2001Chpt11
description
Transcript of 2001Chpt11
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Part Fiv
eAUDITING ACCOUNTING APPLICATIONS AND RELATED ACCOUNTS
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Chap
ter1
1CHAPTER 11AUDITING THE PURCHASING CYCLE AND RELATED ACCOUNTS
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EXPENSE AND LIABILITY RECOGNITION
CICA does not have a definition for expense.
Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. (US standards)
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CATEGORIES OF EXPENSES
Product costs Period costs Allocable costs
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OVERVIEW OF THE PURCHASING CYCLE
Figure 11-1 presents a flowchart of a purchasing system, which serves as a framework for discussing control procedures and tests of controls.
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TYPES OF TRANSACTIONS
Purchase of goods and services for cash or credit. Payment of the liabilities arising from such purchases. Return of goods to suppliers for cash or credit.
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FINANCIAL STATEMENT ACCOUNTS AFFECTED
Purchase transaction: Accounts payable Inventory Purchases or cost of goods sold Various asset and expense accounts
Cash disbursement transaction: Cash Accounts payable Cash discounts
Purchase return transaction: Purchase returns Purchase allowances Accounts payable
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DOCUMENTS AND RECORDS
Purchase requisition. Purchase order. Receiving report. Vendor invoice. Voucher.
Voucher register/purchase journal. Accounts payable subsidiary ledger. Vendor statements. Cheque. Cash disbursements journal/cheque
register.
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MAJOR FUNCTIONS
Requisitioning Purchasing Receiving Invoice processing Disbursements Accounts payable General ledger
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KEY SEGREGATION OF DUTIES
The purchasing function should be segregated from the requisitioning and receiving functions.
The invoice-processing function should be segregated from the accounts payable function.
The disbursement function should be segregated from the accounts payable function.
The accounts payable function should be segregated from the general ledger function.
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STATEGIC SYSTEMS APPROACH INHERENT RISK ASSESSMENT
Auditor should gain a comprehensive understanding of the purchasing process
Industry-related factors Misstatements detected in prior audits
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CONTROL RISK ASSESSMENT
Planning and performing tests of controlson purchasing cycle transactions
Understanding and documenting the purchasing internal control system based
on the planned level of control risk
Assessing and documenting thecontrol risk for the purchasing cycle
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UNDERSTANDING AND DOCUMENTING INTERNAL
CONTROL
Control environment Risk assessment Control activities Information and communication Monitoring
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CONTROL PROCEDURES AND TESTS OF CONTROLS -
PURCHASE TRANSACTIONS
Table 11-5 provides a summary of the internal control objectives, possible misstatements, internal control procedures, and tests of controls for purchase transactions.
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CONTROL PROCEDURES AND TESTS OF CONTROLS -
CASH DISBURSEMENT TRANSACTIONS
Table 11-6 provides a summary of the internal control objectives, possible misstatements, internal control procedures, and tests of controls for cash disbursement transactions.
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CONTROL PROCEDURES AND TESTS OF CONTROLS -
PURCHASE RETURNS TRANSACTIONS The number and magnitude of purchase returns
transactions is generally not material for most entities. Because of the possibility of manipulation the auditor
should at a minimum inquire about how the client controls purchase return transactions.
When goods are returned to a vendor, the client usually prepares a debit memo that reduces the amount of the vendor's accounts payable.
Analytical procedures are usually performed.
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AUDITING ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Substantive tests of transactions Analytical procedures Tests of account balances
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SUBSTANTIVE TESTS OF TRANSACTIONS
The intended objective of such tests is to detect monetary misstatements.
Table 11-8 presents examples of substantive tests of transactions that may be used to test the audit objectives for accounts payable.
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ANALYTICAL PROCEDURES
Compare payables turnover and days outstanding in accounts payable to previous years’ and industry data.
Compare the current-year balances in accounts payable and accruals with prior years' balances.
Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior years.
Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years’ and industry data.
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TESTS OF ACCOUNT BALANCES
Table 11-10 summarizes the test of account balances for each audit objective.
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ACCOUNTS PAYABLE CONFIRMATIONS
Accounts payable confirmations are generally used less frequently by auditors than accounts receivable confirmations because the auditor generally has access to vendor invoices and monthly vendor statements.
The auditor focuses on large dollar accounts, regular vendors with small or zero balances, and a sample of other accounts.
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ACCOUNTS PAYABLE CONFIRMATIONS (cont.)
When confirming accounts payable, auditors generally use a form of positive confirmation referred to as a blank or zero balance confirmation.
See Exhibit 11-5 for a sample confirmation.