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?
Pages to are hidden for
"Information Systems"Please download to view full document