AEB14SMCH18v2GE.docx

AEB14SMCH18v2GE.docx

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AEB14SMCH18v2GE

Chapter18

AuditoftheAcquisitionsandPaymentCycle:

TestsofControls,SubstantiveTestsofTransactions,

andAccountsPayable

ReviewQuestions

18-1a.Assetaccounts:

Officesupplies

Deliveryequipment

Machineryandequipment

Land

Cashinbank

Prepaidexpenses

b.Liabilityaccounts:

Accountspayable

Accruedpropertytaxes

Accruedinsurance

Otheraccruedliabilities

c.Expenseaccounts:

Purchases,purchasereturns&allowances,

purchasesdiscounts（COGSaccounts）

Rentexpense

Legalexpense

Finesandpenalties

Advertisingexpense

Repairsandmaintenance

Depreciationexpense

Utilitiesexpense

Propertytaxexpense

Administrativeexpenses

Incometaxexpense

18-2

TRANSACTION-RELATEDAUDITOBJECTIVE

POSSIBLE

INTERNALCONTROLS

COMMONTESTS

OFCONTROLS

1.Recordedcashdisbursementsareforgoodsandservicesactuallyreceived（occurrence）.

Thereisadequatesegregationofdutiesbetweenaccountspayableandcustodyofsignedchecks.

Supportingdocumentation

isexaminedbeforesigning

ofchecksbyanauthorizedperson.

Approvalofpaymentonsupportingdocumentsatthetimechecksaresigned.

Discusswithpersonnelandobserveactivities.

Discusswithpersonnelandobserveactivities.

Examineindicationofapproval.

2.Existingcashdisbursementtransactionsarerecorded（completeness）.

Checksareprenumberedandaccountedfor.

Thebankreconciliationispreparedmonthlybyanemployeeindependentofrecordingcashdisbursementsorcustodyofassets.

Accountforasequenceofchecks.

Examinebankreconciliationsandobservetheirpreparation.

3.Recordedcashdisbursementtransactionsareaccurate（accuracy）.

Calculationsandamountsareinternallyverified.

Thebankreconciliationispreparedmonthlybyanindependentperson.

Examineindicationofinternalverification.

Examinebankreconciliationsandobservetheirpreparation.

4.Cashdisbursementtransactionsareproperlyincludedintheaccountspayablemasterfileandareproperlysummarized（postingandsummarization）.

Accountspayablemaster

filecontentsareinternallyverified.

Accountspayablemaster

fileortrialbalancetotals

arecomparedwithgeneralledgerbalances.

Examineindicationofinternalverification.

Examineinitialsongeneralledgeraccountsindicatingcomparison.

5.Cashdisbursementtransactionsareproperlyclassified（classification）.

Anadequatechartofaccountsisused.

Accountclassificationsareinternallyverified.

Examineproceduresmanualandchartofaccounts.

Examineindicationofinternalverification.

6.Cashdisbursementtransactionsarerecordedonthecorrectdates（timing）.

Proceduresrequirerecordingoftransactionsassoonaspossibleafterthecheckhasbeensigned.

Datesareinternallyverified.

Examineproceduresmanualandobservewhetherunrecordedchecksexist.

Examineindication

ofinternalverification.

18-3

TRANSACTION-RELATEDAUDITOBJECTIVE

POSSIBLE

INTERNALCONTROLS

COMMONTESTS

OFCONTROLS

1.Recordedacquisitionsareforgoodsandservicesreceived,consistentwiththebestinterestsoftheclient（occurrence）.

Purchaserequisition,purchaseorder,receivingreport,andvendor'sinvoiceareattachedtothevoucher.

Acquisitionsareapprovedattheproperlevel.

Computeracceptsentryofpurchasesonlyfromauthorizedvendorsinthevendormasterfile.

Documentsarecancelledtopreventtheirreuse.

Vendors'invoices,receivingreports,purchaseorders,andpurchaserequisitionsareinternallyverified.

Examinedocumentsinvoucherpackageforexistence.

Examineindication

ofapproval.

Attempttoinputtransactionswithvalidandinvalidvendors.

Examineindication

ofcancellation.

Examineindicationofinternalverification.

2.Existingacquisitiontransactionsarerecorded（completeness）.

Purchaseordersareprenumberedandaccountedfor.

Receivingreportsareprenumberedandaccountedfor.

Vouchersareprenumberedandaccountedfor.

Accountforasequenceofpurchaseorders.

Accountforasequenceofreceivingreports.

Accountforasequenceofvouchers.

3.Recordedacquisitiontransactionsareaccurate（accuracy）.

Calculationsandamountsareinternallyverified.

Batchtotalsarecomparedwithcomputersummaryreports.

Acquisitionsareapprovedforpricesanddiscounts

Examineindicationofinternalverification.

Examinefileofbatchtotalsforinitialsofdatacontrolclerk;comparetotalstosummaryreports.

Examineindicationofapproval.

4.Acquisitiontransactionsareproperlyincludedintheaccountspayableandinventorymasterfiles,andareproperlysummarized（postingandsummarization）.

Accountspayablemasterfilecontentsareinternallyverified.

Accountspayablemasterfileortrialbalancetotalsarecomparedwithgeneralledgerbalances.

Examineindicationofinternalverification.

Examineinitialsongeneralledgeraccountsindicatingcomparison.

18-3（continued）

TRANSACTION-RELATEDAUDITOBJECTIVE

POSSIBLE

INTERNALCONTROLS

COMMONTESTS

OFCONTROLS

5.Acquisitiontransactionsareproperlyclassified（classification）.

Adequatechartofaccountsisused.

Accountclassificationsareinternallyverified.

Examineproceduresmanualandchartofaccounts.

Examineindicationofinternalverification.

6.Acquisitiontransactionsarerecordedonthecorrectdates（timing）.

Proceduresrequirerecordingtransactionsassoonaspossibleafterthegoodsandserviceshavebeenreceived.

Datesareinternallyverified.

Examineproceduresmanualandobservewhetherunrecordedvendors’invoicesexist.

Examineindicationofinternalverification.

18-4Auditingstandardsrequirethatthetestsofcontrolsandsubstantivetestsoftransactionscovertheentireaccountingperiodinordertodeterminethatthesystemwasoperatinginaconsistentmannerthroughouttheperiod.Inselectingthenumberofitemsfortesting,theauditormustdeterminethesamplesize,statisticallyornonstatistically,suchthatitislikelytoberepresentativeoftheactualconditionsofthepopulationofalltransactions.

Intestingitemsthatareperiodicproceduresratherthanindividualtransactions（suchasmonthlybankreconciliations）,theauditormustdeterminetheappropriatetimingtodeterminethatthoseproceduresareoperatingproperly.

18-5Theimportanceofcashdiscountstotheclientisthattheclientcanproduceasubstantialsavingsifitmakesuseofthecashdiscountsavailable.Theauditorshouldexaminevouchersandinvoicestodeterminewhetherdiscountsarebeingtakeninaccordancewiththetermsavailable.

18-6ThedifferenceinthepurposeofthestepsisthatProcedure1ascertainswhetherallexistingacquisitionsarerecordedproperly（completenessandaccuracy）,whereasProcedure2isdesignedtodeterminewhetherrecordedacquisitionsareproper（occurrenceandaccuracy）.Althoughthetwoprocedurestestoppositeobjectives（completenessandoccurrence）,theyaresimilarinthateachisdesignedtodeterminethatthevendor'sname,typeofmaterialandquantitypurchased,andtotalamountoftheacquisitionagreewiththereceivingreport,vendor'sinvoice,andacquisitionsjournalentries.

18-7Itisdifficulttocontrolblankorvoidedchecks（aswellaschecksissuedbeforetheyaremailed）withouthavingaprintedprenumberedsystemofblankchecks.Withoutprenumbering,unauthorizedandunrecordedchecksmaybemoreeasilyissuedwithoutdetectionuntilaftertheyhaveclearedthebank.Theauditorcancompensateforpoorcontroloverchecksbyreconcilingrecordedcashdisbursementswithcashdisbursementsonthebankstatementforatestperiod.

18-8Avoucherisadocumentusedbyanorganizationtoestablishaformalmeansofrecordingandcontrollingacquisitions.Avoucherregisterisajournalforrecordingthevouchersfortheacquisitionofgoodsandservices.Theuseofavouchersystemimprovescontrolovertherecordingofpurchasesbyfacilitatingtherecordinginnumericalorderattheearliestpossibledate,thepointatwhichtheinvoiceisreceived.

18-9Thepointatwhichgoodsandservicesarereceivedisordinarilywhentitletothegoodsandservicespassesandaliabilitythatshouldbeincludedinthefinancialstatementsisestablished.

18-10Theacquisitionandpaymentcycleisrelatedtotheinventoryaccountsinthatnormallyallpurchasesofrawmaterialsinthecaseofamanufacturingoperationormerchandiseinthecaseofadistributioncompanyarerecordedthroughthiscycle.Ifthetestsofinternalcontrolsoftheacquisitionandpaymentcycleindicatethatpropercontrolsexisttoensurethatthepropercostisusedinvaluingtheinventoryandthatnewpurchasesofinventoryarerecordedatthepropertime,intheproperamount,andintheproperaccount,testsconcernedwiththeaccuracyandcutoffoftheinventoryaccountsmaybereducedfromthatlevelrequiredifthecontrolswerenotadequate.

18-11Theacquisitionandpaymentcycleincludestherecordingofliabilitiesthataresetupintheaccountspayableaccount.Iftheauditorfindsthattheinternalcontrolsintheacquisitionandpaymentcyclearesufficienttoensurethataccountspayablearerecordedintheproperamountandatthepropertime,reconcilingthevendors’statementsandtestingthecutoffasyear-endproceduresoftheaccountspayablebalancemaybegreatlyreduced.

18-12Theprocedurewillmostlikelyuncoverthemisstatementinitemb.Thesearchforunrecordedinvoicesisdesignedtodetectanunderstatementofaccountspayable.

18-13Unlessevidenceisdiscoveredwhichindicatesthatadifferentapproachs