Modern Auditing: Assurance Services in Financial Reporting

1. Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 15 – Auditing the Expenditure Cycle

2. Chapter Overview

3. The Expenditure Cycle

4. Develop Audit Objectives

5. Understanding the Entity and Environment

6. Inherent Risk, Including the Risk of Fraud • Management Misstatement of Expenditures • Understate expenses • Understate payables • Other Misstatement Factors • High volume of transactions • Unauthorized purchases • Misappropriation • Duplication of payments

7. Analytical Procedures

8. Consideration of Internal Control Components • Control Environment • Risk Assessment • Information and Communication • Monitoring

9. Study Break • The expenditure cycle consists of all of the following activities, except: • Purchase transactions • Cash disbursement transactions • Sales transactions • Purchase adjustments C. Sales transactions

10. Study Break • This analytical procedure calculates the average number of days it takes to retire accounts payables. • Current ratio • Quick ratio • Cost of Goods Sold to Accounts Payable • Accounts Payable Turn Days D. Accounts Payable Turn Days

11. Purchase Transactions – Documents and Records • Purchase requisition • Purchase order • Approved vendor master file • Open purchase order file • Receiving report • Receiving file • Vendor Invoice

12. Purchase Transactions – Common Documents and Records • Voucher • Exception reports • Voucher summary • Voucher register • Purchase transactions file • Accounts payable master file • Suspense files

13. Purchase Transactions – Functions and Control Activities • Initiating Purchases • Placing vendors on an authorized vendor list • Requisitioning goods and services • Preparing purchase orders • Receipt of Goods and Services • Receiving the goods • Storing goods received for inventory • Returning goods to vendor • Recording Liabilities

14. Systems Flowchart – Purchase Transaction

15. Systems Flowchart – Purchase Transaction

16. Systems Flowchart – Purchase Transaction

17. Study Break • This item is a written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order. • Purchase requisition • Purchase order • Receiving report • Receiving file B. Purchase order

18. Study Break • This function of processing of purchase transaction includes placing vendors on an authorized vendor list and preparing purchase orders. • Initiating purchases • Receipt of goods and services • Recording liabilities • Paying liabilities A. Initiating purchases

19. Cash Disbursement Transactions– Common Documents and Records • Check • Check Summary • Cash Disbursements Transaction File • Cash Disbursements Journal or Check Register

20. Cash Disbursement Transactions- Function and Control Activities • Computerized System • Paying the Liability • Recording the Disbursement • Manual System • Paying the Liability • Recording the Disbursement

21. Systems Flowchart – Cash Disbursement Transactions

22. Study Break • This record is a report of total checks issued in a batch or during a day. • Check • Check summary • Cash disbursements transaction file • Check register B. Check summary

23. Purchase Adjustment Transactions– Common Documents and Records • Purchase Return Authorization • Shipping Report • Debit Memo

24. Purchase Adjustment Function and Controls • Purchase Returns and Allowances • Other Controls • Tests of Controls

25. Substantive Tests of Accounts Payable Balances • Determining Detection Risk for Tests of Details • Existence and Occurrence • Completeness • Rights and Obligations • Valuation and Allocation • Presentation and Disclosure

26. Designing Substantive Tests • Initial Procedures • Analytical Procedures

27. Designing Substantive Tests • Tests of Details of Transactions • Vouch Recorded Payables to Supporting Documentation • Perform Cutoff Tests • Purchases cutoff tests • Cash disbursement cutoff tests • Purchase return cutoff tests • Perform Search for Unrecorded Payables • Subsequent payments

28. Designing Substantive Tests • Tests of Details of Balances • Accounts Payable Confirmations • Reconcile Unconfirmed Payables to Vendor Statements • Tests of Details of Disclosures

29. Study Break • This is a report prepared on the shipment of goods to vendors showing the kinds and quantities of goods shipped. • Purchase Return Authorization • Shipping Report • Debit Memo • Check Summary B. Shipping Report

30. Study Break • These items include all checks issued or vouchers paid after the balance sheet date. • Purchase return cutoff tests • Check summary • Subsequent payments • Confirmation of accounts payable C. Subsequent payments