Chapter 19

Audit of the Acquisition and Payment Cycle:

Tests of Controls, Substantive Tests of Transactions,
and Accounts Payable
Revie !uestions
19"1 a. Asset accounts:
Office supplies
Delivery equipment
Machinery and equipment
Land
Cash in bank
Prepaid epenses
b. Liability accounts:
Accounts payable
Accrued property taes
Accrued insurance
Other accrued liabilities
c. !pense accounts:
Purchases" purchase returns # allo$ances" purchases
discounts %CO&' accounts(
)ent epense
Le*al epense
+ines and penalties
Advertisin* epense
)epairs and maintenance
Depreciation epense
,tilities epense
Property ta epense
Administrative epenses
-ncome ta epense
./0 1
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.. )ecorded cash
disbursements are for
*oods and services
actually received
%occurrence(.
1here is adequate
se*re*ation of duties
bet$een accounts payable
and custody of si*ned
checks.
'upportin* documentation is
eamined before si*nin* of
checks by an authori2ed
person.
Approval of payment on
supportin* documents at the
time checks are si*ned.
Discuss $ith personnel
and observe activities.
Discuss $ith personnel
and observe activities.
!amine indication of
approval.
3. !istin* cash
disbursement transactions
are recorded
%completeness(.
Checks are prenumbered and
accounted for.
1he bank reconciliation is
prepared monthly by an
employee independent of
recordin* cash
disbursements or custody of
assets.
Account for a sequence
of checks.
!amine bank
reconciliations and
observe their
preparation.
4. )ecorded cash
disbursement transactions
are accurate %accuracy(.
Calculations and amounts are
internally verified.
1he bank reconciliation is
prepared monthly by an
independent person.
!amine indication of
internal verification.
!amine bank
reconciliations and
observe their
preparation.
5. Cash disbursement
transactions are properly
included in the accounts
payable master file and
are properly summari2ed
%postin* and
summari2ation(.
Accounts payable master file
contents are internally
verified.
Accounts payable master file
or trial balance totals are
compared $ith *eneral led*er
balances.

!amine indication of
internal verification.
!amine initials on
*eneral led*er
accounts indicatin*
comparison.

6. Cash disbursement
transactions are properly
classified %classification(.
An adequate chart of
accounts is used.
Account classifications are
internally verified.
!amine procedures
manual and chart of
accounts.
!amine indication of
internal verification.
7. Cash disbursement
transactions are recorded
on the correct dates
%timin*(.
Procedures require recordin*
of transactions as soon as
possible after the check has
been si*ned.
Dates are internally verified.
!amine procedures
manual and observe
$hether unrecorded
checks eist.
!amine indication of
internal verification.
./0 2
19"0
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.. )ecorded acquisitions
are for *oods and
services received"
consistent $ith the best
interests of the client
%occurrence(.
Purchase requisition"
purchase order" receivin*
report" and vendor8s invoice
are attached to the voucher.
Acquisitions are approved at
the proper level.
Computer accepts entry of
purchases only from
authori2ed vendors in the
vendor master file.
Documents are cancelled to
prevent their reuse.
9endors8 invoices" receivin*
reports" purchase orders"
and purchase requisitions
are internally verified.
!amine documents
in voucher packa*e
for eistence.
!amine indication of
approval.
Attempt to input
transactions $ith valid
and invalid vendors.
!amine indication of
cancellation.
!amine indication of
internal verification.
3. !istin* acquisition
transactions are recorded
%completeness(.
Purchase orders are
prenumbered and accounted
for.
)eceivin* reports are
prenumbered and accounted
for.
9ouchers are prenumbered
and accounted for.
Account for a
sequence of purchase
orders.
Account for a
sequence of receivin*
reports.
Account for a
sequence of
vouchers.
4. )ecorded acquisition
transactions are accurate
%accuracy(.
Calculations and amounts
are internally verified.
:atch totals are compared
$ith computer summary
reports.
Acquisitions are approved
for prices and discounts
.
!amine indication of
internal verification.
!amine file of batch
totals for initials of
data control clerk;
compare totals to
summary reports.
!amine indication of
approval.
5. Acquisition transactions
are properly included in
the accounts payable and
inventory master files"
and are properly
summari2ed %postin* and
summari2ation(.
Accounts payable master file
contents are internally
verified.
Accounts payable master file
or trial balance totals are
compared $ith *eneral
led*er balances.
!amine indication of
internal verification.
!amine initials on
*eneral led*er
accounts indicatin*
comparison.
6. Acquisition transactions
are properly classified
%classification(.
Adequate chart of accounts
is used.
Account classifications are
internally verified.
!amine procedures
manual and chart of
accounts.
!amine indication of
internal verification.
./0 3
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7. Acquisition
transactions are
recorded on the
correct dates
%timin*(.
Procedures require
recordin* transactions as
soon as possible after the
*oods and services have
been received.
Dates are internally
verified.
!amine procedures
manual and observe
$hether unrecorded
vendors< invoices
eist.
!amine indication of
internal verification.
19"1 Auditin* standards require that the tests of controls and substantive tests
of transactions cover the entire accountin* period in order to determine that the
system $as operatin* in a consistent manner throu*hout the period. -n selectin*
the number of items for testin*" the auditor must determine the sample si2e"
statistically or nonstatistically" such that it is likely to be representative of the
actual conditions of the population of all transactions.
-n testin* items that are periodic procedures rather than individual
transactions %such as monthly bank reconciliations(" the auditor must determine
the appropriate timin* to determine that those procedures are operatin* properly.
19"2 1he importance of cash discounts to the client is that the client can
produce a substantial savin*s if it makes use of the cash discounts available.
1he auditor should eamine vouchers and invoices to determine $hether
discounts are bein* taken in accordance $ith the terms available.
19"3 1he difference in the purpose of the steps is that Procedure . ascertains
$hether all eistin* acquisitions are recorded properly %completeness and
accuracy(" $hereas Procedure 3 is desi*ned to determine $hether recorded
acquisitions are proper %occurrence and accuracy(. Althou*h the t$o procedures
test opposite ob=ectives %completeness and occurrence(" they are similar in that
each is desi*ned to determine that the vendor8s name" type of material and
quantity purchased" and total amount of the acquisition a*ree $ith the receivin*
report" vendor8s invoice" and acquisitions =ournal entries.
./0 4
19"4 -t is difficult to control blank or voided checks %as $ell as checks issued
before they are mailed( $ithout havin* a printed prenumbered system of blank
checks. >ithout prenumberin*" unauthori2ed and unrecorded checks may be
more easily issued $ithout detection until after they have cleared the bank. 1he
auditor can compensate for poor control over checks by reconcilin* recorded
cash disbursements $ith cash disbursements on the bank statement for a test
period.
19"5 A voucher is a document used by an or*ani2ation to establish a formal
means of recordin* and controllin* acquisitions. A voucher re*ister is a =ournal for
recordin* the vouchers for the acquisition of *oods and services. 1he use of a
voucher system improves control over the recordin* of purchases by facilitatin*
the recordin* in numerical order at the earliest possible date" the point at $hich
the invoice is received.
19"9 1he point at $hich *oods and services are received is ordinarily $hen title
to the *oods and services passes and a liability that should be included in the
financial statements is established.
19"16 1he acquisition and payment cycle is related to the inventory accounts in
that normally all purchases of ra$ materials in the case of a manufacturin*
operation or merchandise in the case of a distribution company are recorded
throu*h this cycle. -f the tests of internal controls of the acquisition and payment
cycle indicate that proper controls eist to ensure that the proper cost is used in
valuin* the inventory and that ne$ purchases of inventory are recorded at the
proper time" in the proper amount" and in the proper account" tests concerned
$ith the accuracy and cutoff of the inventory accounts may be reduced from that
level required if the controls $ere not adequate.
19"11 1he acquisition and payment cycle includes the recordin* of liabilities that
are set up in the accounts payable account. -f the auditor finds that the internal
controls in the acquisition and payment cycle are sufficient to ensure that
accounts payable are recorded in the proper amount and at the proper time"
reconcilin* the vendors< statements and testin* the cutoff as year0end
procedures of the accounts payable balance may be *reatly reduced.
19"1# 1he procedure $ill most likely uncover the misstatement in item b. 1he
search for unrecorded invoices is desi*ned to detect an understatement of
accounts payable.
./0 5
19"10 ,nless evidence is discovered $hich indicates that a different approach
should be follo$ed" auditors traditionally follo$ a conservative approach in
selectin* vendors for accounts payable confirmations and customers for
accounts receivable confirmations. 1he auditor assumes that the client is more
likely to understate accounts payable" and therefore concentrates on the vendors
$ith $hom the client deals actively" especially if that vendor8s balance appears to
be lo$er than normal on the client8s accounts payable listin* at the confirmation
date. -n verifyin* accounts receivable" the auditor assumes that the client is more
likely to overstate account balances; and for that reason concentrates more on
the lar*er dollar balances and is not as concerned $ith ?2ero balances.?
19"11 A vendor8s invoice is sent $ith or at the same time as the order and states
the amount of *oods shipped" the price" and other details. 1his is the vendor8s bill
for the *oods shipped. A vendor<s statement contains the individual open items
and the endin* balance due in the account. A vendor8s statement is not as
meanin*ful as an invoice to verify individual transactions because a statement
includes only the total amount of the transactions and not the details makin* up
the shipment" such as unit price and frei*ht. 1he vendor8s statement can be
19"11 7continued8
used to verify the correct balance in accounts payable for an individual vendor.
1he statement contains the endin* balance and the individual transactions
required to reconcile the accounts payable listin*s and determine the propriety of
the balances sho$n for individual vendors.
19"12 1here are several reasons $hy it is not as common to confirm accounts
payable at an interim date as accounts receivable:
Less reliance is placed on accounts payable systems than
accounts receivable systems for most audits. +or accounts
payable" it is common to rely heavily on the search for unrecorded
accounts payable to test the balance. >hen control risk is
assessed at the maimum" it is inappropriate to confirm at an
interim date.
-n auditin* accounts payable" it is common for the auditor to confirm
only those accounts for $hich there are not vendors8 statements
available in the client8s hands at year0end. @ence" the auditor $ill
not kno$ $hich accounts $ill be confirmed until the end of the year.
Accounts payable confirmation is usually a less important and less
time consumin* task than confirmation of receivables; therefore" it
is less important to confirm the accounts payable early for purposes
of reducin* year0end audit time.
19"13 -t is important that the cutoff of accounts payable be coordinated $ith that
of the physical inventory to determine that they are established at the same point
in time. -f these cutoffs are not consistent" *oods may be counted in the physical
inventory for $hich no liability in accounts payable has been recorded" or vice
versa. 'uch a situation $ould result in an understatement of accounts payable
and cost of *oods sold or an overstatement of these t$o accounts" respectively.
Durin* the physical inventory" the auditor should *ather cutoff information %such
as the last several receivin* reports and shippin* documents( to assist in the
./0 6
determination that an accurate cutoff $as established.
19"14 +.O.:. destination means that the title to the *oods passes $hen they are
received by the purchaser. +.O.:. ori*in si*nifies that the title passes to the buyer
$hen the *oods are shipped by the seller.
1he auditor should be a$are that the client mi*ht receive inventory
subsequent to year0end that le*ally $as the property of the client at year0end.
>hen receivin* reports near year0end are bein* eamined and tested in
connection $ith inventory cutoff tests" the auditor should search for *oods that
$ere shipped prior to year0end +.O.:. ori*in and received after the closin* date.
!amination of bills of ladin* $ill substantiate the date of shipment.
.ultiple Choice !uestions /rom CPA '9aminations
19"15 a. %3( b. %3( c. %3(
19"19 a. %4( b. %4( c. %.(
)iscussion !uestions and Problems
19"#6
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. )ecorded
acquisitions and
payments are for
*oods and services
received"
consistent $ith the
best interests of
the client
%occurrence(.
Observe and
inquire about
personnel
performin*
purchasin*"
shippin*"
payables and
disbursin*
functions.
&oods received and
not recorded or
recorded and not
received.
Disbursements
made for *oods not
received.
9endor
statement
reconciliation.
)evie$ of
physical
inventory
shorta*es.
3 Acquisitions are
recorded on the
correct dates
%timin*(.
!istin*
acquisitions are
recorded
%completeness(.
Observe and
inquire about
the procedure
performed by
mail clerk.
Compare
date
mail is
received to
date
accountin*
received
invoices.
Late recordin* or
non0recordin* of
liabilities to
suppliers.
9endor
statement
reconciliation.
'earch for
unrecorded
liabilities.
./0 7
4 !istin*
acquisitions are
recorded
%completeness(.
Account for
numerical
sequence of
receivin*
reports and
determine
that all $ere
recorded.
)eceivin* reports
are misplaced and
acquisitions not
recorded.
9endor
statement
reconciliation.
5 Acquisitions are
recorded at the
proper amounts
%accuracy(.
!amine
cancelled
invoices for
indication of
checkin* for
clerical
accuracy.
Acquisitions from
vendors are
recorded at improper
amounts.
1est etensions"
footin*s"
discounts" and
frei*ht terms on
vendors8
invoices.
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6 Acquisition
transactions are
properly classified
%classification(.
!amine
indication of
approval.
Acquisitions are
recorded in the
$ron* account.
!amine
supportin*
invoice for
reasonableness
of accountin*
distribution.
7 Payments are
recorded on the
correct dates
%timin*(.
!istin* payments
are recorded
%completeness(.
Observe
$hether the
system
automatically
posts checks
$hen they are
prepared.
Checks are
disbursed and not
recorded.
!amine checks
clearin* the
bank prior to
year0end to
determine that
they $ere
recorded in the
cash
disbursements
=ournal prior to
year0end.
A Acquisitions are for
*oods and services
received"
consistent $ith the
best interests of
the client
%occurrence(.
!amine
invoices for
$hich checks
have been
disbursed to
determine
that they have
been
cancelled.
-nvoices are
recorded and paid
more than once.
!amine vendor
statements"
notin* any
unrecorded
payments
appearin* on
the statement.
B )ecorded cash
disbursements are
for *oods and
services actually
received
%occurrence(.
Observe and
inquire about
the handlin*
of checks
from the time
they are
mailed to
suppliers.
Checks are
disbursed and no
merchandise is
received. Checks
are received by
other than the
supplier for $hom
they are intended.
1race checks to
supportin*
invoice and
determine
reasonableness
of ependiture.
)econcile
vendors<
statements.
./0 8
19"#1
!*'ST%&$
a:
T;P' &/ T'ST
b:
P*RP&S' &/ PR&C')*R'
. :oth %test of
authori2ation is a test of
control(
1o determine that the amount recorded in
the acquisitions =ournal is correct
%accuracy(.
1o determine that recorded purchases are
for *oods and services actually received
%occurrence(.
3 1est of control 1o determine that the vendors< invoices
are approved for payment" and that
receivin* reports and purchase orders are
all attached %occurrence(.
4 'ubstantive test of
transactions
1o determine that postin*s to the cash
disbursements =ournal are properly
summari2ed and posted to the *eneral
led*er and are posted to the accounts
payable master file %postin* and
summari2ation(.
5 1est of control 1o determine that all check numbers are
included to the cash disbursements
=ournal" no check number is included more
than once and voided checks are
accounted for %completeness and
occurrence(.
6 'ubstantive test of
transactions
1o determine that the proper amount of
cash disbursements are recorded durin*
the test month. Checks are not recorded
more than once and checks are not
omitted %accuracy" occurrence and
completeness(.
7 :oth %accountin* for
sequence is a test of
control(
1o determine that all receivin* reports
$ere eventually entered into the system as
liabilities %completeness(.
1o determine that acquisitions $ere
recorded at the proper amounts"
considerin* the *oods received
%accuracy(.
A 'ubstantive test of
transactions
1o determine that the amount recorded is
accurate" that the classification is proper"
and that the acquisition is for *oods and
services received" consistent $ith the best
interests of the company %accuracy"
classification and occurrence(.
B 'ubstantive test of
transactions
1o determine that checks are recorded on
the correct dates %timin*(.
./0 9
19"## a. @ere are advanta*es for purchasin* ra$ material =e$elry items
online throu*h supplier >eb sites:
Increased Product Selection. Donnen Desi*n purchasin*
personnel may be able to locate ne$ products only offered
throu*h the -nternet that they may not be able to obtain
throu*h normal purchasin* channels.
Faster Delivery of Purchases. :ecause Donnen Desi*n
purchasin* a*ents may be able to purchase ra$ material
=e$elry items $ith company credit cards" shipment of the
products to Donnen $arehouses can occur at the point of
sale. 1hus" ra$ materials may be received by Donnen more
quickly.
More Product Information. Most =e$elry suppliers post
pictures of the products for sale on the -nternet. 1hus"
Donnen purchasin* personnel may have *reater
opportunities to pre0screen items before purchase than they
do throu*h traditional orderin* sources.
b. @ere are potential risks associated $ith online purchases of ra$
material =e$elry items:
Unauthorized Purchases Using Donnen Credit Cards. &iven
that all online sales must be made usin* a company credit
card" purchasin* a*ents may have an opportunity to make
unauthori2ed purchases that are char*ed to Donnen credit
cards but shipped to purchasin* a*ent addresses.
Privacy Protection for Donnen Credit Cards. :ecause the
reputation of the online vendors is unkno$n" there is some
risk that Donnen credit card information $ill not be
adequately protected by vendors from unauthori2ed use.
Inconsistent Product Quality. :ecause Donnen purchasin*
a*ents $ill be buyin* products from a $ide variety of ne$
vendors" they have less information about product quality
across vendors. As a result" the quality of the products
purchased may vary etensively.
Reliability of Sulier. :ecause Donnen purchasin* a*ents
$ill be buyin* products from a $ide variety of ne$ vendors"
the reliability of those suppliers may vary etensively. 1here
is no certainty that orders placed $ith each vendor $ill be
processed completely and accurately.
c. 1he primary advanta*e of allo$in* Donnen Desi*n purchasin* a*ents
to acquire products usin* company credit cards is that the products
$ill be shipped and delivered on a more timely basis than if they
pay by company check.
./010
19:## 7continued8
d. 1he primary advanta*es of restrictin* purchases to only those that can
be paid by company check are that it %.( decreases the risk that
Donnen personnel use company credit cards to make unauthori2ed
purchases and %3( decreases the risk that online vendors fail to
adequately protect Donnen credit card information.
e. 'u**ested internal controls:
%.( 1o prevent purchasin* a*ents from makin* unauthori2ed
purchases of non0=e$elry items usin* Donnen credit cards"
the company could:
)equest throu*h the credit card a*ency that only
selected types of products are authori2ed for
purchase %for eample" the credit card $ould not be
allo$ed for any services" such as travel" food" hotel"
etc(.
'end all credit card billin* statements directly to
accountin* for reconciliation to receivin* reports of
inventory products.
'eparate credit cards may be issued to purchasin*
personnel $ith pre0specified spendin* limits.
%3( 1o prevent purchasin* a*ents from orderin* =e$elry items for
shipment to an a*ent<s home address" the company could:
'end all credit card billin* statements directly to
accountin* for reconciliation to receivin* reports.
Only allo$ purchases from selected online vendors
$hose policies indicate that products may only be
shipped to the credit card billin* address %$hich $ould
be a Donnen Desi*n address(.
%4( 1o prevent a buildup of unused credits $ith online vendors for
returned *oods" the company could:
Only allo$ purchases from selected online vendors
$hose policies indicate that products may be returned
for credit to the credit card account.
Pre0screen product quality from all vendors before
authori2in* the use of that vendor for online
purchasin*.
!stablish purchasin* limits for each online vendor so
that the amount of purchases at a sin*le vendor are
not ecessive.
./011
19"#0
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c:
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. )ecorded cash
disbursements are
for *oods and
services actually
received
%occurrence(.
Once checks are
si*ned by the
treasurer" they are
returned to someone
independent of
purchasin* and
accounts payable for
mailin*.
All supportin*
documents are
cancelled to prevent
reuse.
)evie$ physical
inventory shorta*es for
unusual or inconsistent
occurrences.
Compare payee on the
check to the company
name on the vendor8s
invoice.
3 )ecorded cash
disbursement
transactions are
correctly stated
%accuracy(.
Checks are prepared
usin* a computer
process" $hich
assures simultaneous
preparation of check
and =ournal. )econcile
bank account on a
timely basis at the end
of each month.
Compare check amounts
to entries in the cash
disbursements =ournal.
1est bank reconciliation.
4 Cash disbursement
transactions are
recorded on the
correct dates
%timin*(.
1ransactions are
recorded automatically
usin* a computer
process $ith the same
information as the
check preparation.
1race last checks $ritten
to cash disbursements
=ournal.
!amine date checks
cancelled at bank to
determine if checks $ere
held by the client.
5 )ecorded
acquisitions are for
*oods and services
received" consistent
$ith the best
interests of the client
%occurrence(.
)equire that an
authori2ed purchase
order andCor approval
of each invoice by the
orderin* department
head be required
before payments are
made for *oods
received.
!amine underlyin*
documents for
reasonableness and
authenticity.
./012
19"#0 7continued8
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6 Acquisition
transactions are
properly classified
%classification(.
Account distributions
are revie$ed by a
responsible individual
prior to entry into the
system.
!amination of
supportin* invoices for
entries into the repairs
and maintenance
account to verify the
proper account
distribution.
7 Acquisition
transactions are
recorded on the
correct dates
%timin*(.
)eceivin* reports to be
delivered to accountin*
at the end of the day
on $hich the ra$
materials are received.
Accountin* department
accounts for numerical
sequence of receivin*
reports after obtainin*
the last number used
from receivin*
personnel.
At the date on $hich the
cutoff test is to be
performed" the auditor
obtains the number of the
last receivin* report%s(
that should have been
recorded and accounts
for the numerical
sequence of all previous
receivin* report%s( that
should have been
recorded.
19"#1 a. 1he type of audit evidence used for each procedure is as follo$s:
A*)%T
PR&C')*R' T;P' &/ A*)%T '-%)'$C'
.
3
4
5
6
7
A
B
!ternal documentation %echan*e rate(; reperformance
-nquiries of client
!ternal documentation
Confirmation
-nternal and eternal documentation
Analytical procedure
-nternal documentation
)eperformance
./013
19"#1 7continued8
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4 D D D D
5 D D D D
6 D D
7 D D D
A D
B D
Eote: )i*hts and )eali2able value are not applicable to accounts payable.
c. Auditin* standards require that all audit ob=ectives be met by
*atherin* sufficient appropriate evidence. Auditor =ud*ment is
required to determine the appropriate evidence to satisfy each
ob=ective. +or eample" $here an ob=ective is contributed to by an
audit procedure that uses less reliable evidence" the audit ob=ective
$ill not be completely met. -n such a case" additional evidence $ill
be *athered usin* other audit procedures.
-n this case" the evidence used in procedure 3 is from
inquiries of the client" $hich is *enerally a $eak form of evidence.
1hus" the classification ob=ective could require more reliable
evidence from other audit procedures to be fully met.
Procedure A uses internal documentation as its primary
evidence. 1he reliability of this procedure $ould depend on the
effectiveness of the client8s internal controls in producin* the
internal documents.
./014
19"#2
'<C'PT%&$
a:
T;P' &/
'<C'PT%&$
b:
TRA$SACT%&$"
R'(AT') A*)%T
&+,'CT%-' $&T
.'T
c:
A*)%T
%.P&RTA$C'
d:
/&((&="*P
e:
'//'CT
&$ A*)%T
f:
PR'-'$T%-'
C&$TR&(S
. Monetary
misstatement
Acquisition transac0
tions are properly
classified
%classification(.
-ndicates that no
one is effectively
revie$in* the
accountin*
distribution. Auditor
must consider the
effect of the
eceptions on
determinin* the
amount of reliance
that he or she may
place on the system.
Determine the
si*nificance of the
misclassifications
and plan any
required additional
steps that are
deemed
appropriate.
-f considered
si*nificant" the
eceptions could
prevent reliance
on the system of
internal controls
and require the
auditor to
perform
additional tests of
the classification
of items $ithin
the financial
statements.
@ave someone
revie$ the account
distribution of
invoices that enter
the system.
3 Control
deviation
)ecorded
acquisitions and
related cash
disbursements are
for *oods and
services received"
consistent $ith the
best interests of the
client %occurrence(.
-ndicates that the
controller is not
follo$in* the
procedure of
initialin* invoices.
1his may indicate
that he or she is not
effectively revie$in*
invoices and other
supportin*
documents prior to
payment.
Determine
$hether or not the
controller is
effectively
revie$in* invoices
and other
supportin*
documents.
-f determination
is made that
controller does
not revie$
supportin*
documents" the
audit tests should
be increased to
determine the
si*nificance of
the deficiency.
A competent
independent person
should revie$
supportin*
documents for
approval of
controller and test
items to determine
effectiveness of
controller8s revie$.
./0
.
/
0
.
6
15
19"#2 7continued8
'<C'PT%&$
a:
T;P' &/
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b:
TRA$SACT%&$"
R'(AT') A*)%T
&+,'CT%-' $&T
.'T
c:
A*)%T
%.P&RTA$C'
d:
/&((&="*P
e:
'//'CT
&$ A*)%T
f:
PR'-'$T%-'
C&$TR&(S
4 Monetary
misstatement
Acquisition transac0
tions are recorded on
the correct dates
%timin*(.
At the date of the
physical inventory"
this situation $ill be
critical in that any
items counted in
physical inventory
and not recorded in
the acquisitions
=ournal $ill cause an
understated cost of
sales and accounts
payable.
Determine
$hether or not this
situation persists
throu*hout the
year and $hether
it is rectified at
physical inventory
date and year0
end.
)equire
epansion of
purchase cutoff
$ork at physical
inventory date
and year0end.
)equire that copies
of all receivin*
reports be routed
directly to
accountin* and that
accountin* account
for numerical
sequence of
receivin* reports on
a re*ular basis.
5 Monetary
misstatement
)ecorded cash
disbursements are
for *oods and
services actually
received
%occurrence(.
-t could be a
fraudulent payment
or it could result in
an overstatement of
perpetual inventory
records. -f the
payment is
fraudulent" there are
serious audit
ramifications. -f it is
unintentional" the
situation is $asteful
of company assets
and must be brou*ht
to the client8s
attention.
+irst determine
$hether it is
fraudulent. -f not"
investi*ate the
frequency of
occurrence of
duplicate
payments to
determine their
si*nificance.
1he duplicate
payments result
in recordin* of
noneistent
inventory. -f the
company
performs an
interim physical
inventory" the
auditor could
eperience a
problem relyin*
on the system of
internal control
bet$een the
physical
inventory date
and year0end.
-nvoices must be
matched $ith an
ori*inal receivin*
report and purchase
order prior to
approval for
payment. All
duplicate invoices
are marked
?duplicate? upon
receipt.
./0
.
/
0
.
7
16
19"#2 7continued8
'<C'PT%&$
a:
T;P' &/
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b:
TRA$SACT%&$"
R'(AT') A*)%T
&+,'CT%-' $&T
.'T
c:
A*)%T
%.P&RTA$C'
d:
/&((&="*P
e:
'//'CT
&$ A*)%T
f:
PR'-'$T%-'
C&$TR&(S
6 Monetary
misstatement
)ecorded cash
disbursement
transactions are
correctly stated
%accuracy(.
)esults in F.GG
liability" $hich may
or may not be
recorded on the
books.
-nvesti*ate the
eception rate to
determine the
possible effect of
unrecorded
liabilities on the
financial
statements.
Probably none"
since occurrence
rate is lo$. -f
amount is
si*nificant" then
epansion of
reconciliation of
vendor
statements may
be appropriate.
An independent
person should
compare checks to
invoice amount prior
to si*nin* checks.
7 Control
deviation
!istin* cash dis0
bursement transac0
tions are recorded
%completeness(.
1he check may not
actually have been
voided. -t could
represent the
disbursement of
cash if a check $as
prepared.
Determine
company policy
for voided checks
and evaluate the
potential for
unrecorded
checks.
Auditor should
eamine the
bank cutoff
statement for the
possibility that
the voided check
and other checks
may have been
issued and
cashed but not
recorded.
)equire that all
voided checks be
properly voided and
saved.
./0
.
/
0
.
A
17
19"#2 7continued8
'<C'PT%&$
a:
T;P' &/
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b:
TRA$SACT%&$"
R'(AT') A*)%T
&+,'CT%-' $&T
.'T
c:
A*)%T
%.P&RTA$C'
d:
/&((&="*P
e:
'//'CT
&$ A*)%T
f:
PR'-'$T%-'
C&$TR&(S
A Control
deviation and
Monetary
misstatement
)ecorded
acquisitions are for
*oods and services
received" consistent
$ith the best
interests of the client
%occurrence(.
)ecorded acquisition
transactions are
correctly stated
%accuracy(.
Absence of
receivin* reports
prevents the auditor
from determinin*
$hether or not the
*oods $ere received
and processed on a
timely basis. 1he
etension error
indicates that the
clerical accuracy of
invoice tests are
ineffective.
Obtain bill of
ladin* copy from
vendor to
determine
$hether or not the
merchandise $as
received.
Determine if the
absence of
receiver indicates
that they are not
compared to the
invoice. Deter0
mine the
eception rate by
epandin* the
tests if the
misstatement
noted is
considered
si*nificant.
-f either of the
problems is
considered
si*nificant to the
auditor" he or she
should epand
the scope of his
or her tests of
controls or
substantive tests
of transactions to
determine the
effect on the
financial
statements.
)equire that copies
of receivin* reports
must be present
before invoices are
approved for
payment. @ave an
independent person
test etensions to
determine that the
clerical tests are
effective.
$&T': +or all monetary misstatements that are potential frauds" the auditor should evaluate $hether a fraud occurred. !ven one fraud is sufficient
for the auditor to consider the potential impact on the audit" primarily because materiality is normally smaller for fraud than for errors.
./0
.
/
0
.
B
18
19"#3
%$STR*CT%&$
a:
'-A(*AT%&$
b:
APP(%CAT%&$ )%//%C*(T%'S
. -f the vast ma=ority of
transactions eceed this
amount" the limit is
appropriate. Other$ise" a
sample of smaller amounts
should also be included.
+or attributes samplin*" the
sample must be randomly
selected from the total
population. 1his limitation $ould
prevent the use of attributes
samplin* or at least force the
auditor to *enerali2e only to
those transactions eceedin*
F.GGG rather than to the overall
system.
3 -f ra$ materials is the most
si*nificant account included in
the accounts tested" this
stratification of the =ud*mental
sample is appropriate.
1o use such a stratification" the
population $ould have to be
divided into ra$ materials and
others" and the sample si2e
computed and results evaluated
for each population separately.
4 'uch elimination of vendors
from repeat selections fulfills
no purpose in the test and
eliminates the possibility of
selectin* more sample items
from vendors $ith $hom the
client does considerable
business.
1he sample $ould not be
random and the auditor could
not statistically *enerali2e to the
population.
5 >hen invoices are not located
they should not simply be
replaced. 1he fact that they
$ere not located must be
taken into account in the
evaluation of the results of the
test.
1he evaluation of results makes
little sense if transactions $ith
missin* documents are omitted
from the sample.
6 1his is an appropriate $ay to
perform the test as lon* as the
sample si2e used is sufficient
to cover all tests performed.
1here $ould be no difficulty in
application.
7 Eo sample that meets the
above requirements can be
random. 1he random selection
of this sample $ill not provide
results that may be evaluated
statistically.
'ee response 4 above.
./019
19"#4 a. 1he fact that the client made a =ournal entry to record
vendors8 invoices $hich $ere received late should simplify the
CPA8s test for unrecorded liabilities and reduce the possibility of a
need for a further ad=ustment" but the CPA8s test is nevertheless
required. Clients normally are epected to make necessary
ad=ustments to their books so that the CPA may audit financial
statements that the client believes are complete and correct. -f the
client has not recorded late invoices" the CPA is compelled in his or
her testin* to substantiate $hat $ill ultimately be recorded as an
ad=ustin* entry. -n this audit" the CPA should test entries in the 3GGB
voucher re*ister to ascertain that all items that $ere applicable to
3GGA have been included in the =ournal entry recorded by the client.
b. Eo. 1he CPA should obtain a letter in $hich responsible eecutives
of the client8s or*ani2ation represent that to the best of their
kno$led*e all liabilities have been reco*ni2ed. @o$ever" this is
done as a normal audit procedure to remind the client of his or her
responsibilities and the statements that have been made. -t does
not relieve the CPA of the responsibility for makin* his or her o$n
tests.
c. >henever a CPA is =ustified in relyin* on $ork done by an internal
auditor he or she can reduce %but not eliminate( his or her o$n
audit $ork. -n this case" the CPA should have determined early in
his or her audit that O2ine8s internal auditor is qualified by bein*
both technically competent and reasonably independent. Once
satisfied as to these points" the CPA should discuss the nature and
scope of the internal audit pro*ram $ith the internal auditor and
revie$ his or her internal audit schedules in order that the CPA may
properly coordinate his or her o$n pro*ram $ith that of the internal
auditor. -f the O2ine internal auditor is qualified and has made tests
for unrecorded liabilities" the CPA may limit his or her $ork to a less
etensive test in this audit area if the results of the internal auditor<s
tests $ere satisfactory.
d. >ork done by an auditor for a federal a*ency $ill normally have no
effect on the scope of the CPA8s audit" since the concern of
*overnment auditors is usually limited to matters $hich are
unrelated to the financial statements. Eevertheless" the CPA should
discuss the *overnment auditor8s $ork pro*ram $ith him or her" as
there are isolated situations $here specific procedures follo$ed to
a satisfactory conclusion by a *overnment auditor $ill furnish the
CPA $ith added assurance and therefore permit him or her to
reduce certain $ork in an area. @o$ever" *overnment auditors are
usually interested primarily in substantiatin* as valid and allo$able
those costs $hich a company has allocated a*ainst specific
*overnment contracts or sales to the *overnment" and
consequently there is little likelihood that the auditor for a federal
a*ency at O2ine $ould check for unrecorded liabilities.
%Another reason for discussin* the federal auditor<s results
$ith him or her is that his or her findin*s may affect the financial
statements in other $ays.(
./020
19"#4 7continued8
e. -n addition to the 3GGB acquisitions =ournal" the CPA should
consider the follo$in* sources for possible unrecorded liabilities:
.. -f a separate cash disbursements =ournal eists" eamine
underlyin* documentation for disbursements recorded durin*
the first part of 3GGB. Determine if any of the disbursements
relate to acquisitions that should have been recorded in
3GGA.
3. 9endors8 invoices that have not been entered in the
acquisitions =ournal.
4. 'tatus of ta returns for prior years still open.
5. Discussions $ith employees.
6. )epresentations from mana*ement.
7. Comparison of account balances $ith precedin* year.
A. !amination of individual accounts durin* the audit.
B. !istin* contracts and a*reements.
/. Minutes.
.G. Attorneys8 bills and letters of representation.
... 'tatus of rene*otiable business.
.3. Correspondence $ith principal suppliers.
.4. Audit testin* of cutoff date for reciprocal accounts" e.*."
inventory and fied assets.
19"#5 a. 1he acquisitions =ournal is a *ood source of information on
transactions for tests of acquisitions and cash disbursements for
the current year. -f an acquisitions =ournal $ere used" the auditor
$ould select items from this =ournal for these tests. 1he lack of this
=ournal $ill force the auditor to locate a different source of
information.
b. -n performin* tests of acquisitions" the auditor should use
prenumbered receivin* documents as the samplin* unit for tests of
completeness" and cash disbursement entries for other tests %e.*."
occurrence and classification(.
c. -f there are no misstatements discovered in the auditor8s tests of
controls and substantive tests of transactions for acquisitions and
cash disbursements" the auditor may be able to reduce the scope
of his or her tests for eistence" accuracy and classification of
accounts payable.
d. 1he client8s request for early completion of the audit $ill present a
problem for the auditor to evaluate the propriety of the purchase
cutoff. 'ince no acquisitions =ournal eists" the auditor is likely to
conclude that there is an important deficiency in internal controls for
the recordin* of accounts payable. 1o compensate for this lack of
internal control" the auditor $ill need to perform an etensive
search for unrecorded liabilities at the end of the year. 1he earlier
the audit is completed" the less time the auditor $ill have to obtain
vendors8 statements and invoices as evidence in determinin* the
appropriateness of the accounts payable balance.
19"#5 7continued8
./021
e. 1he year0end audit of accounts payable should include the
follo$in* audit procedures to satisfy the cutoff ob=ective:
.. )econcile vendors8 statements to the accountin* records as
of year0end.
3. !amine invoices that are paid subsequent to year0end to
determine $hether or not they should have been included in
accounts payable at year0end. -f these invoices indicate that
the purchases $ere received prior to year0end" the auditor
should search the accounts payable listin* for these items. -f
they do not appear on the accounts payable listin*" they
represent unrecorded liabilities and should be recorded by
the client at year0end.
4. !amine all invoices that are unpaid at the end of the audit
to determine $hether or not they should have been recorded
at year0end. +or any of these items $hich $ere liabilities at
year0end" the auditor should follo$ the same procedures
follo$ed in 3. above.
f. 1he auditor must satisfy himself or herself that this audit has been
sufficient to determine that the financial statements are fairly stated.
-f the auditor is able to achieve this and complete his or her
en*a*ement by the date requested by the client" then it is possible
to conduct an adequate audit in these circumstances. Other$ise" it
is not possible.
19"#9 a. 1he most important balance0related audit ob=ectives for accounts
payable are:
.. Accounts payable in the accounts payable list a*ree $ith
related master file and the total is correctly added and
a*rees $ith the *eneral led*er %detail tie0in(.
3. !istin* accounts payable are in the accounts payable list
%completeness(.
4. 1ransactions in the acquisition and payment cycle are
recorded in the proper period %cutoff(.
Other balance0related ob=ectives $hich must also be met" but
*enerally receive less emphasis are:
5. Accounts payable in the accounts payable list eist.
6. Accounts payable in the accounts payable list are correctly
stated.
7. Accounts payable in the accounts payable list are properly
classified.
19"#9 7continued8
b. Mincin is not required to use accounts payable confirmation
./022
procedures. 1he auditor is required to obtain confirmation of
accounts receivable" since the primary audit test is for possible
material overstatements and *enerally the client has available only
internal documents such as sales invoices. +or accounts payable
the auditor can eamine eternal evidence such as vendor invoices
and vendor statements" $hich substantiate the accounts payable
balance. Althou*h not required" the accounts payable confirmation
is often used. 1he auditor mi*ht consider such use $hen:
.. -nternal controls are deficient.
3. 1he company is in a ?ti*ht? cash position and bill payin* is
slo$.
4. Physical inventories eceed *eneral led*er inventory
balances by si*nificant amounts.
5. Certain vendors do not send statements.
6. 9endor accounts are pled*ed by assets.
7. 9endor accounts include unusual transactions.
c. A selection technique usin* the lar*e dollar balances of accounts is
*enerally used $hen the primary ob=ective is to test for
overstatements %often for accounts receivable confirmation(.
Accounts $ith 2ero balances or relatively small balances $ould not
be sub=ected to selection under such an approach. >hen auditin*
accounts payable" the auditor is primarily concerned $ith the
possibility of unrecorded payables or understatement of recorded
payables. 'election of accounts $ith relatively small or no balances
for confirmation is the more efficient direction of testin* since
understatements are more likely to be detected $hen eaminin*
such accounts.
>hen selectin* accounts payable for confirmation the
follo$in* procedures could be follo$ed:
.. Analy2e the accounts payable population and stratify it into
accounts $ith lar*e balances" accounts $ith small balances"
accounts $ith 2ero balances" etc.
3. ,se a sample technique that selects items based on criteria
other than the dollar amounts of the items %select based on
terminal di*its" select every n
th
item based on predetermined
interval" etc.(
4. Desi*n a samplin* plan that $ill place more emphasis on
selectin* accounts $ith 2ero balances or relatively small
balances" especially $hen the client has had substantial
transactions $ith such vendors durin* the year.
5. 'elect prior0year vendors $ho are no lon*er used.
6. 'elect ne$ vendors used in the subsequent period.
19"#9 7continued8
7. 'elect vendors that do not provide periodic statements.
./023
A. 'elect accounts reflectin* unusual transactions durin* the
year.
B. 'elect accounts secured by pled*in* assets.
19"06 a. -t is an appropriate procedure to have the client perform the
reconciliations of vendors8 statements as lon* as the auditor
maintains control over the statements $hich have been received
directly from the vendor and the auditor performs adequate tests to
determine that the reconcilin* items sho$n on the reconciliations
are proper.
b. On 'tatement ." the auditor must determine that the payment $as
recorded on the company8s books prior to Hune 4G. 1he auditor may
also $ant to eamine the cutoff bank statement to determine if the
check to this vendor cleared the bank $ithin a reasonable amount
of time.
On 'tatement 3" the auditor must determine that the
payment $as recorded on the company8s records prior to Hune 4G
and investi*ate the reason that the vendor had not received the
payment at the time his or her statement $as prepared. 1he auditor
must determine $hether or not the *oods represented on the
invoices that Milner had not received $ere in the company8s
inventory at Hune 4G. 1his may be accomplished by requestin* that
the vendor send proof of shipment for the *oods invoiced.
+or 'tatement 4" the auditor should request that the vendor
provide additional details of the account balance. Other$ise" the
auditor $ill not be able to use the vendor8s statement and $ill have
to include the F6"A46.7/ as a potential misstatement.
+or 'tatement 5" the auditor must determine $hether or not
the item for $hich the credit memo $as issued by the vendor on
Huly .6 $as appropriately recorded on the company8s records at
Hune 4G" includin* consideration of inventory.
1he 'tatement 6 reconciliation is incorrect. 1he payment by
Milner on Huly 4 should not have been deducted from the accounts
payable balance per the master file. 1he auditor should investi*ate
the unlocated difference" since it could be comprised of t$o much
lar*er offsettin* amounts that the auditor may $ish to test.
c. 1he auditor must consider $hether the covera*e achieved by the
.B confirmations that $ere received directly from the vendors is
sufficient outside verification of the accounts payable balance at
Hune 4G. -f the auditor is satisfied $ith this covera*e" he or she may
$ish to support the four nonresponses by eaminin* vendor
invoices in support of the amount recorded in the master file. -f the
client has received vendor statements from any of these four
suppliers" the auditor may $ish to reconcile these statements.
19"01 a. -t is essential to coordinate the cutoff tests $ith the physical
observation of inventory. -f the cutoff is inconsistent $ith the
physical inventory there can be si*nificant misstatements in the
./024
income statement and the balance sheet. +or eample" assume an
inventory acquisition for F5G"GGG is received late in the afternoon of
December 4." after the physical inventory is completed. -f the
acquisition is included in accounts payable and purchases but
ecluded from inventory" the result is an understatement of net
earnin*s of F5G"GGG. On the other hand" if the acquisition is
ecluded from both inventory and accounts payable" there is a
misstatement in the balance sheet" but the income statement is
correct.
b.
R'C'%-%$>
R'P&RT $&:
)'SCR%PT%&$ &/
.%SSTAT'.'$T7S8
A),*ST%$> '$TR;
)'+%T CR')%T
ACC&*$T A.&*$T ACC&*$T A.&*$T
374. Eone
3743 )eceived prior to
year0end and not
recorded
-nventory 4"AG/..7 Accounts
payable
4"AG/..7
3744 -ncluded in
accounts payable
and not inventory
-nventory 6".B3.4. Purchases 6".B3.4.
3745 )eceived prior to
year0end and not
recorded
-nventory 7"5G4.GG Accounts
payable
7"5G4.GG
3746 -ncluded in
accounts payable
and not inventory
-nventory B"5B5./. Purchases B"5B5./.
3747 Eone
374A 1itle passed prior
to year0end and
not recorded
-nventory A"6.6.6G Accounts
payable
A"6.6.6G
374B Eone
c. 1ypically" misstatements that have an effect on earnin*s are most
important because of the importance of earnin*s to users of
financial statements. )eceivin* report numbers 3744 and 3746
affect earnin*s. -n addition" these misstatements are more
important because they represent the recordin* of part of the entry.
-f they are not ad=usted" the inventory balance the follo$in* year $ill
be understated by F.4"77A.33 %6".B3.4. I B"5B5./.(. +or the other
three items %receivin* report numbers 3743" 3745 and 374A(" the
misstatement is less important because they $ould be recorded the
follo$in* year and the account balances $ould then be proper.
./025
J Case " =ard Publishin? Company
19"0#
Comuter Solution. Computer prepared data sheets usin* !cel are contained
on the Companion >eb site and on the -nstructor<s )esource CD0)OM" $hich is
available upon request %+ilename P./43.ls(.
Application of audit samplin* is not appropriate for Procedures .0B due to
the nature of the procedures. -n this case" audit samplin* is also not appropriate
for Procedure .G because the samplin* unit is a line item in the cash
disbursements =ournal. 1he samplin* data sheet that follo$s represents an
attributes samplin* approach. 1he only differences bet$een this approach and a
nonstatistical samplin* approach are the estimate of A)AC) and the
determination of sample si2es. 'ee the footnotes to the samplin* data sheet for
further eplanations. A samplin* data sheet usin* attributes samplin* follo$s:
)'SCR%PT%&$ &/ ATTR%+*T'
P(A$$') A*)%T
'P'R T'R ARACRK
%$%T%A(
SA.P('
S%@'AA
/.a. !ntry in CD =ournal a*rees $ith
details on cancelled check.
GL 7L .GL 4B
/.b.%.( All supportin* documents
attached to vendor<s invoice.
.L 6L .GL AA
/.b.%3( Documents a*ree $ith
disbursements.
GL 7L .GL 4B
/.b.%4( !ntry in CD =ournal a*rees $ith
details on vendor8s invoice.
GL 7L .GL 4B
/.b.%5( Discount $as taken as
appropriate.
GL 7L .GL 4B
/.b.%6( 9endor8s invoice initialed. .L 6L .GL AA
/.b.%7( Account codin* reasonable. GL 7L .GL 4B
/.b.%A( Purchases approved by >ard. .L 6L .GL AA
/.b.%B( P.O. or P.). properly approved. .L 6L .GL AA
/.b.%/( Prices" footin*s and etensions
are correct.
GL 7L .GL 4B
/.b.%.G( Details on supportin* documents
a*ree.
GL 7L .GL 4B
/.b.%..( Documents properly completed
and cancelled upon payment.
.L 6L .GL AA
K +or a nonstatistical samplin* data sheet" A)AC) columns should indicate MmediumN for all attributes.
KK +or a nonstatistical samplin* data sheet" students< determination of sample si2e $ill vary. >hile no one ans$er
is correct" the sample si2e chosen for each attribute should reflect the !P!)" 1!) and A)AC) for that attribute.
./026
19"0# 7continued8
Part %%
a. $ttributes samling aroach: 1he results portion of the samplin*
data sheet are as follo$s:
ATTR%+*T'
$&:
SA.P('
S%@' '<C'PT%&$S
'<C'PT%&$
RAT' C*'R
/.a.
/.b. %.(
%3(
%4(
%5(
%6(
%7(
%A(
%B(
%/(
%.G(
%..(
6G
6G
6G
6G
6G
6G
6G
6G
6G
6G
6G
6G
G
.K
G
G
G
7K
4KK
G
G
G
G
G
G
3L
G
G
G
.3L
7L
G
G
G
G
G
5.7L
A.7L
5.7L
5.7L
5.7L
over .A.BL
.3./L
5.7L
5.7L
5.7L
5.7L
5.7L
K Control deviations
KK Monetary misstatements
&onstatistical aroach: :ecause C,!) under nonstatistical
samplin* is estimated usin* auditor =ud*ment" students< ans$ers to
this question $ill vary. 1hey $ill most likely be similar to the C,!)s
calculated usin* attributes samplin*.
:ecause the '!) is 2ero for attributes /.a." /.b.%3(0%5(" and
/.b.%A(0%..(" it is unlikely that students $ill estimate C,!) *reater
than the 1!) of 6L %tests of controls( or 7L %substantive tests of
transactions(. +or attribute /.b.%6( students should conclude that
the results are not acceptable because the '!) of .3L clearly
eceeds the 1!) of 6L. +or attribute /.b.%7(" even thou*h the '!)
equals the 1!) of 7L" the results are not acceptable because
samplin* error must be considered in determinin* C,!). +or
attribute /.b.%.(" students< estimates of C,!) $ill be more variable
since the '!) is only 3L. 'ome students $ill find the results
acceptable" and some $ill not" dependin* on their estimates of
samplin* error.
b. !ception . is not an eception" and has no effect on tests of
details of accounts payable.
./027
19"0# 7continued8
!ception 3 is a control deviation. !ven thou*h it is not a
monetary misstatement" controls require the presence of all
supportin* documents before a purchase and the related
disbursement are processed. -f an invalid purchase is recorded" the
liability and the related debited account may be overstated. -f an
invalid disbursement is recorded" accounts payable may be
inappropriately reduced. 1hus" misstatements in the occurrence of
those transactions could actually result in both overstatements and
understatements of accounts payable. 1ests for occurrence include
tracin* items on the accounts payable listin* to supportin* documents
and confirmation of accounts payable and reconciliation to vendor8s
statements.
!ception 4 is a control deviation $here one0half of those items
also contain monetary misstatements. Misclassification is a serious
misstatement. @o$ever" it relates to the debit entry" not the credit to
accounts payable. 1ests supportin* char*es to assets and epense
accounts $ill need to be increased" but tests of accounts payable $ill
probably not be affected.
c. +ollo$in* is an audit pro*ram for accounts payable. 1he balance0
related audit ob=ectives tested by each procedure are indicated.
:ecause the appropriate audit risk for accounts payable is hi*h and
inherent risk is lo$" and because analytical revie$ procedures $ere
ecellent" detailed tests should be held to a minimum. 1he eception
to this is for procedure 4; this has not been reduced because of the
eception in procedure /.b.%.(.
./028
19"0# 7continued8
+A(A$C'"R'(AT') A*)%T &+,'CT%-'S
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.. Obtain list of accounts payable. +oot the
list and a*ree to *eneral led*er.
D
3. 1race all items on the list over F.G"GGG
to vendor8s invoice and supportin*
documents.
D D
4. Obtain vendor8s statements for 3G
vendors $ith *reatest volume of
purchases" plus .G others" by
confirmation. )econcile statements to
accounts payable list.
D D D D
5. !amine all subsequent period
disbursements and payments in process
of amounts over F6"GGG to determine if
they $ere recorded in the proper period.
D D
6. )evie$ the list of accounts payable for
proper classification of accounts due to
related parties" debit balances" or items
$ith unusual terms.
D
Eote: )i*hts and )eali2able value are not applicable to accounts payable. Eo audit $ork $as
considered necessary for obli*ations.
./029
%nternet Problem Solution: .ana?in? the Accounts Payable /unction
19"1 A typical company has hundreds" if not thousands of vendors $ith $hom it
does business. Mana*in* the vast amount of related information is important to
ensurin* that the company reduces the likelihood of errors in its accounts
payable %AP( processin*. ACP )ecap" a >eb site for accounts payable and
purchasin* professionals" contains an article entitled MMana*in* Oour 9endor
+ileN P$$$.recapinc.comCapaQGGG/Qvendor.htmR that addresses the importance
of carefully evaluatin* and mana*in* a company<s vendor information. Althou*h
this article is $ritten primarily for ACP and purchasin* mana*ers" it contains a
number of important concepts that auditors should be a$are of if they are to
effectively audit a company<s acquisition and payment cycle. After readin* the
article" ans$er the follo$in* questions.
.. 1he article su**ests that there are several key activities that are
necessary to mana*e a company<s vendor information. >hat are
those activitiesS
Anser: 1he key activities are: vendor verification" vendor setup"
vendor file pur*e" vendor file cleanup" analysis of ACP activity" and
enhancin* vendor relationships.
3. >hat are the reasons for mana*in* a company<s vendor
informationS
Anser: 1he four reasons are to reduce the potential for fraud"
reduce duplicate payments" kno$ ho$ much money the company is
spendin* and $ith $hom it is bein* spent" and save money by
purchasin*" processin*" and payin* vendors smarter.
4. 9endor verification is of the key activities involved in mana*in* a
company<s vendor information. >hat are some of the audit issues
related to this activityS
Anser: 'tudent responses $ill vary. 1he primary audit issue
relates to vendor eistence. 'pecifically" the question is MDoes the
vendor represent a le*itimate business $ith $hich the company
does businessSN -n addition" vendor verification may uncover
potential conflicts of interest. Companies should consider $hether
vendors are related to company employees. -f so" then the
company should investi*ate the relationship closely.
%$ote: -nternet problems address current issues usin* -nternet sources. :ecause
-nternet sites are sub=ect to chan*e" -nternet problems and solutions are sub=ect to
chan*e. Current information on -nternet problems is available at
$$$.prenhall.comCarens(.
./030