Chapter 19 Audit of Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions, and
Account Payable
Objective 1: Identify the accounts and the classes of transactions in the acquisition and
payment cycle
Objective 2: Describe the business functions and the related documents and records in the
acquisition and payment cycle
Accounts and Classes of Transactions in the Acquisition
and Payment Cycle
Acquisition of goods and services Cash disbursements Purchase returns and allowances and
purchase discounts
Acquisitions
Accounts: Inventory Property, Plant, and Equipment Prepaid Expenses Leasehold Improvements Accounts Payable Manufacturing Expenses Selling Expenses Administrative Expenses
Acquisitions
Business Functions Documents and Records
Processing purchase orders Purchase requisitionPurchase order
Receiving goods and services Receiving report
Recognizing the liability Acquisitions journalSummary acquisitions reportVendor’s invoiceDebit memoVoucherAccounts payable master fileAccounts payable trial balanceVendor’s statement
Cash Disbursements
Accounts Business Functions Documents and Records
Cash in bankAccounts payablePurchase discounts
Processing and recording cash disbursements
CheckCash disbursement
journal
Objective 3: Understand internal control and design and perform tests of controls and substantive tests
of transactions for the acquisition and payment cycle
Methodology for Designing Tests of Controls and Substantive Tests of
Transactions Understand internal control Assess planned control risk Evaluate cost-benefit of testing controls Designing test of controls and
substantive tests of transactions to meet transaction-related audit objectives
Key Internal Control
Authorization of purchases Separation of asset custody from other
functions Timely recording and independent review
of transactions Authorization of payments
Transaction-related audit objective
Key internal control
Common test of control
Common substantive tests of transactions
Existence Purchase requisition, purchase order, receiving report, and vendor’s invoice are attached to the voucher
Examine documents in voucher package for existence
Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts
Completeness Purchase orders are prenumbered and accounted for
Account for sequence of purchase order
Trace from a file of receiving reports to the acquisitions journal
Accuracy Calculations and amounts are internally verified
Examine indication of internal verification
Compare recorded transactions in the acquisitions journal with the vendor’s invoice, receiving report, and other supporting documentation
Classification An adequate chart of accounts is used
Examine procedures manual and chart of accounts
Compare classification with chart of accounts by reference to vendor’s invoices
Timing Procedures require recording transactions as soon as possible after goods and services have been received
Examine procedures manual and observe whether unrecorded vendors’ invoices exist
Compare dates of receiving reports and vendors’ invoices, with dates in the acquisitions journal
Posting and summarization
Accounts payable master file contents are internally verified
Examine indication of internal verification
Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable and inventory master files
Transaction-related audit objective
Key internal control
Common test of control
Common substantive tests of transactions
Existence There is adequate segregation of duties between accounts payable and custody of signed checks
Discuss with personnel and observe activities
Review the cash disbursement journal, general ledger, and accounts payable master file for large or unusual amounts
Completeness Checks are prenumbered and accounted for
Account for sequence of checks
Reconcile recorded cash disbursements with the cash disbursements on the bank statement
Accuracy Calculations and amounts are internally verified
Examine indication of internal verification
Compare cancelled checks with the related acquisitions journal and cash disbursement journal entries
Classification An adequate chart of accounts is used
Examine procedures manual and chart of accounts
Compare classification with chart of accounts by reference to vendor’s invoices and acquisition journal
Timing Procedures require recording transactions as soon as possible after the checks have been signed
Examine procedures manual and observe whether unrecorded checks exist
Compare dates on cancelled checks with the cash disbursement journal
Posting and summarization
Accounts payable master file contents are internally verified
Examine indication of internal verification
Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable master files
Objective 4: Describe the methodology for designing tests of detail balances for
accounts payable usig the audit risk model
Methodology for Designing Tests of Detail of Balances for Accounts Payable
Set tolerable misstatement and assess inherent risk for accounts payable
Assess control risk for accounts payable Design and perform tests of controls and
substantive tests of transactions for the acquisition and payment cycle
Design and perform analytical procedures for the acquisition and payment cycle
Design tests of details of accounts payable balance to satisfy balance-related audit objective
Objective 5: Design and perform analytical procedures for accounts payable
Analytical Procedures for the Acquisition and Payment Cycle
Analytical Procedure Possible Misstatement
Compare acquisition-related expense account balances with prior years
Misstatements of accounts payable and expenses
Review list of accounts payable for unusual, nonvendor, and interest-bearing payables
Classification misstatement for nontrade liabilities
Compare individual accounts payable with previous years
Unrecorded or nonexist accounts, or misstatement
Calculate ratios such as purchases divided by accounts payable, and accounts payable divided by current liabilities
Unrecorded or nonexist accounts, or misstatements
Objective 6: Design and perform tests of details of balances for accounts payable,
including out-of-period liability tests
Balance-related audit objective
Common test of details of balances procedures
Detail tie-in Re-add or use the computer to total the accounts payable list
Existence Trace from accounts payable list to vendors’ invoices and statements
Completeness Perform out-of-period liability tests
Accuracy Perform same procedures as those used for existence objective and out-of-period liability tests
Classification Review the list and master file for related parties, notes or other interest-bearing liabilities, long-term payables, and debit balances
Cut-off Perform out-of-period liability tests
Obligations Examine vendors’ statements and confirm accounts payable
Presentation and disclosure
Review statements to make sure material related parties, long-term, and interest-bearing liabilities are segregated
Out-of-Period Liability Tests
Examine underlying documentation for subsequent cash disbursement
Examine underlying documentation for bills not paid several weeks after the year-end
Trace receiving reports issued before year-end to related vendor’s invoices
Trace vendors’ statements that show a balance due to the accounts payable trial balance
Send confirmations to vendors with which the client does business
Cutoff Tests
Examine underlying documentation for subsequent cash disbursement
Examine underlying documentation for bills not paid several weeks after the year-end
Trace receiving reports issued before year-end to related vendor’s invoices
Examination of receiving reports Determination of the amount of inventory
in transit
Objective 7: Distinguish the reliability of vendors’ invoices, vendors’ statements, and confirmations
of accounts payable as audit evidence
Vendors’ Invoices vs Vendors’ Statements
The vendors’ statements is superior for verifying accounts payable
The vendors’ invoice is superior for verifying transactions
Confirmations of accounts payable are regarded as more reliable than vendor’s statements