase transactions. Set and document the control risk for the purchasing process. 11-9

10 Control Activities and Tests of Controls – Purchase Transactions
LO# 9 Assertions about Classes of Transactions and Events for the Period under Audit 11-10

11 Auditing Accounts Payable and Accrued Expenses
LO# 10 Auditing Accounts Payable and Accrued Expenses 11-11

12 Auditing Accounts Payable and Accrued Expenses
LO# 10 Auditing Accounts Payable and Accrued Expenses 11-12

13 Tests of Details of Transactions, Account Balances, and Disclosures
Completeness The auditor should conduct a search for unrecorded liabilities that includes the following: Ask management about control procedures used to identify unrecorded liabilities at the end of the period. Obtain copies of vendors’ monthly statements and reconcile the amounts to the client’s accounts payable records. Confirm vendor accounts, including accounts with small or zero balances. Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end. Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities. 11-13

14 Tests of Details of Transactions, Account Balances, and Disclosures
Disclosure Items for the Purchasing Process Payables by type (trade, officers, employees, etc.). Purchases from and payables to related parties. Dependence on a single vendor or a small number of vendors. Short- and long-term payables. Long-term purchase contracts, including any unusual purchase commitments. Costs by reportable segment of the business. 11-14

15 Accounts Payable Confirmations
LO# 13 Accounts Payable Confirmations Accounts payable confirmations are used less often than accounts receivable confirmations. The auditor is able to examine externally created source documents relating to accounts payable. When confirmations are used, they are usually positive and referred to as blank confirmations. The vendor is asked to supply the balance owed by the client. 11-15

16 Evaluating the Audit Findings
LO# 14 Evaluating the Audit Findings All identified misstatements should be aggregated (including any consideration for sampling risk). The likely misstatement is then compared to tolerable misstatement. If the likely misstatement is less than the tolerable misstatement, the auditor has evidence that the account is fairly presented. Conversely, if the likely misstatement exceeds the tolerable misstatement, the auditor should conclude that the account is not fairly presented. 11-16

17 Auditing the Tax Provision and Related Balance Sheet Accounts
LO# 15 Auditing the Tax Provision and Related Balance Sheet Accounts The basics: Use of specialist: GAAP accounting vs. Tax accounting. Multiple locations/foreign operations. Business combinations. Temporary differences. Changes in ownership or tax status. Permanent differences. Accounting for uncertain tax positions. Deferred tax assets – Valuation issues. 11-17

18 End of Chapter 11 11-18

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