Chapter 11 - Auditing the Purchasing Process Flashcards
!! What are the 3 Expense Categories? !!
Product Costs - Costs directly tied to revenue (i.e. COGS)
Period Costs - Costs like general and administrative, payroll
System Allocation - Costs like depreciation
Ten types of Purchasing Documents and Records (1 - 5)
- Purchase requisition
- Purchase order
- Receiving report
- Vendor Invoice
- Voucher
Ten types of Purchasing Documents and Records (6 - 10)
- Voucher register/purchases journal
- Accounts payable subsidiary ledger
- Vendor statement
- Check/EFT
- Cash disbursements journal
!! What are the Major Functions of the Purchasing Process? !!
Requisitioning
Purchasing
Receiving
Invoice Processing
Disbursements
Accounts Payable
General Ledger
What is the Requisitioning Function of the Purchasing Process?
Initiation and approval of requests for good and services by authorized individuals consistent with management criteria.
What is the Purchasing Function of the Purchasing Process?
Approval of purchase orders and proper execution as to price, quantity, quality, and vendor.
What is the Receiving Function of the Purchasing Process?
Receipt of properly authorized goods and services.
What is the Invoice Processing Function of the Purchasing Process?
Processing of vendor invoices for goods and services received; also processing of adjustment for allowances, discounts, and returns.
What is the Disbursements Function of the Purchasing Process?
The processing of payment to vendors.
What is the Accounts Payable Function of the Purchasing Process?
Recording of all vendor invoices, cash disbursements, and adjustments in individual vendor accounts.
What is the General Ledger Function of the Purchasing Process?
Proper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general ledger.
What are the Components that help Assess Inherent Risk in the Purchasing Process?
Industry related factors, such as the adequacy of the supply of raw materials and the volatility of raw material prices.
If misstatements are detected in prior audits. Generally, purchasing is not difficult to audit and the auditor’s past audits must be considered when assess inherent risk.
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Occurence
Possible Misstatement: Purchase recorded, but goods or services not ordered or received.
Example Control Activity: Segregation of duties; Purchase not recorded without purchase order and receiving report
Example Tests of Controls: Test a sample of vouchers for presence of an authorized purchase order and receiving report.
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Completeness
Misstatement: Purchases made but not recorded
Example Control Activity: Accounting for numerical sequence of purchase orders, receiving reports, and vouchers.
Example Tests of Controls: Review entity’s procedures for accounting for numerical sequence of purchase orders, receiving reports, and vouchers.
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Authorization
Misstatement: Purchase of goods or services not authorized
Example Control Activity: Approval of acquisitions consistent with the entity’s authorization dollar limits.
Example Tests of Controls: Review entity’s dollar limits authorization for acquisitions
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Accuracy
Misstatement: Vendor invoice improperly priced or incorrectly calculated
Example Control Activity: Mathematical accuracy of vendor invoice verified.
Example Tests of Controls: Recompute the mathematical accuracy of vendor invoice
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Cutoff
Misstatement: Purchase transactions recorded in the wrong period
Example Control Activity: All receiving reports forwarded to the A/P department daily.
Example Tests of Controls: Compare the dates on receiving reports with the dates on the relevant vouchers.
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Classification
Misstatement: Purchase transaction not properly classified
Example Control Activity: Chart of accounts
Example Tests of Controls: Review purchases journal and general ledger for reasonableness
Summary of Assertions, Possible Misstatements, Example of Control Activities, and Example of Tests of Controls for Purchase Transactions: Presentation
Misstatement: Purchase transaction not properly presented and disclosed
Example Control Activity: Chart of accounts/disclosure checklist
Example Tests of Controls: Review purchases journal and general ledger for proper aggregation or disaggregation of purchase transactions, and determine if disclosure is needed.
Control Activities and Tests of Controls for Purchase Return Transactions
Generally, the number and magnitude of purchase return transactions are not material.
What are some Substantive Tests of Transactions that can be done to Test Cutoff for Accounts Payable and Accrued Expenses?
Compare dates on a sample of vouchers with the dates transactions were recorded in the purchases journal.
Tests transactions around year-end to determine if they are recorded in the proper period.
Why are Purchase Orders useful?
These documents include the description, quality, quantity of, and other information on the goods or services being purchased. The PO also indicates who approved the acquisition and represents the authorization to purchase the goods or services.
Where do we Test for Unrecorded Liabilities?
The auditor will test for these in the completeness assertion. If the entity has strong controls for the completeness assertion, the auditor can reduce the scope of the search for unrecorded liabilities at year-end.
!! What are the Key Segregation Duties in the Purchasing Process? !!
Segregating the purchasing function from the requisitioning and receiving functions.
Segregating invoice-processing functions from accounts payable.
Segregating disbursement from accounts payable
Segregating accounts payable from the general ledger function.
ESSAY QUESTION - How are Product Costs defined?
Certain expenses that can be matched directly with specific transactions or events and are recognized upon recognition of revenue. Includes expenses like cost of goods sold.
ESSAY QUESTION - How are Period Costs defined?
Expenses recognized during the period in which cash is spent or liabilities are incurred for goods or services that are used up at that time or shortly thereafter. These expenses can’t be directly related to specific transactions and are assumed to provide no future benefit. Ex. Selling and admin salaries and rent expense.
ESSAY QUESTION - How are Systematic Allocation costs defined?
These expenses are allocated by systematic and rational procedures to the periods during which the related assets are expected to provide benefits. Depreciation of plant and equipment is an example.
