Information Systems by 367V1De

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									Audit of the Acquisition and Payment
                Cycle
  An Overview of Functions, Documents, and
            Accounting Systems

• Starting point
          • Any Department


 Purchase details


                                                               N
 Prepare prenumbered
 Purchase Requisition   Purchase Requisition
                                                        Accounts
                                                        Payable


                                           Purchasing
PURCHASE REQUISITION                                 28314
Okra Development Corp.                               Copy


To: Purchasing
From:        Stockroom
Date:        August 5, 201X
             Ship by September 12, 201X
   Quantity              Number              Description
        10               Model 317          Roller Bearings




                          Stockroom Clerk     Rita Silverstein
         • Purchasing Department


Originating        Purchase Requisition
Department




                  Determine Vendor,
                  prepare prenumbered
                  Purchase Order




                                                         N


                    Purchase Requisition
                   Purchase Order                               Originating Department
                                                               Receiving
                                                    Accounts
                                                    Payable
                                           Vendor
Okra Development Corp.                                              Copy
8924 Bailey Road                            Purchase Order 6-3378
Salem, OR 92117                             Date:        August 5, 201X
                                            Ship By:     September 12, 201X
                                            Terms:       2/10, n/30
                                                         FOB Shipping Point

To:
Faragut Sales, Inc.
3812 Briar Drive
Salem, OR 92115                 Ship to Okra Development Corp.
                                8924 Bailey Road, Salem, OR 92117
                                                          PR28314
  Quantity         Number           Description           Price       Amount


     10            Model 317   Roller Bearing for         48.00       480.00
                               Model 3118 Ripper




Purchase order number must appear
on all shipments and invoices                           Ordered By

                                                    Margaret Spangler
     • Receiving Department


Purchasing          Blind copy of                         A   Filed until
                    Purchase Order                            goods received
                                                              along with
                                                              invoice copy



                 Count goods, match
                 with Purchase Order,
                 and prepare               Blind copy of
                 Receiving Report          Purchase Order


                                                                               A

                 Receiving Report              Originating Department with
                                               goods

                                             Purchasing
                                Accounts
                                Payable
Okra Development Corp.
8924 Bailey Road, Salem, OR 92117



                         RECEIVING REPORT NO. 8-09321
Carrier:    Yellow Express      229-237441    Purchase Order 6-3378
August 28, 201X                 Supplier:     Faragut Sales, Inc
                                Invoice No.   D8-9912
    Quantity               Description             Condition
       10                Roller Bearings                ok




                         Receiving Clerk      Tony Morelli
Faragut Sales, Inc                                                   D8-9912
3812 Briar Drive, Salem, OR 92115

     SALES INVOICE

Sold to                      Shipped to                 Freight Bill No.
Okra Development Corp.       8924 Bailey Road           229-237441
8924 Bailey Road             Salem, OR 92117
Salem, OR 92117              FOB Shipping Point
  Invoice Date             Date Shipped            Terms       Your Order No.
August 25, 201X          August 20, 201X          2/10, n/30         6-3378
   Quantity         We are pleased to serve you     Price            Amount


       10            Model 317 Roller Bearings      48.00            480.00
     • Accounts Payable Department


Originating   Purchase Requisition
Department


Purchasing      Purchase Order                                        Voucher Register to
                                                                      General
                                             Compare. Then
                                                                      Accounting
                                             prepare Voucher and
                                             enter in Voucher
Receiving      Receiving Report              Register


                                             Purchase Requisition
Vendor         Vendor’s Invoice            Purchase Order
                                         Receiving Report
                                       Vendor’s Invoice
                                     Voucher




                                                            To Cash Disbursements
                                                D           when due
                  VOUCHER NO. 9-00018
                                                                            Amount              480.00
                  Vendor                        Faragut Sales, Inc.         Account No.         682
                  Invoice No.                   D8-9912                     Terms:              2/10, n/30
                  Due Date                      Sept. 4 , 201X              Net Amount          470.40
                  Receiving Report No.          8-09321                     Mathematical Accuracy        B.K.
                  Purchase Order No.            6-3378                      Documents Reviewed           J.S.
                  Purchase Requisition No.      28314                       Account Code Approval        F.Y.D.




Page 287                                              VOUCHER REGISTER


Voucher No.     Date            Payee                          Paid                  Credit                        Debit
                                                        Date     Cheque No.     Vouchers Payable             Amount Account No.
9-00018       Aug. 29/201X      Faragut Sales, Inc.     Sept. 4/1X    867              480.00                  480.00      682
• Cash Disbursements Department

                                  Purchase Requisition
                                Purchase Order
                              Receiving Report
                            Vendor’s Invoice
                          Voucher
 From Accounts
 Payable


  (1)   Check prices, verify math and consistency between documents, prepare
        cheques and cheque register.
  (2)   Review documentation, sign cheques, and cancel vouchers


            Purchase Requisition
          Purchase Order
        Receiving Report
      Vendor’s Invoice
    Voucher
                                             Cheque                      Cheque Register




                 D
                                           To Vendor                 To General Accounting
         Managing Risk in the Payments Cycle

•    Possible Errors

    1.   Cutoff errors


    2.   Consignment goods

    3.   Misclassification

    4.   Recording a transaction
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
 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?                                           to meet
                                                  •Design tests of controls
       •Items to be selected?                      transaction-related objectives
•Timing – when to do the procedures?
        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
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.
         1. Approval of acquisition



         2. The voucher package




     •   Breakdown in control
Completeness

•   Existing acquisition transactions are recorded.


      1.   Receiving reports are prenumbered and accounted for.




      2.   Prenumbering of the voucher




•   Breakdown in control
Accuracy

   •    Recorded acquisition transactions are accurate.

       1.   Batch totals of transactions are mathematically accurate and
            compared with computer batch summary reports




       2.   Transactions are approved for prices and discounts

   •   Breakdown in control
•       Classification
    •     Acquisitions transactions are properly classified.

         1.   A good chart of accounts is necessary



         2.   Posting to the correct accounts




    •     Breakdown in control
•       Timing
    •     Acquisition transactions are recorded on the correct
          dates.

         1.   Transactions should be recorded as soon as possible




         2.   The transaction date should be the system date



    •    Breakdown in control
•       Posting and summarization
    •     Acquisition transactions are properly included in the
          vendor and inventory master files, and are properly
          summarized.

         1.   Reconciliation of accounts payable master file to the general
              ledger




    •    Breakdown in control
Cash Disbursements - Assertions and Test of Controls
•   Occurrence
   •    Recorded cash disbursements are for goods and services
        actually received.
       1.   Adequate segregation of duties


       2.   Examination of all supporting documentation prior to payment




       3.   Approval of payment shown on supporting documents at the time
            cheques are signed.




   •   Breakdown in control
              PURCHASE REQUISITION                                         28314
              Okra Development Corp.                                       Copy

  Okra Development Corp.                                                            Copy
  8924 BaileyTo Purchasing
              Road                                       Purchase Order 6-3378
  Salem, OR 92117
             From:       Stockroom                       Date:      August 5, 201X
                                                         Ship By:   September 12, 200X
                     August 5, Corp.
           Okra Development 200X
            Date:                                        Terms:     2/10, n/30
           8924 Bailey Road, Salem, OR 92117                        FOB Shipping Point
                            Ship by September 12, 200X
                Quantity          Number              Description
  To:
                    10
  Faragut Sales, Inc.          RECEIVING REPORT NO. 8-09321
                                 Model 317           Roller Bearings
   Faragut Drive Inc
  3812 Briar Sales, Yellow Express 229-237441
          Carrier:                                  Purchase Order 6-3378
                                                                        D8-9912
   3812 Briar 92115200X
  Salem, ORDrive, Salem, OR 92115 Ship to Opra Development Corp.
          August 28,                 Supplier:      Faragut Sales, Inc
                                   8924 Bailey Road, Salem, OR 92117
         SALES INVOICE               Invoice Clerk
                                  Stockroom No.     D8-9912
                                                       Rita Silverstein
                                                                PR28314
VOUCHER NO.Quantity
            9-00018                        Description                  Condition
   Sold to                            Shipped to                     Freight Bill No.
                10                     Roller Bearings
                                                  Amount                  ok
                                                                     480.00
   Opra Development Corp.             8924 Bailey Road               229-237441
Vendor                     Faragut Sales, Inc.     Account No.       682
   8924 Bailey Road                Salem, OR 92117
Invoice No.                D8-9912            Terms:                 2/10, n/30
   Salem, OR 92117                 FOB Shipping Point
Due Date                   Sept. 4, 201X           Net Amount        470.40
Receiving Report No.       8-09321
                                       Receiving Clerk           Tony Morelli
                                                   Mathematical AccuracyB.K.
Purchase Order No.         6-3378                  Documents Reviewed         J.S.
Purchase Requisition No.   28314                   Account Code Approval      F.Y.D.
                      OKRA DEVELOPMENT CORP.                                                              867
                      8924 Bailey Road, Salem, OR 92117
                                                                                     Sept. 4, 201X

                      Pay to the
                      order of
                                         Faragut Sales, Inc.                                       $ 470.40
                               Four hundred seventy and 40/100---------------------------Dollars


                         THE BANK
                                                                                           Dewey Lee
                         of OREGON                                                           Treasurer




Page 292                                         CHEQUE REGISTER


                                                          Voucher               Vouchers             Purchase       Cash
Payee                         Cheque No.            No.         Date            Payable Dr           Discounts Cr   Cr
Faragut Sales, Inc.                867           9-00018        Sept. 4, 201X     480.00                 9.60       470.40
•       Completeness
    •     Existing cash disbursement transactions are
          recorded.
         1. Cheques. Key control over cheques?



         2. Cash disbursements journal.



         3. Bank reconciliation




    •    Breakdown in control
                                                   Alpha Bravo Company                                        Prepared by   GHY      Dated 8/7/1X
                                                        Proof of Cash                                         Reviewed by
                                               For the Month of June 201X


                                  5-31-1X                      Receipts              Disbursements                 6-30-1X
Balance per bank                       $11,800      b                 $18,300   b             $21,200     b                 $8,900    b
Deposits in transit
         May 31                             500                         (500)   b
         June 30                                                          600   b                                             600     b
Outstanding cheques
         May 31                            (800)                                                 (800)    j
         June 30                                                                                  400                        (400)
NSF cheques                                                             (100)   j                (100)    j
Cash balance                           $11,500                        $18,300   r             $20,700     d                 $9,100


Balance per books                      $11,320      L                 $18,200   L             $21,710     L                 $8,810    L
Bank service charge
         May                                (20)    b                                             (20)    b
         June                                                                                        10                       (10)    b
Bank collection
         May                                200     b                   (200)
         June                                                             300                                                 300     b
Cash balance                           $11,500                        $18,300   r             $20,700     d                 $9,100
                                       ^                          ^                       ^                            ^


   ^ 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
•       Accuracy
    •     Recorded cash disbursement transactions are
          accurate.
         1.   Check the calculations




         2.   Bank reconciliation


    •    Breakdown in control
•       Classification
    •     Cash disbursement transactions are properly
          classified.
         1. Chart of accounts




         2. Checking the classification




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




         2. Recording of transactions




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




         2. Detail tie-in




    •    Breakdown in control
             System Conversions


• System conversions arise when




• For example
        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
Conversion Tests of Controls and Tests of Detail by Assertion
   Key internal control              Common test of control                 Common test of details

Existence:                           Review vendor file listings for       On a test basis, agree vendor file
Must have only authorized            evidence of agreement.                details for vendors from the new
vendiors with the actual balances.                                         (online) system to the old (batch)
Thus agree vendor file details for                                         system.
each vendor from the new (online)
system to the old (batch) system.
Completeness & Accuracy:             Review aged accounts payable trial    On a test basis, agree aged A/P
All vendor balances at date of       balance listings for evidence of      trial balance details from the old
conversion are included. Thus        comparison.                           (batch) system to the new (online)
agree aged accounts payable trial                                          system for vendors and in total.
balance details from the old
(batch) system to the new (online)
system for each vendor and in
total.
Cutoff:                              Conduct cutoff tests, for receiving   Same as for tests of controls.
Information needs to be recorded     reports and vendor invoices.
in the appropriate system and is
not omitted. Thus procedures
must exist to ensure appropriate
cutoff of transactions.
          Problem 18-19, Page 634

The following auditing procedures were performed in the audit of accounts payable:
  1. Examine supporting documentation for cash disbursements several days before and after year end.
  2. Examine the acquisitions and payments journals for the last few days of the current period and the first
      few days of the succeeding period, looking for large or unusual amounts.
  3. Trace from the general ledger trial balance and supporting working papers to determine if accounts
      payable, related parties, and other related assets and liabilities are properly included on the financial
      statements.
  4. For liabilities that are payable in a foreign currency, determine the exchange rate and check calculations.
  5. Discuss with the controller whether any amounts included on the accounts payable list are due to related
      parties, debit balances, or notes payable.
  6. Obtain vendors’ statements from the controller, and reconcile to the listing of accounts payable.
  7. Obtain vendors’ statements directly from vendors, and reconcile to the listing of accounts payable.
  8. Obtain the accounts payable aged trial balance listing and the accounts payable open transaction file.
      Add the data file again, and agree totals with the listing and to the general ledger.

REQUIRED
  a. For each procedure, identify the type of audit evidence used.
  b. For each procedure, use the matrix below to identify which balance-related audit objective(s) was (were)
     satisfied. (Procedure 1 is completed as an illustration.)
  c. Evaluate the need to have certain objectives satisfied by more than one audit procedure.


u18a-34
u18a-35
          8
              7
                  6
                      5
                          4
                              3
                                  2
                                      1
                                                             Audit
                                                           procedure




                                          Existence

                                          Completeness
                                      X




                                          Accuracy

                                          Classification

                                          Detail Tie-in
                                      X




                                          Cutoff

                                          Obligations
                                                             Balance-Related Audit Objective




                                          Presentation
                                          and Disclosure
Problem 18-20, Page 634

  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:
  1. All transactions selected must exceed $100.
  2. At least 50 of the transaction items must be for purchases of raw materials because these
       transactions are typically material.
  3. It is not acceptable to include the same vendor in the sample more than once.
  4. All vendors’ invoices that cannot be located must be replaced with new sample items.
  5. Both cheques and supporting documents are to be examined for the same transactions.
  6. The sample must be random, after modifications for instructions 1 through 5.

REQUIRED:
  a. Evaluate each of these instructions for testing acquisition and cash disbursement
     transactions.
  b. Explain the difficulties of applying each of these instructions to attributes sampling.
     Problem 18-21, Page 635
• You were in the final stages of your examination of the financial statements of Ozine Corporation for the year
ended December 31, 2009, when you were consulted by the corporation’s president. He believed that there
was no point in your examining the 2010 acquisitions data files and testing data in support of 2010 entries. He
stated that (1) bills pertaining to 2009 that were received too late to be included in the December acquisitions
data files were recorded by the corporation as of the year end by journal entry, (2) the internal auditor made
tests after the year end, and (3) he would furnish you with a letter confirming that there were no unrecorded
liabilities.
•REQUIRED:
   a. Should a public accountant’s test for unrecorded liabilities be affected by the fact that the client made a
          journal entry to record 2009 bills that were received late? Explain.
   b. Should a public accountant’s test for unrecorded liabilities be affected by the fact that a letter is
          obtained in which a responsible management official confirms that, to the best of his or her knowledge,
          all liabilities have been recorded? Explain.
   c. Should a public accountant’s test for unrecorded liabilities be eliminated or reduced because of internal
          audit tests? Explain.
   d. Assume that the corporation, which handled some government contracts, had no internal auditor but
          that an auditor from the Auditor General’s office spent three weeks auditing the records and was just
          completing her work at this time. How would the public accountant’s unrecorded liability test be
          affected by the work of the auditor from the Auditor General’s office?
   e. What sources in addition to the 2009 acquisitions data files should the public accountant consider to
          locate possible unrecorded liabilities?

								
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