Chapter 18 Flashcards
A computer file for maintaining a record for each vendor of individual acquisitions, cash disbursements, acquisition returns and allowances, and vendor balances
Accounts Payable Master File
A listing of the amount owed to each vendor at a point in time; prepared directly from the accounts payable and vendor balances
Accounts Payable Trial Balance
The transaction cycle that includes the acquisition of and payment for goods and services from supplier outside the organization
Acquisition and Payment Cylce
A journal or listing generated from the acquisitions transaction file and typically includes information such as vendor name, date, amount, and account classification for each transaction
Acquisitions Journal
Tests to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period
Cutoff Tests
A document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted
Debit Memo
Shipping contract in which title to the goods passes to the buyer when the goods are received
FOB Destination
Shipping contract in which title to the goods passes to the buyer at the time that the goods are shipped
FOB Origin
A document prepared or electronically issued by the purchasing department indicating the description, quantity, and related information for goods and services that the company intends to purchase
Purchase Order
Request by an authorized employee to the purchasing department to place an order for inventory and other items used by an entity
Purchase Requisition
A document prepared by the receiving department at the time tangible goods are received, indicating the description of the goods, the quantity received, the date received, and other relevant data; it is part of the documentation necessary for payment to be made
Receiving Report
A document or record that specifies the details of an acquisition transaction and amount of money owed to the vendor for an acquaition
Vendor’s Invoice
A statement prepared monthly by the vendor, which indicates the customer’s beginning balance , acquisitions, payments, and ending balance
Vendor’s Statement
A document used to establish a formal means of recording and controlling acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered
Voucher
Three classes of transactions included in the acquisitions and payment cycle:
1) Acquisitions of goods and services
2) Cash disbursements
3) Purchase returns and allowances and purchase discounts
The ten Accounts involved in the acquisitions and payment cycle:
1) Accounts Payable
2) Cash in bank
3) Purchase returns and allowances
4) Purchase Discounts
5) Manufacturing expense control account
6) Selling expense control account
7) Raw Material Purchases
8) Property, Pant and Equipment
9) Prepaid expenses
10) Administrative expense control account
Accounts for Acquisitions class of transactions
Inventory and prepaid expenses
Business Functions for the Acquisitions class of transactions
Processing purchase orders
Document and records for Acquisitions class of transactions
Purchase requisition and purchase orders
Accounts for Cash Disbursements class of transactions
Cash in Bank and Accounts Payable
Business Functions for Cash Disbursements class of transactions
Processing and recording cash disbursements
Documents and records for Cash Disbursements class of transactions
Cash disbursement journal or listing
The proper recognition of the liability for the receipt of goods and services requires BLANK
Prompt and accurate recordings
Vendors invoice
indicates the amount recorded in the acquisition file
Documents associated with the disbursement process that auditors examine include:
Check, cash disbursement transaction file, and cash disbursement journal or listing
Test of controls and substantive tests of transactions for the acquisition and payment cycle are divided into two broad categories:
1) Tests of acquisitions which include: processing purchase orders, receiving goods and services, and recognizing liability
2) Test of payments which includes processing and recording cash disbursements
To prevent theft or misuse
Goods should be physically controlled from the time of their receipt until their use or disposal
Personnel who record acquisitions should not
Have access to cash, marketable securities, and other assets
The most important controls over cash disbursements include:
1) The signing of checks by an individual with proper authority
2) Separation of responsibilities for signing checks and performing the accounts payable function
3) Careful examination of supporting documents by the check signer at the time the check is signed
Key internal controls for occurrence transaction-related audit objectives for cash disbursements
Approval of payment on supporting documents is given at the time checks are signed
Common tests of controls for occurrence transaction-related audit objectives for cash disbursements
Examine indication of approval
Common Substantive Tests of transactions for occurrence transaction-related audit objectives for cash disbursements
Examine supporting documents as part of the tests of acquisitions
Key Internal controls for completeness transaction-related audit objectives for cash disbursements
Checks are prenumbered and accounted for
Common tests of controls for completeness transaction-related audit objectives for cash disbursements
Account for a sequence of checks
Common substantive tests for completeness transaction-related audit objectives for cash disbursements
Reconcile recorded cash disbursements
Key internal controls for accuracy transaction-related audit objectives for cash disbursements
Calculations and amounts are internally verified
Common tests of controls for accuracy transaction-related audit objectives for cash disbursements
Examine indication of internal verification
Common substantive tests for accuracy transaction-related audit objectives for cash disbursements
Recompute cash discounts
Key internal controls for posting and summarization transaction-related audit objectives for cash disbursements
Accounts payable master file contents are internally verified
Common Tests of Controls for posting and summarization transaction-related audit objectives for cash disbursements
Examine indication of internal verification
Common substantive tests of transactions for posting and summarization transaction-related audit objectives for cash disbursements
Test clerical accuracy by footing journals and tracing postings to general ledger and accounts payable master file
Key internal control for classification transaction-related audit objectives for cash disbursements
Account classification are internally verified
Common Tests of controls for classification transaction-related audit objectives for cash disbursements
Examine indication of internal verification
Common substantive tests of transactions for classification transaction-related audit objectives for cash disbursements
Compare classification with chart of accounts by referring to vendors’ invoices for acquisitions journal
Key internal control for timing transaction-related audit objectives for cash disbursements
Dates are internally verified
Common tests of controls for timing transaction-related audit objectives for cash disbursements
Examine indication of internal verification
Common substantive tests of transactions for timing transaction-related audit objectives for cash disbursements
Compare dates on cancelled checks records with the bank cancellation date
Key internal controls for occurrence transaction-related audit objectives for acquisitions
Documents are cancelled to prevent their reuse
Common Tests of Controls for occurrence transaction-related audit objectives for acquisitions
Examine indication of cancellation
Common substantive Tests of Transactions for occurrence transaction-related audit objectives for acquisitions
Examine vendor master file for unusual vendors
Key internal controls for completeness transaction-related audit objectives for acquisitions
Purchase orders are prenumbered and accounted for
Common Tests of Controls for completeness transaction-related audit objectives for acquisitions
Account for a sequence of purchase orders
Common substantive Tests of Transactions for completeness transaction-related audit objectives for acquisitions
Trace from a file of receiving reports to the acquisitions journal
Key internal controls for accuracy transaction-related audit objectives for acquisitions
Calculations and amounts are internally verified
Common Tests of Controls for accuracy transaction-related audit objectives for acquisitions
Examine indication of internal verification
Common substantive Tests of Transactions for accuracy transaction-related audit objectives for acquisitions
Recompute the clerical accuracy on the vendor’s invoice, including discounts and freight
Key internal controls for posting and summarization transaction-related audit objectives for acquisitions
Accounts payable master file is internally verified
Common Tests of Controls for posting and summarization transaction-related audit objectives for acquisitions
Examine indication of internal verification
Common substantive Tests of Transactions for posting and summarization transaction-related audit objectives for acquisitions
Test clerical accuracy by footing the journals and tracing posting to general ledger and counts payable and inventory master files
Key internal controls for classification transaction-related audit objectives for acquisitions
Account classifications are internally verified
Common Tests of Controls for classification transaction-related audit objectives for acquisitions
Examine indication of internal verification
Common substantive Tests of Transactions for classification transaction-related audit objectives for acquisitions
Compare classification with chart of accounts by referring to vendors’ invoices
Key internal controls for timing transaction-related audit objectives for acquisitions
Date are internally verified
Common Tests of Controls for timing transaction-related audit objectives for acquisitions
Examine indication of internal verification
Common substantive Tests of Transactions for timing transaction-related audit objectives for acquisitions
Compare dates of receiving reports and vendors’ invoices with dates in the acquisition journal
Three important differences in acquisitions and payments journal compared to other cycles
1) Larger number accounts leading to greater amount of classification misstatements
2) Increased rate of auditor judgments, increasing the chance of misstatements
3) Dollar amounts of individual transactions in the cycle cover a wide range
Analytical procedures for acquisitions and payment cycle
1) Compare acquisition-related expense account balances with prior years
2) Review list of accounts payable for unusual, nonvendor, and interest bearing payables
3) Compare individual accounts payable with previous years
4) Calculate ratios
Analytical procedures for the acquisitions and payment cycle are used to uncover misstatements mostly in this account
Accounts payable
The difference in emphasis in auditing assets and liability results directly from
The legal liability of CPAs
Common Tests of details of detail tie-in balance related audit objective
Trace the total to the general ledger
Common Tests of details of existence balance related audit objective
Trace from accounts payable list to vendors’ invoices and statements
Common Tests of details of completeness balance related audit objective
Perform out-of-period liability tests
Common Tests of details of accuracy balance related audit objective
Perform same procedures as those used for existence objective and out of period liability tests
Common Tests of details of classification balance related audit objective
Review the list and master file for related parties
Common Tests of details of cutoff balance related audit objective
Test for inventory in transit
Common Tests of details of obligations balance related audit objective
Examine vendors’ statements and confirm accounts payable
This balance related audit objective must be performed first for accounts payable
Detail Tie-in
The auditor should trace receiving reports issued after year-end to BLANK
Test for overstatement cutoff amounts
In determining that the accounts payable cutoff is correct:
it is essential that the cutoff test be coordinated with the physical observation of the inventory
Auditors get highly reliable evidence from BLANK when they examine vendors’ invoices and related supporting documents
Evidence about individual transactions
The vendor’s invoice is superior for verifying accounts payable because
it includes the ending balance
The vendor’s invoice is superior for verifying transactions because
the auditor verifying individual transactions and the invoice shows the details of the acquisition
The most important distinction between a vendors’ statement and a confirmation of accounts payable is
the source of the information
