Post on 03-Jan-2016
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Audit of the Acquisition and Payments Cycle
An Overview of Functions, Documents, and Accounting Systems
• Starting point• Any Department
Accounts Payable
Purchasing
Prepare prenumbered Purchase Requisition Purchase Requisition
Purchase details
Payments Cycle-2
PURCHASE REQUISITION 28314
Okra Development Corp. Copy
To: Purchasing
From: Stockroom
Date: August 5, 201XShip by September 12, 201X
Quantity Number Description
10 Model 317 Roller Bearings
Stockroom Clerk Rita Silverstein
Payments Cycle-3
• Purchasing Department
Accounts Payable
Vendor
Determine Vendor, prepare prenumbered Purchase Order
Purchase RequisitionOriginating Department
Receiving
Originating Department
Payments Cycle-4
Okra Development Corp.8924 Bailey RoadSalem, OR 92117
Copy
Purchase Order 6-3378
Date:Ship By:Terms:
August 5, 201XSeptember 12, 201X2/10, n/30
FOB Shipping Point
To:
Faragut Sales, Inc.3812 Briar DriveSalem, Or 92115
Ship to Okra Development Corp.8924 Bailey Road, Salem, OR 92117
PR28314
Quantity Number Description Price Amount
10 Model 317 Roller Bearing for Model 3118 Ripper 48.00 480.00
Purchase order number must appear on all shipments and invoices.
Ordered By
Margaret Spangler
Payments Cycle-5
• Receiving Department
Accounts Payable
Purchasing
Count goods, match with Purchase Order, and prepare Receiving Report
Blind copy of
Purchase OrderPurchasing
Originating Department with goods
Filed until goods received along with invoice copy
Blind copy of
Purchase Order
Payments Cycle-6
Okra Development Corp.8924 bailey Road, Salem Or 92117
Receiving Report No. 8-09321
Carrier: Yellow Express 229-237441 Purchase Order: 6-3378
August 28, 201X Supplier: Faragut Sales, Inc.
Invoice No. D8-9912
Quantity Description Condition
10 Roller Bearings ok
Receiving Clerk Tony Morelli
Payments Cycle-7
Faragut Sales, Inc.3812 Briar Drive, Salem, OR 92115
D8-9912
SALES INVOICE
Sold to Shipped to Freight Bill No.
Okra Development Corp. 8924 Bailey Road 229-237441
8924 Bailey Road Salem, Or 92117
Salem, Or 92117 FOB Shipping Point
Invoice Date Date Shipped Terms Your Order No.
August 25, 201X August 20,201X 2/10,n/30 6-3378
Quantity We are pleased to serve you. Price Amount
10 Model 317 Roller Bearings 48.00 480.00
Payments Cycle-8
• Accounts Payable Department
Voucher Register to General Accounting
Compare. Then prepare Voucher and enter in Voucher Register
Purchase Requisition
Purchasing
To Cash Disbursements when due
Purchase Order
Receiving Report
Vendor’s Invoice
Originating Department
Receiving
Vendor
Payments Cycle-9
Page 287 VOUCHER REGISTERPaid Credit Debit
Voucher No. Date Payee Date Cheque No. Vouchers Payable Amount Account No.
9-00018 Aug. 29/201X Faragut Sales, Inc. Sept. 4/201X 867 480.00 480.00 682
Voucher No. 9-00018
Amount 480.00
Vendor Faragut Sales Inc. Account No. 682
Invoice No. D8-9912 Terms 2/10, n/30
Due Date Sept. 4, 201X Net Amount 470.40
Receiving Report No. 8-09321 Mathematical Accuracy B.K.
Purchase Order No. 6-3378 Documents Reviewed J.S.
Purchase Requisition No. 28314 Account Code Approved F.Y.D
Payments Cycle-10
• Cash Disbursements Department
(1) Check prices, verify math and consistency between documents, prepare cheques and cheque register.
(2) Review documentation, sign cheques, and cancel vouchers
Cheque Cheque Register
To Vendor To General Accounting
From Accounts Payable
Payments Cycle-11
Managing Risk in the Payments Cycle
• Possible Errors
1. Cutoff errors
2. Consignment goods
3. Misclassification
4. Recording a transaction
Payments Cycle-12
Fraud in the Acquisition and Payment Cycle• Most frauds
• Management
• Three areas to look at:•Paying for fictitious purchases
•Receiving kickbacks
•Purchasing goods for personal use
Payments Cycle-13
Designing Tests of Controls for the Acquisition and Payment Cycle
•The type of audit procedures?•What is the sample size?
•Items to be selected? •Timing – when to do the procedures?
By assertion:
Payments Cycle-14
Attribute Sampling for Tests of Controls
• Attribute sampling is common in the area of tests of controls of acquisitions and payments.
• There can be a large number of accounts
• Stratification
• The following slides shows test of controls for acquisitions and payments
Payments Cycle-15
Acquisitions - Assertions and Test of ControlsExistence or Occurrence
• Recorded acquisitions are for goods and services received, consistent with the best interests of the client.1. Approval of acquisition
2. The voucher package
• Breakdown in control
Payments Cycle-16
Completeness
• Existing acquisition transactions are recorded.
1. Receiving reports are prenumbered and accounted for.
2. Prenumbering of the voucher
• Breakdown in control
Payments Cycle-17
Accuracy
• Recorded acquisition transactions are accurate.
1. Batch totals of transactions are mathematically accurate and compared with computer batch summary reports
2. Transactions are approved for prices and discounts
• Breakdown in control
Payments Cycle-18
• Classification• Acquisitions transactions are properly classified.
1. A good chart of accounts is necessary
2. Posting to the correct accounts
• Breakdown in control
Payments Cycle-19
• Timing• Acquisition transactions are recorded on the correct
dates.
1. Transactions should be recorded as soon as possible
2. The transaction date should be the system date
• Breakdown in control
Payments Cycle-20
• Posting and summarization• Acquisition transactions are properly included in the
vendor and inventory master files, and are properly summarized.
1. Reconciliation of accounts payable master file to the general ledger
• Breakdown in control
Payments Cycle-21
Cash Disbursements - Assertions and Test of Controls• Occurrence
• Recorded cash disbursements are for goods and services actually received.
1. Adequate segregation of duties
2. Examination of all supporting documentation prior to payment
3. Approval of payment shown on supporting documents at the time cheques are signed.
• Breakdown in control
Payments Cycle-22
PURCHASE REQUISITION 28314
Okra Development Corp. Copy
Okra Development Corp.8924 Bailey RoadSalem, OR 92117
Copy
Purchase Order 6-3378
Date:Ship By:Terms:
August 5, 201XSeptember 12, 201X2/10, n/30
FOB Shipping Point
Okra Development Corp.8924 bailey Road, Salem Or 92117
Receiving Report No. 8-09321
Faragut Sales, Inc.3812 Briar Drive, Salem, OR 92115
D8-9912
SALES INVOICEVoucher No. 9-00018
Amount 480.00
Vendor Faragut Sales Inc. Account No. 682
Invoice No. D8-9912 Terms 2/10, n/30
Due Date Sept. 4, 201X Net Amount 470.40
Receiving Report No. 8-09321 Mathematical Accuracy B.K.
Purchase Order No. 6-3378 Documents Reviewed J.S.
Purchase Requisition No. 28314 Account Code Approved F.Y.D
PAID
Payments Cycle-23
Page 292 CHEQUE REGISTERVoucher Vouchers Purchase Cash
Payee Cheque No. No. Date Payable Dr. Discounts Cr Cr
Faragut Sales, Inc 867 9-00018 Sept. 4, 201X 480.00 9.60 470.40
OKRA DEVELOPMENT CORP.8924 Bailey Road, Salem, OR 92117
867
Sept. 4, 201X
Pay to the order of Faragut Sales, Inc. $474.40
Four hundred and seventy 40/100----------------- Dollars
Dewey LeeTHE BANKof OREGON
Treasurer
Payments Cycle-24
• Completeness• Existing cash disbursement transactions are
recorded.1. Cheques. Key control over cheques?
2. Cash disbursements journal.
3. Bank reconciliation
• Breakdown in controlPayments Cycle-25
5-31-1X Receipts Disbursements 6-30-1X
Balance per bank $11,800 b $18,300 b $21,200 b $8,900 b
Deposits in transit
May 31 500 (500) b
June 30 600 b 600 b
Outstanding cheques
May 31 (800) (800) j
June 30 400 (400)
NSF cheques (100) j (100) j
Cash balance $11,500 $18,300 r $20,700 d $9,100
Balance per books $11,320 L $18,200 L $21,710 L $8,810 L
Bank service charge
May (20) b (20) b
June 10 (10) b
Bank collection
May 200 b (200)
June 300 300 b
Cash balance $11,500 $18,300 r $20,700 d $9,100
^ ^ ^ ^
^ Footed d Traced to cash disbursements journal
b Traced to bank statement L Traced to general ledger
r Traced to cash receipts journal j Customer’s NSF cheque redeposited on July 8 and cleared
Alpha Bravo Company
Proof of Cash
For the Month of June 201X
Prepared by GHY Dated 8/7/1XReviewed by
Payments Cycle-26
• Accuracy• Recorded cash disbursement transactions are
accurate.1. Check the calculations
2. Bank reconciliation
• Breakdown in control
Payments Cycle-27
• Classification• Cash disbursement transactions are properly
classified.1. Chart of accounts
2. Checking the classification
• Breakdown in control
Payments Cycle-28
• Timing• Cash disbursement transactions are recorded on
the correct dates.1. The date of the transaction
2. Recording of transactions
• Breakdown in control
Payments Cycle-29
• Posting and Summarization• Cash disbursement transactions are properly
included in the vendor master file and properly summarized.
1. Vendor master file
2. Detail tie-in
• Breakdown in control
Payments Cycle-30
System Conversions
• System conversions arise when
• For example
Payments Cycle-31
Impact of System Conversion
• When an organization changes an entire system or a set of systems, there are three issues that the auditor needs to address:– A new system of internal controls
– The auditor will need to audit
– The auditor will need to
• An example of an accounts payable conversion from batch to online
Payments Cycle-32
Conversion Tests of Controls and Tests of Detail
Key internal control Common test of control Common test of details
Existence:Must have only authorized vendiors with the actual balances. Thus agree vendor file details for each vendor from the new (online) system to the old (batch) system.
Review vendor file listings for evidence of agreement.
On a test basis, agree vendor file details for vendors from the new (online) system to the old (batch) system.
Completeness & Accuracy:All vendor balances at date of conversion are included. Thus agree aged accounts payable trial balance details from the old (batch) system to the new (online) system for each vendor and in total.
Review aged accounts payable trial balance listings for evidence of comparison.
On a test basis, agree aged A/P trial balance details from the old (batch) system to the new (online) system for vendors and in total.
Cutoff:Information needs to be recorded in the appropriate system and is not omitted. Thus procedures must exist to ensure appropriate cutoff of transactions.
Conduct cutoff tests, for receiving reports and vendor invoices.
Same as for tests of controls.
Payments Cycle-33
Problem 16-12, Page 529
• In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that the auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelihood of an accurate cutoff?
Payments Cycle-34
You are the staff auditor testing the combined purchase and cash disbursements journal for a small audit client. Internal control is regarded as reasonably effective, considering the number of personnel.
The auditor in charge has decided that a sample of 80 items should be sufficient for this audit because of excellent controls and gives you the following instructions:
1.All transactions selected must exceed $100.2.At least 50 of the transaction items must be for purchases of raw materials because these
transactions are typically material.3.It is not acceptable to include the same vendor in the sample more than once.4.All vendors’ invoices that cannot be located must be replaced with new sample items.5.Both cheques and supporting documents are to be examined for the same transactions.6.The sample must be random, after modifications for instructions 1 through 5.
REQUIRED:a.Evaluate each of these instructions for testing acquisition and cash disbursement
transactions.b.Explain the difficulties of applying each of these instructions to attributes sampling.
Problem 18-20, Page 634, Canadian 11th. Edition
Payments Cycle-35