Acquisition Cycle modify_240216_035037.pdf

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1. 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.

2. 19 -2
©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

3. 19 - 3
©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
Purchase
Discounts
Cash
disbursements
Purchase
returns and
allowances
Purchase
discounts
Acquisitions
of goods and
services
Raw Material
Purchases
Property, Plant
and Equipment
Prepaid
Expenses
Accounts Payable

4. 19 - 4
©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

5. 19 - 5
©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
Acquisitions:

6. 19 - 6
©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
Cash disbursements:

7. 19 - 7
©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

8. 19 - 8
©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

9. 19 - 9
©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 balanceVendor’s statement
Recognizing the liability

10. 19 - 10
©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

11. 19 - 11
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
How E-Commerce Affects the
Acquisition and Payment Cycle
Suppliers Customers
Internet-based technologies
allow for electronic linkages
between suppliers and customers.
Purchase
orders
Customer
orders
EDIEDI

12. 19 - 12
©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.

13. 19 - 13
©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.
Audit
procedures
Items to
select
Sample
size
Timing
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.

14. 19 - 14
©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.

15. 19 - 15
©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

16. 19 - 16
©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.

17. 19 - 17
©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).

18. 19 - 18
©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.

19. 19 - 19
©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.

20. 19 - 20
©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

21. 19 - 21
©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
select
Sample
size
Audit
procedures
Design tests of details of accounts payable
balance to satisfy balance-related audit objectives.

22. 19 - 22
©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.
Classification
misstatement
for nontrade liabilities.
Analytical procedure
Compare acquisition-related
expense account balances
with prior years.
Misstatement of accounts
payable and expenses.
Possible misstatement

23. 19 - 23
©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

24. 19 - 24
©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.

25. 19 - 25
©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.

26. 19 - 26
©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 destinationFOB origin

27. 19 - 27
©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.

28. 19 - 28
©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.

29. 19 - 29
©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
Bank
Accounts
Payable
Acquisition
Expenses
Payments Expenses
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by AP and TDB
Audited by
TOC, STOT, and AP

30. 19 - 30
©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
Accounts
Payable
Acquisition
Assets
Acquisition
of assets
Ending
balance
Audited by
TOC, STOT, and AP
Audited by
AP and TDB