Addthis Arens Chapter18
Audit of the Acquisition and Payment
Cycle: Tests of Controls, Substantive
Tests of Transactions, and Accounts
Payable.
Chapter 18
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 1
Learning Objective 1
Identify the accounts and the
classes of transactions in the
acquisition and payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 2
Transactions in the Acquisition
and Payment Cycle
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances
and purchase discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 3
Accounts in the Acquisition
and Payment Cycle
Cash in Bank
Accounts Payable
Raw Material
Purchases
Cash Acquisitions
disbursements of goods and
services
Purchase Returns
and Allowances
Purchase
Discounts
Purchase
returns and
allowances
Purchase
discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Property, Plant
and Equipment
Prepaid
Expenses
18 - 4
Accounts in the Acquisition
and Payment Cycle
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities
Accounts Payable
Selling Expense Control Account
Subsidiary accounts
Commissions
Travel, delivery expenses
Repairs, Advertising
Acquisitions
of goods and
services
Administrative Expense Control Account
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Subsidiary accounts
Supplies, Officers’ travel
Legal fees
Auditing fees, Taxes
18 - 5
Learning Objective 2
Describe the business functions
and the related documents and
records in the acquisition and
payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 6
Classes of Transactions
and Accounts
Acquisitions:
Inventory
Property, plant, and equipment
Prepaid expenses
Leasehold improvements
Accounts payable
Manufacturing expenses
Selling and administrative expenses
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 7
Classes of Transactions
and Accounts
Cash disbursements:
Cash in bank (from cash disbursements)
Accounts payable
Purchase discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 8
Business Functions in the Cycle
Processing purchase orders
Receiving goods and services
Recognizing the liability
Processing and recording cash disbursements
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 9
Related Documents
and Reports
Processing purchase orders:
Purchase requisition
Purchase order
Receiving goods and services:
Receiving report
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 10
Related Documents
and Reports
Recognizing the liability:
Vendor’s invoice
Debit memo
Voucher
Acquisitions transaction file
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 11
Related Documents
and Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendor’s statement
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 12
Related Documents
and Reports
Processing and recording cash disbursements:
Check
Cash disbursements transaction file
Cash disbursements journal or listing
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 13
Learning Objective 3
Understand internal control, and
design and perform tests of
controls and substantive tests
of transactions for the acquisition
and payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 14
Methodology for Designing Controls
and Substantive Tests
Understand internal control –
acquisitions and cash disbursements
Assess planned control risk –
acquisitions and cash disbursements
Determine extent of testing controls
Design tests of controls and
Audit procedures
substantive tests of transactions
Sample size
for acquisitions and cash
Items to select
disbursements to meet
Timing
transaction-related audit objectives
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 15
Understand Internal Control
Study the client’s flowcharts
Review internal control questionnaires
Perform walk-through tests
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 16
Assess Planned Control Risk
Authorization of purchases
Separation of asset custody from
other functions
Timely recording and independent
review of transactions
Authorization of payments
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 17
Determine Extent of Testing
of Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk
The auditor performs tests of controls to obtain
evidence that controls are operating effectively
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 18
Controls and Substantive Tests
of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Acquisitions are accurately recorded
(accuracy)
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 19
Controls and Substantive Tests
of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and
summarization)
Acquisitions are correctly classified
(classification)
Acquisitions are recorded on the
correct dates (timing)
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 20
Attributes Sampling
Because of the importance of tests of controls
and substantive tests of transactions for
acquisitions and cash disbursements, the use
of attributes sampling is common in this
audit area.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 21
Important Differences
Larger number of transactions
Significant judgment
Wide range of dollar amount
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 22
Learning Objective 4
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 23
Methodology for Designing Tests
of Balances for Accounts Payable
Identify client business
risks affecting
accounts payable
Phase I
Set tolerable misstatement
and assess inherent risk Phase I
for accounts payable
Assess control risk for
the acquisition and
payment cycle
Phase I
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 24
Methodology for Designing Tests
of Balances for Accounts Payable
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the acquisition
and payment cycle
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 25
Methodology for Designing Tests
of Balances for Accounts Payable
Design and perform
analytical procedures
Phase III
for accounts
payable balance
Design tests of
Audit procedures
details of accounts
Sample size
payable balance to
satisfy balanceItems to select
related audit
Timing
objectives
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Phase III
18 - 26
Learning Objective 5
Design and perform analytical
procedures for accounts payable.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 27
Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Possible misstatement
Compare acquisition-related
expense account balances
with prior years.
Misstatement of accounts
payable and expenses
Review list of accounts payable Classification misstatement
for nontrade liabilities
for unusual, nonvendor, and
interest-bearing payables
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 28
Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Compare individual accounts
payable with previous years
Possible misstatement
Unrecorded or nonexistent
accounts, or misstatements
Calculate ratios, such as
Unrecorded or nonexistent
purchases divided by accounts accounts, or misstatements
payable, and accounts payable
divided by current liabilities
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 29
Learning Objective 6
Design and perform tests of
details of balances for accounts
payable, including out-of-period
liability tests.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 30
Out-of-Period Liability Tests
Examine underlying documentation for
subsequent cash disbursements
Examine underlying documentation for bills
not paid several weeks after the year-end
Trace receiving reports issued before
year-end to related vendors’ invoices
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 31
Out-of-Period Liability Tests
Trace vendors’ statements that show a balance
due to the accounts payable trial balance
Send confirmations to vendors with which
the client does business
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 32
Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit
FOB destination
FOB origin
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 33
Learning Objective 7
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable as audit
evidence.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 34
Reliability of Evidence
Distinction between vendors’ invoices
and vendors’ statements
Difference between vendors’ statements
and confirmations
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 35
Sample Size
Sample sizes for accounts payable tests vary
considerably, depending on many factors.
Statistical sampling is less commonly used
for the audit of accounts payable than
for accounts receivable.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 36
Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Cash in
Bank
Acquisition
Expenses
Payments
Expenses
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and
TDB
Ending
balance
Audited
by AP and
TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 37
Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Acquisition
Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and
TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 38
End of Chapter 18
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 39
Cycle: Tests of Controls, Substantive
Tests of Transactions, and Accounts
Payable.
Chapter 18
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 1
Learning Objective 1
Identify the accounts and the
classes of transactions in the
acquisition and payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 2
Transactions in the Acquisition
and Payment Cycle
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances
and purchase discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 3
Accounts in the Acquisition
and Payment Cycle
Cash in Bank
Accounts Payable
Raw Material
Purchases
Cash Acquisitions
disbursements of goods and
services
Purchase Returns
and Allowances
Purchase
Discounts
Purchase
returns and
allowances
Purchase
discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Property, Plant
and Equipment
Prepaid
Expenses
18 - 4
Accounts in the Acquisition
and Payment Cycle
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities
Accounts Payable
Selling Expense Control Account
Subsidiary accounts
Commissions
Travel, delivery expenses
Repairs, Advertising
Acquisitions
of goods and
services
Administrative Expense Control Account
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Subsidiary accounts
Supplies, Officers’ travel
Legal fees
Auditing fees, Taxes
18 - 5
Learning Objective 2
Describe the business functions
and the related documents and
records in the acquisition and
payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 6
Classes of Transactions
and Accounts
Acquisitions:
Inventory
Property, plant, and equipment
Prepaid expenses
Leasehold improvements
Accounts payable
Manufacturing expenses
Selling and administrative expenses
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 7
Classes of Transactions
and Accounts
Cash disbursements:
Cash in bank (from cash disbursements)
Accounts payable
Purchase discounts
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 8
Business Functions in the Cycle
Processing purchase orders
Receiving goods and services
Recognizing the liability
Processing and recording cash disbursements
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 9
Related Documents
and Reports
Processing purchase orders:
Purchase requisition
Purchase order
Receiving goods and services:
Receiving report
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 10
Related Documents
and Reports
Recognizing the liability:
Vendor’s invoice
Debit memo
Voucher
Acquisitions transaction file
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 11
Related Documents
and Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendor’s statement
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 12
Related Documents
and Reports
Processing and recording cash disbursements:
Check
Cash disbursements transaction file
Cash disbursements journal or listing
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 13
Learning Objective 3
Understand internal control, and
design and perform tests of
controls and substantive tests
of transactions for the acquisition
and payment cycle.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 14
Methodology for Designing Controls
and Substantive Tests
Understand internal control –
acquisitions and cash disbursements
Assess planned control risk –
acquisitions and cash disbursements
Determine extent of testing controls
Design tests of controls and
Audit procedures
substantive tests of transactions
Sample size
for acquisitions and cash
Items to select
disbursements to meet
Timing
transaction-related audit objectives
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 15
Understand Internal Control
Study the client’s flowcharts
Review internal control questionnaires
Perform walk-through tests
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 16
Assess Planned Control Risk
Authorization of purchases
Separation of asset custody from
other functions
Timely recording and independent
review of transactions
Authorization of payments
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 17
Determine Extent of Testing
of Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk
The auditor performs tests of controls to obtain
evidence that controls are operating effectively
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 18
Controls and Substantive Tests
of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Acquisitions are accurately recorded
(accuracy)
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 19
Controls and Substantive Tests
of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and
summarization)
Acquisitions are correctly classified
(classification)
Acquisitions are recorded on the
correct dates (timing)
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 20
Attributes Sampling
Because of the importance of tests of controls
and substantive tests of transactions for
acquisitions and cash disbursements, the use
of attributes sampling is common in this
audit area.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 21
Important Differences
Larger number of transactions
Significant judgment
Wide range of dollar amount
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 22
Learning Objective 4
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 23
Methodology for Designing Tests
of Balances for Accounts Payable
Identify client business
risks affecting
accounts payable
Phase I
Set tolerable misstatement
and assess inherent risk Phase I
for accounts payable
Assess control risk for
the acquisition and
payment cycle
Phase I
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 24
Methodology for Designing Tests
of Balances for Accounts Payable
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the acquisition
and payment cycle
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 25
Methodology for Designing Tests
of Balances for Accounts Payable
Design and perform
analytical procedures
Phase III
for accounts
payable balance
Design tests of
Audit procedures
details of accounts
Sample size
payable balance to
satisfy balanceItems to select
related audit
Timing
objectives
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
Phase III
18 - 26
Learning Objective 5
Design and perform analytical
procedures for accounts payable.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 27
Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Possible misstatement
Compare acquisition-related
expense account balances
with prior years.
Misstatement of accounts
payable and expenses
Review list of accounts payable Classification misstatement
for nontrade liabilities
for unusual, nonvendor, and
interest-bearing payables
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 28
Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Compare individual accounts
payable with previous years
Possible misstatement
Unrecorded or nonexistent
accounts, or misstatements
Calculate ratios, such as
Unrecorded or nonexistent
purchases divided by accounts accounts, or misstatements
payable, and accounts payable
divided by current liabilities
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 29
Learning Objective 6
Design and perform tests of
details of balances for accounts
payable, including out-of-period
liability tests.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 30
Out-of-Period Liability Tests
Examine underlying documentation for
subsequent cash disbursements
Examine underlying documentation for bills
not paid several weeks after the year-end
Trace receiving reports issued before
year-end to related vendors’ invoices
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 31
Out-of-Period Liability Tests
Trace vendors’ statements that show a balance
due to the accounts payable trial balance
Send confirmations to vendors with which
the client does business
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 32
Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit
FOB destination
FOB origin
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 33
Learning Objective 7
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable as audit
evidence.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 34
Reliability of Evidence
Distinction between vendors’ invoices
and vendors’ statements
Difference between vendors’ statements
and confirmations
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 35
Sample Size
Sample sizes for accounts payable tests vary
considerably, depending on many factors.
Statistical sampling is less commonly used
for the audit of accounts payable than
for accounts receivable.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 36
Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Cash in
Bank
Acquisition
Expenses
Payments
Expenses
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and
TDB
Ending
balance
Audited
by AP and
TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 37
Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Acquisition
Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and
TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 38
End of Chapter 18
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
18 - 39