[PPT]Chapter 1 – The Demand for Audit and Other Assurance...
Transcript of [PPT]Chapter 1 – The Demand for Audit and Other Assurance...
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Audit of the Acquisition and Audit of the Acquisition and Payment Cycle: Tests of Payment Cycle: Tests of
Controls, Substantive Tests of Controls, Substantive Tests of Transactions, and Accounts Transactions, and Accounts
Payable.Payable.
Chapter 18Chapter 18
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Learning Objective 1Learning Objective 1
Identify the accounts and the classes Identify the accounts and the classes of transactions in the acquisition and of transactions in the acquisition and payment cycle.payment cycle.
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Transactions in the Transactions in the Acquisition and Payment Acquisition and Payment
CycleCycleThree classes of transactions: 1. Acquisitions of goods and services2. Cash disbursements3. Purchase returns and allowances
and purchase discounts
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Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle
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Learning Objective 2Learning Objective 2
Describe the business functions and Describe the business functions and the related documents and records in the related documents and records in the acquisition and payment cycle.the acquisition and payment cycle.
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Classes of TransactionsClasses of Transactionsand Accountsand Accounts
Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements Accounts payable Manufacturing expenses Selling and administrative expenses
Acquisitions:
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Classes of TransactionsClasses of Transactionsand Accountsand Accounts
Cash in bank (from cash disbursements) Accounts payable Purchase discounts
Cash disbursements:
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Business Functions in the Business Functions in the CycleCycle
Receiving Goods and Services
Processing Purchase Orders
Recognizing the
Liability
Processing & Recording
cash disbursement
s
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Related DocumentsRelated Documentsand Reportsand Reports
Processing purchase orders:Purchase requisitionPurchase order
Receiving goods and services:Receiving report
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Related DocumentsRelated Documentsand Reportsand Reports
Recognizing the liability:
Vendor’s invoice
Debit memo
Voucher
Acquisitions transaction file
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Related DocumentsRelated Documentsand Reportsand Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendor statement
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Related DocumentsRelated Documentsand Reportsand Reports
Processing and recording cash disbursements:Check
Cash disbursements transaction file
Cash disbursements journal or listing
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Learning Objective 3Learning Objective 3
Understand internal control, and Understand internal control, and design and perform tests of controls design and perform tests of controls and substantive tests of transactions and substantive tests of transactions for the acquisitionfor the acquisitionand payment cycle.and payment cycle.
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Methodology for Designing Methodology for Designing Controls and Substantive TestsControls and Substantive Tests
Understand internal control –acquisitions and cash disbursements
Assess planned control risk –acquisitions and cash disbursements
Determine extent of testing controls
Audit proceduresSample size
Items to selectTiming
Design tests of controls andsubstantive tests of transactions
for acquisitions and cashdisbursements to meet
transaction-related audit objectives
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Understand Internal ControlUnderstand Internal Control
Study the client’s flowcharts
Review internal control questionnaires
Perform walk-through tests
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Assess Planned Control RiskAssess Planned Control Risk
Authorization of purchases
Separation of asset custody fromother functions
Timely recording and independentreview of transactions
Authorization of payments
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Determine Extent of TestingDetermine Extent of Testingof Controlsof Controls
The auditor identifies the key internal controlsand weaknesses and assesses control risk
The auditor performs tests of controls to obtainevidence that controls are operating effectively
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Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions
Recorded acquisitions are for goodsand services received (occurrence)
Existing acquisitions are recorded(completeness)
Acquisitions are accurately recorded(accuracy)
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Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions
Acquisitions are correctly includedin the master files (posting andsummarization)
Acquisitions are correctly classified(classification)
Acquisitions are recorded on thecorrect dates (timing)
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Attributes SamplingAttributes Sampling
Because of the importance of tests of controlsand substantive tests of transactions foracquisitions and cash disbursements, the useof attributes sampling is common in thisaudit area.
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Important Differences Important Differences Compared to other CyclesCompared to other Cycles
Acquisitions and Payments Cycle transactions:Larger number of transactionsSignificant judgmentWide range of dollar amount
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Learning Objective 4Learning Objective 4
Describe the methodology for Describe the methodology for designing tests of details of balances designing tests of details of balances for accounts payable using the audit for accounts payable using the audit risk model.risk model.
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Identify client businessrisks affecting
accounts payable
Methodology for Designing TestsMethodology for Designing Testsof Balances for Accounts Payableof Balances for Accounts Payable
Set tolerable misstatementand assess inherent risk
for accounts payableAssess control risk for
the acquisition andpayment cycle
Phase I
Phase I
Phase I
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Methodology for Designing TestsMethodology for Designing Testsof Balances for Accounts Payableof Balances for Accounts Payable
Design and performtests of controls and
substantive testsof transactions
for the acquisitionand payment cycle
Phase II
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TimingItems to select
Sample sizeAudit procedures
Methodology for Designing TestsMethodology for Designing Testsof Balances for Accounts Payableof Balances for Accounts Payable
Design and performanalytical procedures
for accountspayable balanceDesign tests of
details of accountspayable balance to
satisfy balance-related audit
objectives
Phase III
Phase III
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Learning Objective 5Learning Objective 5
Design and perform analytical Design and perform analytical procedures for accounts payable.procedures for accounts payable.
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Analytical Procedures for the Analytical Procedures for the Acquisition and Payment Acquisition and Payment
CycleCycle
Review list of accounts payable for unusual, nonvendor, and interest-bearing payables
Classification misstatement for nontrade liabilities
Analytical procedure
Compare acquisition-related expense account balances with prior years
Misstatement of accountspayable and expenses
Possible misstatement
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Analytical Procedures for the Analytical Procedures for the Acquisition and Payment Acquisition and Payment
CycleCycleAnalytical procedure
Compare individual accounts payable with previous years
Unrecorded or nonexistent accounts, or misstatements
Calculate ratios, such aspurchases divided by accounts payable, and accounts payable divided by current liabilities
Unrecorded or nonexistent accounts, or misstatements
Possible misstatement
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Learning Objective 6Learning Objective 6
Design and perform tests of details of Design and perform tests of details of balances for accounts payable, balances for accounts payable, including out-of-period liability tests.including out-of-period liability tests.
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Out-of-Period Liability TestsOut-of-Period Liability Tests
Examine underlying documentation forsubsequent cash disbursements
Examine underlying documentation for billsnot paid several weeks after the year-end
Trace receiving reports issued beforeyear-end to related vendors’ invoices
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Out-of-Period Liability TestsOut-of-Period Liability Tests
Trace vendors’ statements that show a balancedue to the accounts payable trial balance
Send confirmations to vendors with whomthe client does business
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Cutoff TestsCutoff Tests
Relationship of cutoff to physical observation of inventory Inventory in transit
FOB destinationFOB origin
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Learning Objective 7Learning Objective 7
Distinguish the reliability of vendors’ Distinguish the reliability of vendors’ invoices, vendors’ statements, and invoices, vendors’ statements, and confirmations of accounts payable as confirmations of accounts payable as auditauditevidence.evidence.
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Reliability of EvidenceReliability of Evidence
Distinction between vendors’ invoicesand vendors’ statements
Difference between vendors’ statementsand confirmations
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Accounts Payable Accounts Payable ConfirmationConfirmation
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Sample SizeSample Size
Sample sizes for accounts payable tests varyconsiderably, depending on many factors.
Statistical sampling is less commonly usedfor the audit of accounts payable thanfor accounts receivable.
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Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment Acquisition and Payment
CycleCycle
TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS
Cash inBank
AccountsPayable
AcquisitionExpenses
Payments ExpensesAudited by
TOC, STOT, and AP
Endingbalance
Endingbalance
Audited byTOC, STOT, and AP
Audited byAP and
TDBAudited
by AP andTDB
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Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment Acquisition and Payment
CycleCycle
TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS
AccountsPayable
AcquisitionAssets
Acquisitionof assets
Endingbalance
Audited byTOC, STOT, and AP
Audited byAP and
TDB