Audit of Acquisition Cycle (Chap. 11 A) Overview of related accounts (Exh. 11.1, p. 493).

1. Audit of Acquisition Cycle (Chap. 11 A) Overview of related accounts (Exh. 11.1, p. 493). Understand the phases of processing transactions and the related controls (p. 494-). Testing controls (p. 499). Substantive tests of accounts payable and expenses (p. 500-).

2. Exhibit 16.1 Overview of Accounts in Acquisition Cycle

3. The acquisition and payment process consists of five major phases: • <Authorized requisition (request) for goods or services. • <Authorized purchase of goods or services according to company policies. <Receipt of goods and services & Accounting for receipt of goods and • services (accounting classification and valuation) • <Approval of items for payment. • <Cash disbursements.

4. Approaches for Testing Completeness of Accounts Payable (Use one or more of the following) 1.        Reconcile monthly statements or confirmations of major vendors with recorded accounts payable. 2.        Test subsequent cash disbursements. 3.       Perform analytical procedures of expense accounts - $ and % changes from prior year and common-size income statements.

5. Exhibit 11.3 Typical Manufacturing CompanyAudit Program—Accounts Payable and PurchasesDecember 31, 2003 W/P Done Ref By Audit Objectives Assess the control risk over purchase and cash disbursement transactions and determine the completeness, existence, valuation, presentation, and obligations of purchases, operating expenses, and trade accounts payable. Test of Controls and Transactions 1. Review computer matching exception reports to determine number of exceptions andeffectiveness of follow-up procedures. ____ ____ 2. Determine whether there have been any changes to the computer programs for processingpurchases and disbursements during the year. ____ ____ 3. Review results of ITF, noting proper account distribution, correctness of computermatching, effectiveness of edit controls, account balance updates, and generation ofexception reports. ____ ____ Analytical Procedures Prepare a common-size income statement and compare expenses with the prior period.Identify and investigate significant differences. ____ ____ Tests of Details 1.Use generalized audit software to verify mathematical accuracy of accounts payable, andagree to general ledger (valuation). ____ ____ 2.Identify the major vendors and obtain monthly statement as of year-end (completeness). ____ ____ 3.Send confirmation letters to major vendors not providing monthly statements (completeness). ____ ____ 4.Agree monthly statements and confirmations from major vendors with accounts payablelist (existence, completeness, valuation, and obligation). ____ ____ 5.Perform a cutoff test of purchases and cash disbursements. ____ ____ 6.Review long-term purchase commitments and determine whether a loss needs to be accrued(completeness, presentation, and disclosure). ____ ____ 7.State your conclusion as to the correctness of the account balances. ____ ____

6. Audit of Inventory (Chapter 11 B) Understand the complexities of auditing inventory (p. 502-) Understand control procedures for inventory (p. 504-). Understand how to review inventory for obsolescence (p. 508) Substantive testing of inventory/cost of sales (p. 509-, & Exh. 11.6).   Objectives and procedures for observing a physical inventory (Exh. 11.7, p. 511).