A2 Expenditure Cycle

Question 1

Accounts Payable Department

Answer 1

Matches the purchase order, receiving report, & vendor invoice. This ensures that goods were received and the payment was properly authorized. The treasurer should make the payment.

Question 2

Purchase Department

Answer 2

Prepares the purchase order. The authority to accept incoming goods in receiving should be based on an approved purchase order issued by this department.

Question 3

Purchases Free of MM

Answer 3

Independent matching of the Purchase order, receiving report, and vendor invoices is an effective control in assuring recorded purchases are free of material misstatement.

Question 4

Debit Memo

Answer 4

These adjust invoice amounts to correct increases or decreases in the amount depending on the goods.

When goods are returned to a vendor, the purchasing department should send a debit memo to the accounts department.

Question 5

Credit Memo

Answer 5

These reduce account receivable (not payable)

Question 6

Testing Accounts Payable

Answer 6

When testing liabilities, an auditor generally is concerned about understatement. Accounts payable audit procedures would likely focus on mgmt’s Completeness assertion. If AP isn’t complete, then its overstated.

Test performed include tracing from receiving report to AP trial balance (to ensure its been recorded & verifies all merchandise received is recorded)

Question 7

Unrecorded Payables

Answer 7

When performing a search for unrecorded payables, an auditor would compare cash payments after the balance sheet date with the AP trial balance to determine that disbursements that pertain to the prior year’s business have been accrued. AKA out of period search.

Review Disbursement after year end, Identify disbursements related to expenses incurred before year end, verify recorded as year end liability.

Question 8

Blank Purchase Orders

Answer 8

Purchase orders with blank/omitted quantities are sent to receiving department who count goods upon arrival & records them in receiving report.

Question 9

Treasurer

Answer 9

Receives the approved voucher package and pays the bill. The treasurer also cancels all supporting documents after payment, returns paid vouchers to accounting department who then files the package.

Question 10

Expenditure Cycle Test

Answer 10

To test completeness, agree the accounts payable listing to the general ledger. The term listing typically indicates a record. Remember we are moving upward, from small numbers to big numbers to test completeness (or source docs to FS).