AUDIT purchase & payment .ppt
Transcript of AUDIT purchase & payment .ppt
AUDIT PURCHASE AND
PAYMENT CYCLE
ACCOUNT & CLASSES OF
TRANSACTION IN THE
ACQUISITION AND PAYMENT
CYCLE
Is to evaluate whether the account effected by the acquisitions of good and services and cash disbursement for the acquisition are fairly presented in accordance with generally accepted accounting principle Graf 19-1
Cash in bankAcc payable
Purchase returns and allowances
Purchase discounts
Manufacturing exp control acc
Cash disbursements
Purchase return and allowances
Purchase discounts
Raw material purchases
Property, plant, equipment
Pre expenses
Admin exp control acc
Supplies
Officer’s travel
Legal fees
Auditing fees
Taxes
Subsidiary accounts
Repair & maintenance
Taxes
Supplies
Freight in
Utilities
Selling exp control acc
Commissions
Travel expense
Delivery expense
Repairs
Advertising
Acquisitions of goods and services
Subsidiary accounts Subsidiary accounts
3 classes of transaction that included in the cycle:-
1)ACQUISITIONS OF GOOD AND SEVICES
2)CASH DISBURSMENT
3)PURCHASE RETURN AND ALLOWANCES
AND PURCHASE DISCOUNTS
BUSINESS FUNCTION IN
THE CYCLE AND
RELATED DOCUMENT
AND RECORD
DEBIT MEMOPURCHASE
REQUISITION
PURCHASE
ODERVENDOR INVOCE
VOUCHER ACQUISITION TRANSACTION
FILE
ACQUISITION JOURNAL OR
LISTING
ACCOUNT PAYABLE
MASTER FILE
ACCOUNT PAYABLE TRIAL
BALANCE
VENDOR’S STATEMENT
CHECK CASH DISBURMENT TRANSACTION FILE
CASH DISBURSEMENT
JOURNAL OR LISTING
ACCOUNTS BUSINESS FUNCTION DOCUMENT AND RECORDS
ACQUISITIONS INVENTORY
PROPERTY,PLANT AND
EQUIPMENT
PREPAID EXPENSES
LEASEHOLD IMPROVEMENT
ACCOUNT PAYABLE
MANUFACTURING EXPENSES
SELLING EXPENSES
ADMINISTRACTIVE EXPENSES
PROCESSING PURCHASE
ODER
RECEIVING GOODS AND
SERVICES
RECOGNISING THE LIABILITY
PURCHASE REQUISITION
PURCHASE ODER
RECEIVING REPORT
ACQUISITIONS TRANSACTION FILE
ACQUISITION JOURNAL\LISTING
VENDOR INVOICE
DEBIT MEMO
VOUCHER
ACCOUNT PAYABLE MASTER FILE
ACCOUNT PAYABLE TRIAL BALANCE
VENDOR STATEMENT
CASH DISBURSEMENT CASH IN BANK (FROM CASH
DISBURSEMENT)
ACCOUNTS PAYABLE
PURCHASE DISCOUNT
PROCESSING AND
RECORDING CASH
DISBURSEMENT
CHECK
CASH DISBURSEMENTS
TRANSACTION FILE
CASH DISBURSEMENT JOURNAL\
LISTING
PURCHASE REQUISITION
Request for good and services by and authorized employee.
It may take the form of a request for such acquisition as materials by a foreman or the
storeroom supervisor, outside repair by office or factory personnel, or insurance by the vice
president in charge of property and equipment.
PURCHASE ORDER
Document identifying the description, quantity and related information for good and services
the company intends to purchase.
This this document is often used to indicated authorization to acquired good and services.
VENDOR INVOICE
Is a document received from the vendor and show the amount owed for an acquisition
It indicated the description and quantity of good and services received, price (including
freight), cash discount term, date of the billing and total amount.
DEBIT MEMOA document received from the vendor and indicated a reduction in the amount owed to a vendor because of returned goods or an allowance granted.
VOUCHER
Is commonly used by organizations to establish a formal means of recording and
controlling acquisitions, primarily by enabling each acquisition transaction to be
sequentially numbered.
Include a cover sheet or folder for containing documents and a package of relevant
document such as the purchase order, copy of the packing slip, receiving report, and
vendor invoice.
After payment a copy of the check is added to the voucher package.
ACQUISITIONS TRANSACTION FILE
this is a computer-generated file that includes all acquisition transaction
processed by the accounting system for a period, such as a day, week or month.
It contained all information entered into the system and includes information for
each transaction, such as a vendor name, date amount, account classification and
description and quantity of good and services purchase.The file can also include purchase return and allowance or there can be separate file for those transactions.
ACQUISITIONS JOURNAL OR LISTING
The listing of report is generated from the acquisitions transaction file typically
includes the vendor name, date, amount and account classification or
classification for each transaction, such as repair and maintenance, Inventory or
utilities.
It also identifies whatever the acquisition was for cash or account payable
The journal or listing can cover any time period, typically a month.
ACCOUNT PAYABLE MASTER FILE
Records acquisitions, cash disbursement, and acquisition return and allowance
transaction for each vendor.
The master file is updated from the acquisition, return and allowances and cash
disbursement equals the total balance of account payable in the general ledger.
Printout of the account payable master file show by the vendor , beginning balance in
account payable, each acquisition, acquisition return and allowance, cash disbursement
and the ending balance.
ACCOUNT PAYABLE TRIAL BALANCE
Listing includes the amount owed to each vendor or for each invoice or voucher at the
point in time
It is prepared directly from the account payable master file.
VENDOR STATEMENT
Document prepared monthly by the vendor and indicates the beginning balance,
acquisitions, return and allowance, payment to the vendor and ending balance.
These balance and activities are the vendor representations of the transaction
for the period, not the client.
CHECK
Document used to pay the acquisition when payment is due.
After the check is signed by the authorized person, it is assets. Therefore signed
checks should be mailed by the signer or a person under the signer control.
CASH DISBURSEMENT TRANSACTIOJ FILE
Computer generated file that includes all cash disbursement transaction
processed by the accounting system period, such as a day week, or month
Includes the same type of information discussed for the acquisition
transaction file.
CASH DISBURSEMENT JOURNAL\LISTING
Report generated from the cash disbursement transaction file that includes all
transaction for any time period
Same transaction including all relevant information are included in the
account payable master file and general ledger.
PROCESSING PURCHASE
ORDER
RECEIVING GOODS AND
SERVICES
RECOGNIZING THE
LIABILITY
PROCESSING AND RECORDING
CASH DISBURSEMENT
BUSINESS FUNCTION
PROCESSING PURCHASE ORDERSThe request for good or services by the client personnel is the starting point for the cycle.Exact form of the request ant the required approval depend on the nature of good and services and company policy.
RECEIVING GOODS AND SERVICES
Receipt by the company of good and services from the vendor is the critical
point in the cycle because it is the point at which most company first
recognize the acquisition and related liability on there record
When good are received , adequate control requires examination for
description, quantity, timely arrival and condition
A receiving report is a paper or electronic document prepared at the time
tangible goods are received
RECOGNISING THE LIABILITY
Proper recognition of the liability for the receipt of good and services requires
prompt and accurate recording.
Initial recording has significant effect on the recorded financial statement and
the actual cash disbursement.
PRCESSING AND RECORDING CASH DISBURSEMENT-Are in the
-CHECK-CASH DISBURSEMENT TRANSACTIOJ FILE-CASH DISBURSEMENT JOURNAL\LISTING
TRANSACTION INTERNAL CONTROL SUBTANTIVE TESTS OF TRANSACTION
Recorded cash disbursement are for good and services actually received(EXISTENCE)
there is adequate segregation of duties between account payable ad custody of signed check
Supporting documentation is examined before singing of check by an authorized person
Approval of payment
Review the cash disbursement journal, ledger and account payable
Trace the cancelled check to the related acquisition journal entry
Examine cancelled check for authorized signature, proper endorsement
Examine supporting document
Existing cash disbursement transaction are recorded(COMPLETENESS)
• Check are prenumbered and accounted for
• Bank reconciliation is prepared monthly
Reconcile recorded cash disburment with the cash disbursement on the bank statement
Recorded cash disbursement transaction are accurate (ACCURANCY)
• Calculation and amount are internally verified
• Bank reconciliation is prepared monthly by independent person
Compare cancelled checks with the relatedRecomputed cash discountPrepare proof cash disbursement
TRANSACTION THAT RELATED AUDIT OBJECTIVE IN CASH DISBURSEMENT
Internal control
Understand Internal Control
The auditor gains an understanding of internal control for the acquisition and payment cycle by studying the client’s flowcharts, preparing internal control questionnaires, and performing walk-through tests for acquisitions and cash disbursements.
Key Internal Control1.Authorisation of Purchases :
- Proper authorisation is essential because it ensure that the goods and services acquired are for authorised company purposes and it avoids the acquisition of unnecessary items.
2.Separation of Asset Custody from other Functions :
- Most companies have receiving department initiate a receiving report as evidence of the receipt and examination of goods.
- One copy sent to the raw materials storeroom and another to the accounts payable department for their information needs.
3.Timely Recording and Independent Review of Transactions :
- Some companies , the recording of the liability for acquisitions is made on the basis of the receipt of goods and services.
- Other companies , it is deferred until the vendor’s invoice is received.
4.Authorisation of Payments :
- Most important controls over cash disbursements include the signing of checks by an individual with proper authority , separation of responsibilities for signing the checks and performing the accounts payable function , and careful examination of the supporting documents by the check signer at the time the check is signed.
CONTROL PROCEDURES OVER PURCHASES AND
PAYMENTS
Evaluate Cost-Benefit of Testing Controls
The auditor identifies the key internal controls and weaknesses.
The auditor decides whether substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.
Controls and Substantive Tests ofTransactions for Acquisitions
Recorded acquisitions are for goods and services received, consistent with the best interests of the client (existence).
Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy). Acquisitions are correctly classified
(classification).
Controls and Substantive Tests ofTransactions for Cash
Disbursements The assumption underlying these controls
and audit procedures is separate cash disbursements and acquisitions journals.
The acquisitions and cash disbursements tests are typically performed concurrently.
METHODOLOGY FOR
DESIGNING TESTS OF
DETAILS OF BALANCES FOR
ACCOUNTS PAYABLE
PHASE 1 PHASE 2 PHASE 3
Identify client business risks affecting 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 objectives
Audit proceduresSample sizeItems to selectTiming
Analytical Procedure Possible Misstatement
Compare acquisition-related expense account balances with prior years.
Misstatement of accounts payable and expenses
Review list of accounts payable for unusual, non-vendor and interest-bearing payables.
Classification misstatement for non trade liabilities.
Compare individual accounts payable with previous years.
Unrecorded or non existent accounts or misstatement.
Calculates ratios such as purchases divided by accounts payable and accounts payable divided by current liabilities.
Unrecorded or non existent accounts or misstatement.
The auditor should recognize the difference in emphasis between the audit of liabilities and the audit of sales. When assets are being verified, attention is focused on making certain that the balance in the account is not overstated. There are two types of test:
1. Out-of-Period Liability Test
• The emphasis on understatements in liability accounts.
• Important to accounts payable.
• The extent of test to uncover unrecorded accounts payable, often called the search for unrecorded accounts payable, depends heavily on assessed control risk and the materiality of the potential balance in the accounts.
• The same audit procedures used to uncover unrecorded payables are applicable to the accuracy.
• The audit procedures that follow are typical test.
Out-of-Period Liability Test
1. Examine underlying documentation for subsequent cash disbursement.
Purpose – Uncover cash disbursements made in the subsequent accounting period that represent liabilities at the balance sheet date.
2. Examine underlying documentation for bills not paid several weeks after the year end.
Carried out in the same manner as the preceding one and serves the same purpose.
Differences is that it is done for unpaid obligations near the end of the audit field work rather than obligations that have already been paid.
3. Trace receiving reports issued before year-end to related vendors’ invoices.
All merchandise received before the year-end of the accounting period, indicated by the issuance of receiving report, should be included as accounts payables.
4. Trace vendors’ statements that show a balance due to accounts payable trial balance.
If the client maintains a file of vendors statement indicating a balance due at the balance sheet date can be traced to the listing to make sure that it is included as an account payable.
5. Send confirmations to vendors with which client does business.Sending confirmation to active vendors for which a balance has not been included in the accounts payable list is a useful means of searching for omitted amounts.
Cutoff Test
• Cutoff test for accounts payable are intended to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period.
• The relationship of cutoff to physical observation of inventory and the determination of the amount of inventory in transit. There are include:
1. Relationship of cutoff to physical observation of inventory.
In determining that the accounts payable cutoff is correct, it is essential that the cutoff test be coordinated with the physical observation of inventory.
2. Inventory in transit.
A distinction in accounts payable must be made between acquisitions of inventory that are on an FOB destination basis and those that are made FOB origin.
Determining whether inventory has been acquired on an FOB destination or origin basis is done by examining vendors’ invoices.
DISTINGUISH THE RELIABILITY OF VENDORS’ INVOICES,
VENDORS’ STATEMENT AND CONFIRMATIONS OF ACCOUNTS PAYABLE AS AUDIT EVIDENCE
It is essential that the auditor understand the relative reliability of the three primary types of evidence ordinarily used: vendors’ invoices, statements and confirmations.
a) Distinction between vendors’ invoices and vendors’ statements.
• In examining vendors’ invoices and related supporting documents, such as receiving reports and purchase orders, the auditor gets highly reliable evidence about individual transactions.
• The vendors’ statement is superior for verifying accounts payable because it includes the ending balance. It is not as desirable as invoices for verifying individual transactions because a statement includes only the total amount of the transaction.
• The vendor’s invoice is superior for verifying transaction because the auditor is verifying individual transaction and the invoice show the details of the acquisitions.
b) Distinction between vendors’ statements and confirmations.
• The most important is the source of the information.
• A vendor’s statements has been prepared by an independent third party but is in the hands of the client at the time the auditor examines it.
• A confirmation of accounts payable, which normally is a request for an itemized statement sent directly to the public accountant’s office, provides the same information but can regarded as more reliable.
• In addition, it include a request for information about notes and acceptances payable as well as consigned inventory owned by the vendor but stored on the
client’s premises.
• When vendors’ statement are examined or confirmations are received, there must be a reconciliation of the statement or confirmation with the accounts payable list.
• Sample sizes for accounts payable tests vary considerably, depending on such factors:
1) Materiality of accounts payable
2) Number of accounts outstanding
3) Assessed control risk
4) Results of the prior year
• Statistical sampling is less commonly used for the audit of accounts payables than for accounts receivable.
Cash inBank
AccountsPayable
AcquisitionExpenses
Endingbalance
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
Audited byAP
Payments Expenses
Endingbalance
Audited byAP and TDP
Audited byTOC, STOT, and AP
Audited byTOC, STOT, and AP