Wednesday, May 6, 2020
Chapter 19 Free Essays
Chapter 19 Free Essays Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable. Chapter 19 à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 1 Learning Objective 1 Identify the accounts and the classes of transactions in the acquisition and payment cycle. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 2 Transactions in the Acquisition and Payment Cycle 1. We will write a custom essay sample on Chapter 19 or any similar topic only for you Order Now Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances and purchase discounts 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 3 Accounts in the Acquisition and Payment Cycle Cash in Bank Accounts Payable Cash Acquisitions disbursements of goods and services Purchase returns and allowances Purchase discounts Raw Material Purchases Purchase Returns and Allowances Property, Plant and Equipment Purchase Discounts Prepaid Expenses à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 4 Accounts in the Acquisition and Payment Cycle Manufacturing Expense Control Account Subsidiary accounts Repair and maintenance Taxes, Supplies Freight in, Utilities Accounts Payable Acquisitions of goods and services Selling Expense Control Account Subsidiary accounts Commissions Travel, delivery expenses Repairs, Advertising Administrative Expense Control Account Subsidiary accounts Supplies, Officersââ¬â¢ travel Legal fees Auditing fees, Taxes à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 5 Learning Objective 2 Describe the business functions and the related documents and records in the acquisition and payment cycle. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 ââ¬â 6 Classes of Transactions and Accounts Acquisitions: ? ? ? ? Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements ? Accounts ? payable Manufacturing expenses ? Selling and administrative expenses 19 ââ¬â 7 à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Classes of Transactions and Accounts Cash disbursements: ? Cash in bank (from cas h disbursements) payable Purchase discounts ? Accounts ? à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 8 Business Functions in the Cycle Processing purchase orders ? Receiving goods and services ? Recognizing the liability ? Processing and recording cash disbursements à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 9 Related Documents and Reports Processing purchase orders: ? Purchase requisition ? Purchase order Receiving goods and services: ? Receiving report à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 10 Related Documents and Reports Recognizing the liability: ? Vendorââ¬â¢s invoice ? Debit memo ? Voucher ? Acquisitions transaction file 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 11 Related Documents and Reports Recognizing the liability: ? Acquisitions journal or listing ? Accounts payable master file ? Accounts payable trial balance ? Vendorââ¬â¢s statement à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 12 Related Documents and Reports Processing and recording cash disbursements: ? Check ? Cash disbursements transaction file ? Cash disbursements journal or listing à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 13 Learning Objective 3 Describe how e-commerce affects the acquisition of goods and service. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 14 How E-Commerce Affects the Acquisition and Payment Cycle Internet-based technologies allow for electronic linkages between suppliers and customers. Information about products is available over the Internet. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 15 How E-Commerce Affects the Acquisition and Payment Cycle Some companies use extranets which allow companies to communicate and conduct business in a secure setting. Other companies use business-to-business auctions hosted on the Internet to negotiate purchases. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 16 Learning Objective 4 Understand internal control, and design and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 17 Methodology for Designing Controls and Substantive Tests Understand internal control ââ¬â acquisitions and cash disbursements Assess planned control risk ââ¬â acquisitions and cash disbursements Determine extent of testing controls Design tests of controls and Audit procedures substantive tests of transactions Sample size for acquisitions and cash Items to select disbursements to meet Timing transaction-related audit objectives à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 18 Understand Internal Control ? Study the clientââ¬â¢s flowcharts ? Review internal control questionnaires ? Perform walk-through tests à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 19 Assess Planned Control Risk ? Authorization of purchases Separation of asset custody from other functions ? Timely recording and independent review of transactions ? Authorization of payments à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 20 Determine Extent of Testing of Controls ? The auditor identifies the key internal controls and weaknesses and assesses control risk ? The auditor perf orms tests of controls to obtain evidence that controls are operating effectively à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 21 Controls and Substantive Tests of Transactions for Acquisitions ? Recorded acquisitions are for goods and services received (occurrence) ? Existing acquisitions are recorded (completeness) ? Acquisitions are accurately recorded (accuracy) à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 22 Controls and Substantive Tests of Transactions for Acquisitions ? Acquisitions are correctly included in the master files (posting and summarization) ? Acquisitions are correctly classified (classification) ? Acquisitions are recorded on the correct dates (timing) à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 23 Attributes Sampling Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, the use of attributes sampling is common in this audit area. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 24 Important Differences ? Larger number of transactions ? Significant judgment ? Wide range of dollar amount à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 25 Learning Objective 5 Describe the methodology for designing tests of details of balances for accounts payable using the audit risk model. 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 26 Methodology for Designing Tests of Balances for Accounts Payable Identify client business risks affecting accounts payable Phase I Set tolerable misstatement and assess inherent risk Phase I for accounts payable Assess control risk for the acquisition and payment cycl e Phase I 19 ââ¬â 27 à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Methodology for Designing Tests of Balances for Accounts Payable Design and perform tests of controls and substantive tests Phase II of transactions for the acquisition and payment cycle 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 28 Methodology for Designing Tests of Balances for Accounts Payable Design and perform analytical procedures Phase III for accounts payable balance Design tests of Audit procedures details of accounts Sample size payable balance to satisfy balanceItems to select related audit Timing objectives à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Phase III 19 ââ¬â 29 Learning Objective 6 Design and perform analytical procedures for accounts payable. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 ââ¬â 30 Analytical Procedures for the Acquisition a nd Payment Cycle Analytical procedure Compare acquisition-related expense account balances with prior years. Possible misstatement Misstatement of accounts payable and expenses Review list of accounts payable Classification misstatement for nontrade liabilities for unusual, nonvendor, and interest-bearing payables à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 31 Analytical Procedures for the Acquisition and Payment Cycle Analytical procedure Compare individual accounts payable with previous years Possible misstatement Unrecorded or nonexistent accounts, or misstatements Calculate ratios, such as Unrecorded or nonexistent purchases divided by accounts accounts, or misstatements payable, and accounts payable divided by current liabilities à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 32 Learning Objective 7 Design and perform tests of details of balances for accounts payable, including out-of-period liability tests. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 33 Out-of-Period Liability Tests Examine underlying documentation for subsequent cash disbursements ? Examine underlying documentation for bills not paid several weeks after the year-end ? Trace receiving reports issued before year-end to related vendorsââ¬â¢ invoices à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 34 Out-of-Period Liability Tests ? Trace vendorsââ¬â¢ statements that show a balance due to the accounts payable trial balance ? Send confirmations to vendors with which the client does business à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 35 Cutoff Tests ? Relationship of cutoff to physical observation of inventory ? Inventory in transit ? ? FOB destination FOB origin à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 36 Learning Objective 8 Distinguish the reliability of vendorsââ¬â¢ invoices, vendorsââ¬â¢ statements, and confirmations of accounts payable as audit evidence. à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 37 Reliability of Evidence ? Distinction between vendorsââ¬â¢ invoices and vendorsââ¬â¢ statements ? Difference between vendorsââ¬â¢ statements and confirmations 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 38 Sample Size Sample sizes for accounts payable tests vary considerably, depending on many factors. Statistical sampling is less commonly used for the audit of accounts payable than for accounts receivable. à ©2008 Prentice Hall Business Publishing, Auditing 12 /e, Arens/Beasley/Elder 19 ââ¬â 39 Types of Audit Tests for the Acquisition and Payment Cycle Cash in Bank Payments Audited by TOC, STOT, and AP Accounts Payable Acquisition Expenses Expenses Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB Ending balance Audited by AP TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 40 Types of Audit Tests for the Acquisition and Payment Cycle Accounts Payable Acquisition Assets Acquisition of assets Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 41 End of Chapter 19 à ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 19 ââ¬â 42 How to cite Chapter 19, Papers
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