ch17 70 360

Chapter 17: Audit of the
Acquisition and Payment

Cycle
1
Copyright © 2007 Pearson Education Canada
Chapter 17 objectives
 Identify the major business functions in the
acquisition and payment cycle
 Discuss how tests of controls are designed for the
acquisition and payment cycle
 Explain why accounts payable is considered
separately from acquisitions and payments
 What is a conversion audit and what issues does
the auditor need to consider during one?
17-2
Business functions in the
acquisition and payments cycle
 Processing purchase orders
 Receiving goods and services
 Recognizing the liability for goods and
services purchased
 Vendor master file changes
 Processing and recording payments
17-3
Methodology for designing tests of controls
for the acquisition and payment cycle
17-4
Acquisition and payment tests of
controls by assertion
Transaction- Key internal Common test of
related audit control control
objective
Occurrence: Existence of Examine
Recorded purchase underlying
acquisitions are for requisition, documents for
goods and services purchase order, reasonableness and
received, receiving report authenticity.
consistent with the and vendor’s
best interests of invoice attached to
the client. the
voucher/cheque.
17-5
objective
Completeness: Receiving Account for a

Existing reports are sequence of
acquisition prenumbered receiving
transactions are and accounted reports (a block
recorded. for. test).
17-6
Transaction-related Key internal control Common test of
audit objective control
Accuracy: Batch totals are Examine file of

Recorded compared with batch totals for
acquisition computer summary initials of data entry
transactions are reports. clerk; compare
accurate. totals to summary
reports.
17-7
objective
Classification: Automatic Enter test

Acquisition updates and transactions or
transactions are posting. observe entry,
properly and trace to
classified. correct file.
17-8
objective
Timing: Transaction date Observe data

Acquisition must be system entry process.
transactions are date (today’s
recorded on the date) or a
correct dates. reasonable date.
17-9
Transaction-related Key internal Common test of
audit objective control control
Posting and Comparison of Test clerical
summarization: accounts payable accuracy by footing
Acquisition master file or trial the journals and
transactions are balance totals tracing postings to
properly included in with general general ledger and
the vendor and ledger balance. accounts payable
inventory master and inventory
files, and are master files.
properly summarized.
17-10
Practice problem 17-22 (p. 522)
 Risks when purchases
are made via the
internet
 Identification of
internal controls for
such purchases
17-11
Attribute sampling for tests of
controls
 Attribute sampling is common in the area of tests
of controls of acquisitions and payments
 Because of the number of accounts affected, the
auditor may choose a relatively low tolerable
exception rate
 It is also common to stratify so that large dollar
or unusual amounts are segregated and separately
tested
17-12
Practice problem 17-23
(pp. 522-23)
 Assessment of
exceptions found
during the audit of
cash disbursements
17-13
Cash disbursements tests of
objective
Occurrence: Approval of Examine
Recorded cash payment on indication of
disbursements supporting approval.
are for goods documents at
and services the time
actually cheques are
received. signed.
17-14
objective
Completeness: Cheques are Account for a

Existing cash prenumbered sequence of
disbursement and accounted cheques (block
transactions are form. test).
recorded.
17-15
objective
Accuracy: Monthly Examine bank
Recorded cash preparation of a reconciliations
disbursement bank and observe
transactions are reconciliation their
accurate. by an preparation.
independent
person.
17-16
objective
Classification: Adequate chart Examine

Cash of accounts. procedures
disbursement manual and
transactions are chart of
properly accounts.
classified.
17-17
objective
Timing: Cash Transaction date Observe data

disbursement must be system entry process.
transactions are date.
recorded on the
correct dates.
17-18
Transaction-related Key internal Common test of
audit objective control control
Posting and Comparison of Test clerical
summarization: vendor master file accuracy by
Cash disbursement or trial balance footing journals
transactions are totals with and tracing
properly included in general ledger postings to general
the vendor master balance. ledger and vendor
file and properly master file.
summarized.
17-19
 Accounts payable and
cash disbursements
audit issues in the
face of a client cash
shortage
 What are risks and
audit procedures?
17-20
Methodology for designing tests of details of
balances of accounts payable
17-21
Accounts payable
 Accounts payable is the ending balance
sheet obligation
 Acquisition and payments are the
transactions that occur throughout the year
 Both the ending liability and the
transactions often involve highly material
amounts
17-22
Analytical procedures (Table 17-4)
Analytical procedure Possible misstatement

Compare acquisition-related Misstatement of accounts
expense account balances payable and expenses.
with prior years.
Review list of accounts Classification misstatement

payable for unusual, for nontrade liabilities.
nonvendor, and interest
bearing payables.
17-23
Analytical procedures (Table 17-4)
(cont’d)
Analytical procedure Possible misstatement
Compare individual accounts Unrecorded or nonexistent
payable with previous years. accounts, or misstatements.
Calculate ratios such as Unrecorded or nonexistent

purchase divided by accounts accounts, or misstatements.
payable, and accounts
payable divided by current
liabilities.
17-24
System conversions
 System conversions arise when an
organization has undertaken a major
change in its systems by implementing a
new computer system or has made major
changes to a particular system
 For example, a batch processing system
could be replaced with an online
processing system
17-25
Impact of system conversion
 When an organization changes an entire system
or a set of systems, there are three issues that the
auditor needs to address:
– A new system of internal controls will need to be
documented and evaluated
– The auditor will need to audit the actual data
conversion process
– The auditor will need to determine whether
accounting policies have been changed
 The following example looks at an accounts
payable conversion (from batch to online) by
assertion
17-26
Conversion tests of controls and tests of
detail by assertion: existence
Key internal Common test of Common test of
control control details
Agree vendor Review vendor On a test basis,
file details for file listings for agree vendor file
each vendor evidence of details for
from the new agreement. vendors from the
(online) system new (online)
to the old (batch) system to the old
system. (batch) system.
17-27
detail by assertion: completeness and
accuracy
Agree aged Review aged On a test basis,
accounts payable accounts payable agree aged A/P
trial balance trial balance trial balance
details from the listings for details from the
old (batch) system evidence of old (batch) system
to the new (online) comparison. to the new (online)
system for each system for vendors
vendor and in and in total.
total.
17-28
detail by assertion: cutoff
Procedures exist Conduct cutoff Same as for
to ensure tests, for tests of controls.
appropriate receiving
cutoff of reports and
transactions. vendor invoices.
17-29
 Assessment of
internal controls in an
automated
environment
 Identify controls to
prevent or detect the
weaknesses
 Identify tests of
controls and tests of
details
17-30

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Chapter 17: Audit of the

Acquisition and Payment

Completeness: Receiving Account for a

Accuracy: Batch totals are Examine file of

Classification: Automatic Enter test

Timing: Transaction date Observe data

Completeness: Cheques are Account for a

Classification: Adequate chart Examine

Timing: Cash Transaction date Observe data

Analytical procedure Possible misstatement

Review list of accounts Classification misstatement

Calculate ratios such as Unrecorded or nonexistent

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