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Audit of Purchase and Payment CycleSyaffiq Ubaidillah b Borhanudin Taufiq b Rahmat Izzaz Naqiuddin b Zamrose Nasri Mohd Hazmi b Abu KassimIdentify the accounts and the classes of transactions in the acquisition and payment cycle.Transactions in the Acquisition and Payment Cycle1. Acquisitions of goods and services 2. Cash disbursements 3. Purchase returns and allowances and purchase discountsAccounts in the Acquisition and Payment CycleCash in Bank Accounts Payable Cash Acquisit
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Audit of PurchaseAudit of Purchaseand Payment Cycleand Payment Cycle
Syaffiq Ubaidillah b BorhanudinSyaffiq Ubaidillah b Borhanudin
Taufiq b RahmatTaufiq b Rahmat
Izzaz Naqiuddin b Zamrose NasriIzzaz Naqiuddin b Zamrose Nasri
Mohd Hazmi b Abu KassimMohd Hazmi b Abu Kassim
Identify the accounts and theIdentify the accounts and the
classes of transactions in theclasses of transactions in the
acquisition and payment cycle.acquisition and payment cycle.
Transactions in the Transactions in the Acquisition and Payment Acquisition and Payment
CycleCycle
1.1. Acquisitions of goods and servicesAcquisitions of goods and services2.2. Cash disbursementsCash disbursements3.3. Purchase returns and allowancesPurchase returns and allowances
and purchase discountsand purchase discounts
Accounts in the Accounts in the AcquisitionAcquisition
and Payment Cycleand Payment CycleCash in BankCash in Bank
Purchase ReturnsPurchase Returnsand Allowancesand Allowances
PurchasePurchaseDiscountsDiscounts
CashCashdisbursementsdisbursements
PurchasePurchasereturns andreturns andallowancesallowances
PurchasePurchasediscountsdiscounts
AcquisitionsAcquisitionsof goods andof goods andservicesservices
Raw MaterialRaw MaterialPurchasesPurchases
Property, PlantProperty, Plantand Equipmentand Equipment
PrepaidPrepaidExpensesExpenses
Accounts PayableAccounts Payable
Accounts in the Accounts in the AcquisitionAcquisition
and Payment Cycleand Payment Cycle
AcquisitionsAcquisitionsof goods andof goods andservicesservices
Accounts PayableAccounts Payable
Manufacturing Expense Control AccountSubsidiary accountsRepair and maintenanceTaxes, SuppliesFreight in, Utilities
Administrative Expense Control AccountSubsidiary accountsSupplies, Officers’ travelLegal feesAuditing fees, Taxes
Selling Expense Control AccountSubsidiary accountsCommissionsTravel expenseRepairs, Advertising
Describe the business functionsDescribe the business functions
and the related documentsand the related documents
and records in the acquisitionand records in the acquisition
and payment cycle.and payment cycle.
Classes of TransactionsClasses of Transactionsand Accountsand Accounts
InventoryInventoryProperty, plant, and equipmentProperty, plant, and equipmentPrepaid expensesPrepaid expensesLeasehold improvementsLeasehold improvementsAccounts payableAccounts payableManufacturing expensesManufacturing expensesSelling and administrative expensesSelling and administrative expenses
Classes of TransactionsClasses of Transactionsand Accountsand Accounts
Cash in bankCash in bank (from cash disbursements)(from cash disbursements)Accounts payableAccounts payablePurchase discountsPurchase discounts
BusinessBusiness Functions Functionsin the Cyclein the Cycle
Processing purchase ordersProcessing purchase orders
Receiving goods and servicesReceiving goods and services
Recognizing the liabilityRecognizing the liability
Processing and recording cash disbursementsProcessing and recording cash disbursements
Related DocumentsRelated Documentsand Reportsand Reports
Purchase requisitionPurchase requisition Purchase orderPurchase order
Receiving reportReceiving report
Processing purchase ordersProcessing purchase orders
Receiving goods and servicesReceiving goods and services
Related DocumentsRelated Documentsand Reportsand Reports
Acquisitions transaction fileAcquisitions transaction file
Acquisitions journal or listingAcquisitions journal or listing
Vendor’sVendor’s invoiceinvoice
VoucherVoucher
A/P trial balanceA/P trial balance
Debit memoDebit memo
A/P master fileA/P master file
Vendor’s statementVendor’s statement
Recognizing the liabilityRecognizing the liability
Related DocumentsRelated Documentsand Reportsand Reports
Cash disbursements transaction fileCash disbursements transaction file
ChequeCheque
Cash disbursements journal or listingCash disbursements journal or listing
Processing and recording cash disbursementsProcessing and recording cash disbursements
Major Internal Control and Major Internal Control and Related Audit ProceduresRelated Audit Procedures
Transaction-related audit objective
Key internal control Common test of control Common substantive tests of transactions
Existence Purchase requisition, purchase order, receiving report, and vendor’s invoice are attached to the voucher
Examine documents in voucher package for existence
Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts
Completeness Purchase orders are prenumbered and accounted for
Account for sequence of purchase order
Trace from a file of receiving reports to the acquisitions journal
Accuracy Calculations and amounts are internally verified
Examine indication of internal verification
Compare recorded transactions in the acquisitions journal with the vendor’s invoice, receiving report, and other supporting documentation
Classification An adequate chart of accounts is used
Examine procedures manual and chart of accounts
Compare classification with chart of accounts by reference to vendor’s invoices
Timing Procedures require recording transactions as soon as possible after goods and services have been received
Examine procedures manual and observe whether unrecorded vendors’ invoices exist
Compare dates of receiving reports and vendors’ invoices, with dates in the acquisitions journal
Posting and summarization Accounts payable master file contents are internally verified
Examine indication of internal verification
Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable and inventory master files
Understand internal control andUnderstand internal control and
design and perform tests ofdesign and perform tests of
controls and substantive testscontrols and substantive tests
of transactions for theof transactions for the
acquisition and payment cycle.acquisition and payment cycle.
Methodology for Designing Methodology for Designing Tests ofTests of
Balances – Accounts Balances – Accounts ReceivableReceivable
Understand internalUnderstand internalcontrol – acquisitionscontrol – acquisitions
and cash disbursements.and cash disbursements.
AuditAuditproceduresprocedures
Items toItems toselectselect
SampleSamplesizesize TimingTiming
Assess planned controlAssess planned controlrisk – acquisitions andrisk – acquisitions andcash disbursements.cash disbursements.
Design tests of controls and substantive tests ofDesign tests of controls and substantive tests oftransactions for acquisitions and cash disbursementstransactions for acquisitions and cash disbursements
to meet transaction-related audit objectives.to meet transaction-related audit objectives.
Evaluate cost-benefit of testing controls.Evaluate cost-benefit of testing controls.
Understand Internal Understand Internal ControlControl
The auditor gains an understanding of internalThe auditor gains an understanding of internalcontrol for the acquisition and paymentcontrol for the acquisition and payment
cycle by studying the client’s flowcharts,cycle by studying the client’s flowcharts,preparing internal control questionnaires,preparing internal control questionnaires,
and performing walk-through tests forand performing walk-through tests foracquisitions and cash disbursements.acquisitions and cash disbursements.
Assess Planned Control Assess Planned Control RiskRisk
Authorization of purchasesAuthorization of purchases
Separation of asset custodySeparation of asset custodyfrom other functionsfrom other functions
Timely recording and independentTimely recording and independentreview of transactionsreview of transactions
Authorization of paymentsAuthorization of payments
Evaluate Cost-Benefit of Evaluate Cost-Benefit of Testing ControlsTesting Controls
The auditor identifies the key internal controlsThe auditor identifies the key internal controlsand weaknesses and assesses control risk.and weaknesses and assesses control risk.
The auditor decides whether substantive testsThe auditor decides whether substantive testswill be reduced sufficiently to justify the costwill be reduced sufficiently to justify the cost
of performing tests of controls.of performing tests of controls.
Controls and Substantive Controls and Substantive Tests ofTests of
Transactions for AcquisitionsTransactions for Acquisitions
Recorded acquisitions are for goods andRecorded acquisitions are for goods andservices received, consistent with theservices received, consistent with thebest interests of the client (existence).best interests of the client (existence).
Existing acquisitions are recorded (completeness).Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy).Acquisitions are accurately recorded (accuracy).
Acquisitions are correctly classified (classification).Acquisitions are correctly classified (classification).
Controls and Substantive Controls and Substantive Tests ofTests of
Transactions for AcquisitionsTransactions for Acquisitions
Acquisitions transactions are recordedAcquisitions transactions are recordedon the correct dates (timing).on the correct dates (timing).
Acquisitions transactions are properlyAcquisitions transactions are properlyincluded in the accounts payable andincluded in the accounts payable and
inventory master files and are properlyinventory master files and are properlysummarized (posting and summarization).summarized (posting and summarization).
Controls and Substantive Controls and Substantive Tests ofTests of
Transactions for Cash Transactions for Cash DisbursementsDisbursements
The assumption underlying these controlsThe assumption underlying these controlsand audit procedures is separate cashand audit procedures is separate cash
disbursements and acquisitions journals.disbursements and acquisitions journals.
The acquisitions and cash disbursementsThe acquisitions and cash disbursementstests are typically performed concurrently.tests are typically performed concurrently.
Attributes SamplingAttributes Sampling
Because of the importance of tests ofBecause of the importance of tests ofcontrols and substantive tests ofcontrols and substantive tests of
transactions for acquisitions and cashtransactions for acquisitions and cashdisbursements, the use of attributesdisbursements, the use of attributes
sampling is common in this audit area.sampling is common in this audit area.
Describe the methodology forDescribe the methodology for
designing tests of details ofdesigning tests of details of
balances for accounts payablebalances for accounts payable
using the audit risk model.using the audit risk model.
Identify client risks affectingIdentify client risks affectingaccounts payable.accounts payable.
Methodology for Designing Methodology for Designing TestsTests
of Details of Balances for of Details of Balances for A/PA/P
Phase IPhase I
Set tolerable misstatement and assessSet tolerable misstatement and assessinherent risk for accounts payable.inherent risk for accounts payable.
Assess control risk for accounts payable.Assess control risk for accounts payable.
Methodology for Designing Methodology for Designing TestsTests
of Details of Balances for of Details of Balances for A/PA/P
Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions for thesubstantive tests of transactions for the
acquisition and payment cycle.acquisition and payment cycle.
Phase IIPhase II
Methodology for Designing Methodology for Designing TestsTests
of Details of Balances for of Details of Balances for A/PA/P
Design and perform analytical proceduresDesign and perform analytical proceduresfor the acquisition and payment cycle.for the acquisition and payment cycle.
Phase IIIPhase III
AuditAuditproceduresprocedures
Items toItems toselectselect
SampleSamplesizesize TimingTiming
Design tests of details of accounts payable balanceDesign tests of details of accounts payable balanceto satisfy balance-related audit objectives.to satisfy balance-related audit objectives.
Design and perform analyticalDesign and perform analytical
procedures for accounts payable.procedures for accounts payable.
Analytical Procedures for Analytical Procedures for the Acquisition and the Acquisition and
Payment CyclePayment Cycle
Review list of accounts payableReview list of accounts payablefor unusual, non-vender, andfor unusual, non-vender, and
interest-bearing payables.interest-bearing payables.
Classification misstatementClassification misstatementfor nontrade liabilities.for nontrade liabilities.
Analytical procedureAnalytical procedure
Compare acquisition-relatedCompare acquisition-relatedexpense account balancesexpense account balances
with prior years.with prior years.
Misstatement of accountsMisstatement of accountspayable and expenses.payable and expenses.
Possible misstatementPossible misstatement
Analytical Procedures for Analytical Procedures for the Acquisition and the Acquisition and
Payment CyclePayment CycleAnalytical procedureAnalytical procedure
Compare individual accountsCompare individual accountspayable with previous years.payable with previous years.
Unrecorded or nonexistentUnrecorded or nonexistentaccounts, or misstatements.accounts, or misstatements.
Calculate ratios, such asCalculate ratios, such aspurchases divided by accountspurchases divided by accountspayable, and accounts payablepayable, and accounts payabledivided by current liabilities.divided by current liabilities.
Unrecorded or nonexistentUnrecorded or nonexistentaccounts, or misstatements.accounts, or misstatements.
Possible misstatementPossible misstatement
Design and perform testsDesign and perform tests
of details of balances forof details of balances for
accounts payable, includingaccounts payable, including
out-of-period liability tests.out-of-period liability tests.
Out-of-Period Liability Out-of-Period Liability TestsTests
Examine underlying documentation forExamine underlying documentation forsubsequent cash disbursements.subsequent cash disbursements.
Examine underlying documentation for billsExamine underlying documentation for billsnot paid several weeks after the year-end.not paid several weeks after the year-end.
Trace receiving reports issued beforeTrace receiving reports issued beforeyear-end to related vendors’ invoices.year-end to related vendors’ invoices.
Out-of-Period Liability Out-of-Period Liability TestsTests
Trace vendors’ statements that show a balanceTrace vendors’ statements that show a balancedue to the accounts payable trial balance.due to the accounts payable trial balance.
Send confirmations to vendors with whichSend confirmations to vendors with whichthe client does business.the client does business.
Cutoff TestsCutoff Tests
Relationship of cutoff to physicalRelationship of cutoff to physicalobservation of inventoryobservation of inventory
Inventory in transitInventory in transit
Distinguish the reliability ofDistinguish the reliability of
vendors’ invoices, vendors’vendors’ invoices, vendors’
statements, and confirmationsstatements, and confirmations
of accounts payableof accounts payable
as audit evidence.as audit evidence.
Reliability of EvidenceReliability of Evidence
Distinction between vendors’Distinction between vendors’invoices and vendors’ statements.invoices and vendors’ statements.
Difference between vendors’Difference between vendors’statements and confirmations.statements and confirmations.
Sample SizeSample Size
Sample sizes for accounts payable tests varySample sizes for accounts payable tests varyconsiderably, depending on many factors.considerably, depending on many factors.
Statistical sampling is less commonly usedStatistical sampling is less commonly usedfor the audit of accounts payable thanfor the audit of accounts payable than
for accounts receivable.for accounts receivable.
End of Chapter 19End of Chapter 19
Thank you for timeThank you for time