Ch 12 - Auditing the Purchasing and Payroll Processes

Question 1

What are the accounts associated with the acquisition and payment cycle?

Answer 1

Major Accounts

• Accounts Payable
• Expenses

Other Related Accounts

• Inventory
• Cost of Goods Sold

Question 2

What are the core purchase transactions?

Answer 2

1. Purchasing goods and services
   (purchase transactions)
2. Making payments
   (cash disbursements transactions)
3. Purchase adjustments

Question 3

What are the types of risks associated with the purchasing process?

Answer 3

Inherent risks and risks of material misstatements

➡ These vary based on the entity and its environment

Question 4

Examples of considerations in terms of risks varying on the entity and its environment:

Answer 4

• Importance of purchases
  (𝗠𝗮𝗻𝘂𝗳𝗮𝗰𝘁𝘂𝗿𝗲𝗿 (𝗕𝗼𝗲𝗶𝗻𝗴) vs Financial Firm (e.g., Goldman Sachs))
• Compliance with laws and regulations
  (Hilton Brands vs. 𝗟𝗼𝗰𝗸𝗵𝗲𝗲𝗱 𝗠𝗮𝗿𝘁𝗶𝗻) Who are the suppliers for these companies? Lockheed may have more laws and regulations to follow
• Results of analytical procedures
  ➡ If a company is growing, we expect to see purchases, inventory, and accounts payable grow at similar rates
  (Decrease in payables as a percentage of assets may signal a completeness issue)
• Vendor characteristics
• Competition and pressure to achieve earnings targets
  (Incentive to inflate earnings ➡ Understate AP/related expenses
  The assertion we are concerned about here is completeness)
• Ability to pay obligations (liquidity)
  (problems with liquidity may cause going concern issues or incentives to understate liabilities)
• Risk of duplicate vendor payments
• Timing of accruals
  (We should record liabilities 𝘄𝗵𝗲𝗻 𝗮𝘀𝘀𝗲𝘁𝘀 𝗮𝗿𝗲 𝗱𝗲𝗹𝗶𝘃𝗲𝗿𝗲𝗱 (not the invoice)
  ➡ The assertion related to this is cut-off)