Audit of the Acquisition and Payments Cycle

1. Audit of the Acquisition and Payments Cycle

2. N An Overview of Functions, Documents, and Accounting Systems • Starting point • Any Department Purchase details Purchase Requisition Prepare prenumbered Purchase Requisition Accounts Payable Purchasing

4. Purchase Requisition Purchase Order N Purchase Requisition • Purchasing Department Originating Department Determine Vendor, prepare prenumbered Purchase Order Originating Department Receiving Accounts Payable Vendor

6. Receiving Report A A • Receiving Department Blind copy of Purchase Order Purchasing Filed until goods received along with invoice copy Count goods, match with Purchase Order, and prepare Receiving Report Blind copy of Purchase Order Originating Department with goods Purchasing Accounts Payable

9. Purchase Requisition Purchase Order Receiving Report Vendor’s Invoice Voucher D Purchase Requisition • Accounts Payable Department Originating Department Purchase Order Purchasing Voucher Register to General Accounting Compare. Then prepare Voucher and enter in Voucher Register Receiving Report Receiving Vendor’s Invoice Vendor To Cash Disbursements when due

11. Purchase Requisition Purchase Requisition Purchase Order Purchase Order Receiving Report Receiving Report Vendor’s Invoice Vendor’s Invoice Voucher Voucher D • Cash Disbursements Department From Accounts Payable • Check prices, verify math and consistency between documents, prepare cheques and cheque register. • Review documentation, sign cheques, and cancel vouchers Cheque Register Cheque To Vendor To General Accounting

12. Managing Risk in the Payments Cycle • Possible Errors • Cutoff errors • Consignment goods • Misclassification • Recording a transaction

13. Fraud in the Acquisition and Payment Cycle • Most frauds • Management • Three areas to look at: • Paying for fictitious purchases • Receiving kickbacks • Purchasing goods for personal use

14. Designing Tests of Controls for the Acquisition and Payment Cycle • Understand general controls • Understand internal control; evaluate design effectiveness By assertion: • Assess planned control risk; identify and assess risks of material misstatement • Evaluate cost-benefit of testing controls • The type of audit procedures? • What is the sample size? • Items to be selected? • Timing – when to do the procedures? • Design tests of controls to meet transaction-related objectives

15. Attribute Sampling for Tests of Controls • Attribute sampling is common in the area of tests of controls of acquisitions and payments. • There can be a large number of accounts • Stratification • The following slides shows test of controls for acquisitions and payments

16. Acquisitions - Assertions and Test of Controls Existence or Occurrence • Recorded acquisitions are for goods and services received, consistent with the best interests of the client. • Approval of acquisition • The voucher package • Breakdown in control

17. Completeness • Existing acquisition transactions are recorded. • Receiving reports are prenumbered and accounted for. • Prenumbering of the voucher • Breakdown in control

18. Accuracy • Recorded acquisition transactions are accurate. • Batch totals of transactions are mathematically accurate and compared with computer batch summary reports • Transactions are approved for prices and discounts • Breakdown in control

19. Classification • Acquisitions transactions are properly classified. • A good chart of accounts is necessary • Posting to the correct accounts • Breakdown in control

20. Timing • Acquisition transactions are recorded on the correct dates. • Transactions should be recorded as soon as possible • The transaction date should be the system date • Breakdown in control

21. Posting and summarization • Acquisition transactions are properly included in the vendor and inventory master files, and are properly summarized. • Reconciliation of accounts payable master file to the general ledger • Breakdown in control

22. Cash Disbursements - Assertions and Test of Controls • Occurrence • Recorded cash disbursements are for goods and services actually received. • Adequate segregation of duties • Examination of all supporting documentation prior to payment • Approval of payment shown on supporting documents at the time cheques are signed. • Breakdown in control

23. PAID

25. Completeness • Existing cash disbursement transactions are recorded. • Cheques. Key control over cheques? • Cash disbursements journal. • Bank reconciliation • Breakdown in control

26. Alpha Bravo Company Proof of Cash For the Month of June 201X Prepared by GHY Dated 8/7/1X Reviewed by ^ Footed d Traced to cash disbursements journal b Traced to bank statement L Traced to general ledger r Traced to cash receipts journal j Customer’s NSF cheque redeposited on July 8 and cleared

27. Accuracy • Recorded cash disbursement transactions are accurate. • Check the calculations • Bank reconciliation • Breakdown in control

28. Classification • Cash disbursement transactions are properly classified. • Chart of accounts • Checking the classification • Breakdown in control

29. Timing • Cash disbursement transactions are recorded on the correct dates. • The date of the transaction • Recording of transactions • Breakdown in control

30. Posting and Summarization • Cash disbursement transactions are properly included in the vendor master file and properly summarized. • Vendor master file • Detail tie-in • Breakdown in control

31. System Conversions • System conversions arise when • For example

32. 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 • The auditor will need to audit • The auditor will need to • An example of an accounts payable conversion from batch to online

33. Conversion Tests of Controls and Tests of Detail

34. Problem 16-12, Page 529 • In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that the auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelihood of an accurate cutoff?

35. Problem 18-20, Page 634, Canadian 11th. Edition You are the staff auditor testing the combined purchase and cash disbursements journal for a small audit client. Internal control is regarded as reasonably effective, considering the number of personnel. The auditor in charge has decided that a sample of 80 items should be sufficient for this audit because of excellent controls and gives you the following instructions: All transactions selected must exceed $100. At least 50 of the transaction items must be for purchases of raw materials because these transactions are typically material. It is not acceptable to include the same vendor in the sample more than once. All vendors’ invoices that cannot be located must be replaced with new sample items. Both cheques and supporting documents are to be examined for the same transactions. The sample must be random, after modifications for instructions 1 through 5. REQUIRED: Evaluate each of these instructions for testing acquisition and cash disbursement transactions. Explain the difficulties of applying each of these instructions to attributes sampling.