Chapter 19 Instructors Guide.docx

Chapter 19 Instructors Guide.docx

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Chapter19InstructorsGuide

Chapter19

AuditoftheAcquisition

andPaymentCycle:

TestsofControls,

SubstantiveTestsofTransactions,andAccountsPayable

Ifonlytwocyclesaretobecoveredinanintroductoryauditingcourse,whichiswhatweusuallydo,wecoverthesalesandcollectioncycleandtheacquisitionandpaymentcycle.Wetrytomakeourcoverageparalleltothatfollowedinthesalesandcollectioncycletoemphasizesimilaritiesanddifferences,andreinforcewhathasalreadybeenlearned.

Thefollowingarethetopicscovered:

⏹Chapteropeningvignette

⏹Accountsandclassesoftransactionsintheacquisitionandpaymentcycle

⏹Businessfunctionsinthecycleandrelateddocumentsandrecords

⏹Accountingrulesfordeterminingthetimingofrecordingtransactions

⏹Effectsofe-commerceontheacquisitionandpaymentcycle

⏹Decisionmaking-decidinganapproach

⏹Overviewoftheaudit

⏹Methodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsfortheacquisitionandpaymentcycle

⏹Methodologyfordesigningtestsofdetailsofbalancesforaccountspayable

⏹Summary

ChapterOpeningVignette–“FalsePurchasesCamouflageOverstatedProfits”

Thisvignetteisanexcellenttooltodiscusshowfraudoccursinbusinesses,includingfraudinvolvingtheacquisitionandpaymentcycle.Itisinterestingtodiscusswithstudentshowsuchafraudcouldhavebeendiscoveredbytheauditorsandwhethertheauditorsshouldhavebeenheldresponsiblefornotdiscoveringthefraudgivenmanagementoverrideofcontrols.WeremindstudentsthatSAS99nowrequiresauditorstoperformprocedurestoaddressmanagementoverrideofcontrols.

AccountsandClassesofTransactionsintheAcquisitionandPaymentCycle（page634）

WeuseFigure19-1（page635）toidentifytheaccountsaffectedintheacquisitionandpaymentcycle.

（SeeFigure19-1）

BusinessFunctionsintheCycleandRelatedDocumentsandRecords（page634）

NextwegothroughtherelationshipsofaccountbalancestorecordsusingT-19-1.

（SeeT-19-1）

Itisimportantthatstudentsunderstandthedocumentsandrecordsthataffectacquisitionsandcashdisbursements.Wespendasmuchtimeasisneededtomakesuretheydo.Table19-1onpage636ishelpfultoaccomplishthisgoal.

（SeeTable19-1）

AccountingRulesforDeterminingtheTimingofRecordingTransactions

WebrieflycoverkeytermsonT-19-2fordefinitionalpurposes,givinganexampleofeach.

（SeeT-19-2）

HowE-commerceAffectstheAcquisitionandPaymentCycle（page638）

BecausemanycompaniesusetheInternettostreamlineprocessesfortheacquisitionofgoodsandservices,wenextaddressthetypesofcycleactivitiesthatarecommonlyconductedacrosstheInternetandthroughprivateextranetsandotherEDIarrangementswithbusinesssuppliersandcustomers.Thisdiscussionalsohighlightshowcompaniesmayusebusiness-to-businessauctionshostedovertheInternettopurchasesuppliesandservices.Weemphasizehowmanyofthesee-commerceactivitiesmayaffecttheclient’sbusinessrisksrelatedtotransactionsandaccountsintheacquisitionandpaymentcycle.Problem19-22providesausefulexampletoemphasizepotentialrisksassociatedwithonlinepurchasingactivitiesandrelatedinternalcontrolsthatmightbeimplementedtomitigatesomeofthoserisks.

DecisionMaking-DecidinganApproach

Weliketoapproachthecoverageoftheauditoftheacquisitionandpaymentcyclesomewhatdifferentlythanwedoforthesalesandcollectioncycle.WeaskstudentstoturntoFigure19-1（page635）andaskseveralquestionsaboutthecycleasawhole.

1.Whataresomeexamplesofclientbusinessrisksthatmightberelatedtotransactionsandaccountsintheacquisitionandpaymentcycle?

2.Whataresomelogicalanalyticalprocedurestoperformfortransactions?

3.Whataresomelogicalanalyticalprocedurestoperformforendingbalances?

4.Assumingtheauditordecidedonacontrolriskof100%anddidalmostnotestsofcontrolsandsubstantivetestsoftransactions,whattestsofdetailsofbalanceswouldbenecessaryformanufacturingexpenseaccounts,accountspayable,property,plantandequipment,etc.?

5.Assumingtheauditordecidedonacontrolriskof60%anddidextensivetestsofcontrolsandsubstantivetestsoftransactions,whattestsofdetailsofbalancescouldbereduced,andhow?

6.Whenshouldtheauditorfollowthestrategyin4,andwhenshouldthestrategyin5befollowed?

（SeeFigure19-1）

OverviewoftheAudit

WegobacktoFigure13-2（page406）,roleofallaudittests,anddiscusstherelationshipsinthatfigure.

（SeeFigure13-2）

MethodologyforDesigningTestsofControlsandSubstantiveTestsofTransactions（page639）

FirstwereviewthemethodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsasitisshowninFigure19-2（page639）.

（SeeFigure19-2）

Inthissectionweaskthefollowingquestionsorgooverthefollowingassignedproblems:

⏹DiscussionQuestion19-21-typeoftestandobjectives

⏹DiscussionQuestion19-24-typeofevidenceandobjectives

⏹ReviewQuestion19-6-directionoftests

⏹Problem19-23-controlstopreventmisstatementsandsubstantiveaudittests

⏹Problem19-25-importanceofexceptionsandeffectoftheexceptionsontheremainderoftheaudit

HavestudentsreconstructTable19-2（page642）foracquisitionsusingT-19-3foreachtransaction-relatedauditobjective.Weemphasizewhyeachobjectiveismoreorlessimportantthanthesameobjectiveforsales.

（SeeT-19-3）

HavestudentsuseT-19-4toreconstructTable19-3（page644）forcashdisbursementsinthesamemannerastheydidforacquisitions.Alsoaddressthefollowingquestions:

⏹Whatisaproofofcashdisbursements,andwhatisitsrelevance?

⏹HowwouldaperformanceformatauditprogrambedevelopedfromTables19-2and19-3?

⏹Couldauditsamplingbeusedeffectivelyforacquisitionsandcashdisbursements?

（SeeT-19-4）

MethodologyforDesigningTestsofDetailsofBalancesforAccountsPayable（page645）

Firstweaskaboutthesimilaritiesanddifferencesbetweenaccountsreceivableandaccountspayable.

⏹Overstatementversusunderstatementemphasis

⏹SupplieraccessthroughtheInternettoaccountspayablerecordsandothersupplychainmanagementinformationcreateclientbusinessrisksuniquetoaccountspayable

⏹Availabledocumentaryevidenceinaccountspayableisusuallymorereliable

⏹Qualityofaccountspayablecontrolsvariesmorefromclienttoclientthanaccountsreceivable

NextwereviewthemethodologyfordesigningtestsofdetailsofbalancesasshowninFigure19-3（page646）.

（SeeFigure19-3）

NextwegooverTable19-5（page649）fairlycarefullyandtalkaboutthebalance-relatedauditobjectives,relatedaudittests,andthebasisforthedecisionastoprocedures,samplesize,timinganditemstoselect.

Thenwegooverinmoredetail,theprimarydecisionstheauditormakesinusingaccountspayableconfirmations,thebasisofthesedecisions,andacomparisonwiththeauditofaccountsreceivable.

Decisionsintheconfirmationofaccountspayable:

⏹Confirmationornonconfirmation

⏹Samplesizeforconfirmation

⏹Itemstoselectforconfirmation

⏹Timingofconfirmation

Iftheideashavenotalreadybeencovered,wegooverthefollowingquestions:

⏹ReviewQuestion19-13-zerobalanceconfirmations

⏹ReviewQuestion19-14-vendor'sinvoiceversusvendor'sstatement

Wedistinguishbetween,andcompare,out-of-periodliabilitytestsandcutoff.Wespendsometimeonboth,buttheemphasisisoncutofftests.TheexamplesonT-19-5andT-19-6arehelpful:

（SeeT-19-5andT-19-6）

Wethendiscussthefollowing:

⏹Cutoffproceduresatphysicalinventory

⏹Documentationofreceivingreportsbetweeninventorydateandyear-endwork

⏹Cutoffproceduresatyear-end

⏹Inventory-in-transit-testsandmethodsofrecording

Wefinishthesectionwithaproblemsuchas19-31.

Summary（page653）

Figure19-5（page654）ishelpfulinsummarizingthechapter.Figure19-5issimilartofiguresusedinotherchapters,butthisfigureisspecifictotheacquisitionandpaymentcycle.

（SeeFigure19-5）

Finally,Case19-32isintendedtocovertestsofcontrols,substantivetestsoftransactions,andtestsofdetailsofbalancesforacquisitions,cashdisbursements,andaccountspayable,includingconsiderationoftheauditriskmodelandanalyticalprocedures.

CHAPTER19

CROSS-REFERENCEOFLEARNINGOBJECTIVESANDPROBLEMMATERIAL

LearningObjectives

Review

Questions

Multiple

Choice

Questions

Discussion

Questionsand

Problems

Cases

19-1Identifytheaccountsandtheclassesoftransactionsintheacquisitionandpaymentcycle.

19-1

19-2Describethebusinessfunctionsandtherelateddocumentsandrecordsintheacquisitionandpaymentcycle.

19-7,19-8,

19-9,19-14

19-28

19-32

19-3Describehowe-commerceaffectstheacquisitionofgoodsandservices.

19-22

19-6

19-4Understandinternalcontrol,anddesignandperformtestsofcontrolsandsubstantivetestsoftransactionsfortheacquisitionandpaymentcycle.

19-2,19-3,

19-4,19-5,

19-6,19-7,

19-10,19-11

19-18

19-20,19-21,

19-23,19-25,

19-26,19-28

19-32

19-5Describethemethodologyfordesigningtestsofdetailsofbalancesforaccountspayableusingtheauditriskmodel.

19-11

19-25,19-28

19-32

19-6Designandperformanalyticalproceduresforaccountspayable.

19-24

19-7Designandperformtestsofdetailsofbalancesforaccountspayable,includingout-of-periodliabilitytests.

19-10,19-12,

19-16,19-17

19-19

19-23,19-24,

19-27,19-28,

19-29,19-31

19-32

19-8Dist