Chapter 13 - Audit of the Acquisition and Payment Cycle Flashcards
What is the acquisition and payment cycle?
The acquisition and payment cycle involves the decisions and processes necessary for obtaining the goods and services for operating a business.
What are the 4 major business functions in the acquisition and payment cycle?
- Processing Purchase Orders
- Receiving Goods and Services
- Recognizing the Liability
- Processing and Recording Cash Disbursements
What are the 5 important accounts and assertions in this cycle?
- Completeness of A/P
- Completeness of expenses
- Cutoff of expenses
- Valuation and completeness of provisions
- Classification and valuation of capital assets
What are some examples of inherent risk factors in the acquisition and payment cycle?
- Debt covenants or performance incentives tied to A/P
- Liquidity or going concern problems
- Complex arrangements with vendors
What are some potential fraud risks affecting the completeness and/or cutoff assertions related to the acquisition and payment cycle?
- Recording A/P in the next period
- Omitting disclosures of related party transactions or contingent liabilities
- Fictitious vendor allowances
- Understating provisions
- Payments to fictitious vendors and theft of funds
What are the 3 key controls related to the acquisition and payment cycle?
- Authorization of Purchases
- Processing Vendor Master File Changes
- Timely Recording and Independent Review of Transactions
- Authorization of Payments
What are some examples of substantive analytical procedures for the acquisition and payment cycle, and what possible misstatement could it identify?
- Compare acquisition-related expense account balances with prior years (misstatement of A/P and expenses)
- Compare the ratio of expense account balances to sales in current and prior years (an unusually low expense account may indicate an unrecorded liability)
- Inspect list of accounts payable for unusual, non-vendor, and interest-bearing payables (Classification misstatement for non-trade liabilities)
What are some typical audit procedures conducted to uncover unrecorded accounts payable?
- Inspect underlying documentation for subsequent cash disbursements.
- Inspect underlying documentation for bills not paid several weeks after the year-end.
- Trace receiving reports issued before year-end to related vendors’ invoices.
- Trace vendors’ statements that show a balance due to the accounts payable trial balance.
- Send confirmations to client’s vendors.
What are the three primary types of evidence in the acquisition and payment cycle?
- Vendor invoices (for verifying transactions)
- Vendor statements (for verifying ending A/P balances)
- Confirmations
What are accrued liabilities and what are the key risks for these accounts?
Accrued liabilities are estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date
Examples: accrued commissions, accrued income taxes, accrued payroll, and accrued rent.
Key risks:
- Completeness (are they all included?)
- Accuracy (are they calculated correctly?)
- Allocation/cutoff`
Why is it important for an organization to use purchase orders?
Purchase orders are written authorization of the request for goods and services. They can be used to document due process and show that these goods and services were ordered at the correct price, for the correct quantities, by authorized individuals. It also provides documentation of the legal commitment to purchase those goods and services.
What is the purpose of matching receiving report and invoice details to purchase orders?
Matching the receiving report quantities to the purchase orders ensures that only ordered quantities have been shipped (i.e., that there has not been over- or under-shipping).
It also helps to ensure that the correct items have been shipped.
Matching to the invoice checks that the goods have been invoiced at the same price as authorized on the purchase order.
How do high-quality perpetual records affect the auditor’s tests of controls of inventory acquisitions?
If the auditor finds that the recording of inventory costs and quantities are well controlled, then the credit side of accounts payable has also been tested, reducing the need for extensive tests of accounts payable for the accuracy objective.
Provide examples of two controls that improve completeness over recording of acquisitions transactions.
- Purchase orders are pre-numbered and accounted for.
2. Receiving reports are pre-numbered and accounted for, and matched to accounts payable invoices.
Why is an organization more likely to have poor internal controls over accounts payable than over accounts receivable?
For accounts payable, companies may rely upon the supplier to remind them to pay their bills, particularly if cash flow is poor. For accounts receivable, organizations are concerned about collecting their money, so will pay closer attention to controls over collections.
