Module 6 - Expenses/liabilities of Payment cycle Flashcards
What are the three classes of transactions within the acquisitions and payment cycles?
- Acquisition of goods and services (materials, labor)
- Cash disbursements
- Purchase returns and allowances and discounts
*Focuses on the expenses related to operation of business
10 typical accounts involved in the acquisitions and payment cycle:
What are the four business functions involved in recording the three classes of transactions (acquisition and payment cycle)?
1) Processing purchase orders
2) Receiving goods/services
3) Recognizing the liability
4) Processing and recording cash disbursements
What are the documents included in these business functions:
Processing purchase orders
1) Processing purchase orders
- Purchase requisition: Internal document made when needs arise
- Purchase order: Internal purchasing dept. authorizes purchase to vendor
What are the documents included in these business functions:
- Receiving goods/services
2) Receiving goods/services
Receiving report: Made by receiving department (internal); compares items received to info on bill of lading
(description of goods, quantity, etc.)
Describe these documents related to Recording the liability:
- Vendor’s invoice
- Debit Memo
- Acquisitions Transaction File
Vendor’s invoice: From the vendor (external); description of goods and amounts owed; usually initiates recording process
Debit memo: From the vendor (external); description of returned items; supports reductions to A/P
Acquisitions Transaction File: Log of all acquisition transactions for a given period
Describe these documents related to Recording the liability:
- Acquisitions journal
- Vendor’s statement
Acquisitions journal: Generated from transaction file; gives vendor names, account classification, dates, and amounts
Vendor’s statement: Monthly statement that comes from vendor that contains balance details; provides a lot of audit evidence
Describe these documents related to Recording the liability:
- Accounts Payable Master File
- Accounts Payable Trial Balance
Accounts Payable master file: contains info by vendor of all invoices, cash disbursements, and returns/allowances
Accounts Payable trial Balance: Generated from amster file; Listing of amounts owed to each vendor
What documents can be obtained as evidence for this business function:
Processing and Recording Cash Disbursements
Check/Wire Transfers
Cash disbursement files: Detailed accounting record of transactions related to cash
Cash disbursement journal: Summarized accounting record of cash transactions for a time period
What are the steps to desigings tests of controls and tests of transactions for the acquisition and payment cycle?
**discussed further do not strictly memorize
- Understand internal controls
- Assess Planned Control Risk
- Determine extent of testing controls
- Design tests for acquistions
- Design tests for cash disbursements
How can the auditor gain a better understanding of internal controls related to the acquisitions and payment cycle?
- Study Client flowcharts
- Internal control questionnaire
- Perform walk-through of processes
Controls that affect Planned Control Risk of Acquistions/Payment cycle:
Autorization of purchase: Require requisitions and authorizations for significant/unusual purchases
Separation of asset custody from other functions: Separate duties related to requistions, payment, and receiving
Timely recording and independent review of transactions: Controls to ensure expenses/liabilities recorded in appropriate period
Autorization of Payments
What are some controls specific to the authorization of payments?
3-way match: Company reconciles the purchase order, receiving report, and vendor invoice for agreement before sending to authorization
Vendor master-list: Company maintains list of vendors that payments may be made to; requires authorization to edit list
Checks are signed by individual with proper authority
What factors do auditors consider when deciding the extent of testing controls?
Auditor identifies key control deficiencies to assess control risk; low control risk = more testing for effectiveness
If testing supports control risk, increase detection risk and reduce required substantive testing
What audit objectives should auditors focus on when designing tests of controls and tests of transactions for the acquisition/payment cycle?
Completeness; Existing acquisition are recorded; failure to record can result in overstatement of net income
Posting and summarization; Amounts included/summarized in master files
Accuracy: Acquisitions recorded at right amount
Classification; Acquistions correctly classified
Timing; Acquisitions recorded on correct date
What is phase 1 for designing tests of balances for the acquisition/payment cycle?
- Identify client business risks affecting accounts payable
- Set performance materiality and assess inherent risk for accounts payable
- Assess control risk for the acquisition/payment cycle
Phase 2 and phase 3 for designing tests of details of balance for the acquisition/payment cycle:
Phase 2
- Design and perform tests of controls/substantive tests of trans. (discussed previously)
Phase 3
- Design and perform analytical procedures
- Design tests of D.O.B. of acconts payable to satisfy balance related audit objectives
What analytical procedures may be performed in the acquisition and payment cycle?
- Compare individual A/P with previous years; provides evidence of misstatement/unrecorded in A/P
- Review lists of A/P for unusual, large, interest bearing payables; Classification evidence
- Calculate ratios, such as accounts payable divided by current liabilities; tests for unrecorded/nonexistent accounts
A/P does not benefit from extensive analytical procedures; used mainly to guide testing
What is this test of D.O.B. for the acquisitions/payment cycle:
Out-of-period liability tests (Search for unrecorded liabilities)
Tests to uncover unrecorded A/P (Completeness) by:
- Examine underlying docs. for subsequent cash disbursement after year-end;
- Examine underlying docs for bills not paid several weeks after year-end; look for liabilities that are still present
- Trace receiving reports received before year-end to related vendor’s invoice
- Check vendor’s statements for possible A/P
- Send confirmations to vendors
How can these tests of D.O.B. help uncover unrecorded liabilities:
- Check vendor’s invoice/receiving report for details of timing of liability
- Check receiving repors issued before year-end to related invoices
- Check vendor’s invoice/receiving report for details of timing of liability; companies ofter do not include liabilities if paid after year-end even though they should
- Check receiving repors issued before year-end to related invoices; All items received before year-end should be a liability; trace documentation to ensure it should be included
What are this test for D.O.B. of the acquisition cycle:
Cutoff test
Tests to ensure transactions recorded days before or after year-end are included in correct period.
- Relationship between physical observation of inventory; inventory must be recorded alongside liability
- Auditor should check vendor’s invoices for shipping details (FOB destination, FOB origin)
