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Messier_10e_IPPTChap011.pptChapter 11
Auditing the Purchasing Process
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 11: Auditing the Purchasing Process
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Expense and Liability Recognition
Expenses are outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
LO# 1
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Expenses are outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Expense Categories
PRODUCT COSTS
PERIOD COSTS
LO# 1
SYSTEMATIC ALLOCATION
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The three categories of expense are Product Costs, Period Costs, and Systematic Allocations.
Overview of the Purchasing Process
A purchase transaction usually begins with a purchase requisition generated by the user department. The purchasing department prepares a purchase order that is sent to the vendor. When the goods are received or the services rendered, a liability is recorded. Finally, the entity pays the vendor.
Purchase requisition
Purchase order
Receiving
report and liability recorded
LO# 2
11-*
Vendor
*
Overview of the Purchasing Process:
A purchase transaction usually begins with a purchase requisition generated by the user department. The purchasing department prepares a purchase order that is sent to the vendor. When the goods are received or the services rendered, a liability is recorded. Finally, the entity pays the vendor.
LO# 3
Types of Transactions and Financial Statement Accounts Affected
Three types of transactions are processed through the purchasing process:
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Three types of transactions are processed through the purchasing process:
Purchase Transactions affect: Accounts payable, Inventory, Purchases or cost of goods sold, Various asset and expense accounts
Cash disbursement transactions affect: Cash, Accounts payable, Cash discounts, Various asset and expense accounts
Purchase return transactions affect: Purchase returns, Purchase allowances, Accounts payable, Various asset and expense accounts
RP21
| Type of Transaction | Account Affected | ||
| Purchase Transaction | Accounts payable | ||
| Inventory | |||
| Purchases or cost of goods sold | |||
| Various asset and expense accounts | |||
| Cash disbursement transaction | Cash | ||
| Accounts payable | |||
| Cash discounts | |||
| Various asset and expense accounts | |||
| Purchase return transaction | Purchase returns | ||
| Purchase allowances | |||
| Accounts payable | |||
| Various asset and expense accounts |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Flowchart of the Purchasing Process – EarthWear Clothiers (continued)
Requesting
Purchasing
IT
Department
Purchase
requisition
Approved
purchase
requisition
received
Input
Error
corrections
Purchase
order
program
Purchase
order file
Accounts
payable
master file
Error
report
Purchasing
Vendor
A/P
Receiving
PO #2
Filed
Numerically
LO# 3
11-*
Purchase
order
(4 part)
*
Refer to figure 11-1 in the text for a flowchart of EarthWear’s purchasing process.
Department
Receiving
Accounts Payable (A/P)
PO #1
Goods
received,
counted, and
inspected
Receiving
report (RR)
Enter vendor,
quantity, and
PO #
Daily
receiving log
PO #A
Receiving
report
Vendor
invoice
Compare invoice
to PO and RR
Review
account
distribution
Voucher
packet
Input
Error
correction
To IT
From IT
LO# 3
Flowchart of the Purchasing Process – EarthWear Clothiers (continued)
11-*
*
Refer to figure 11-1 in the text for a flowchart of EarthWear’s purchasing process.
Department
IT
Accounts
payable
update
Purchase
order file
A/P master
file
General
ledger file
Error
report
Input
from A/P
Report
to A/P
A/P reporting
Weekly
Monthly
A/P listing
Cash
disbursement
report
Daily
Daily
Monthly
reports
General
ledger
Open PO report
A/P expense
distribution report
Voucher register
Cash disbursements
journal
LO# 3
Flowchart of the Purchasing Process – EarthWear Clothiers (continued)
11-*
*
Refer to figure 11-1 in the text for a flowchart of EarthWear’s purchasing process.
Flowchart of the Purchasing Process – EarthWear Clothiers (concluded)
Department
Accounts Payable (A/P)
IT
Cashier
Error
correction
Review documents
and authorize payment
Cash
disbursement
report
Input
A/P master
file
Cash
disbursement
program
Review checks
and EFT listing
To Vendors
LO# 3
11-*
Checks
and EFT
Listing
Checks/
EFTs
*
Refer to figure 11-1 in the text for a flowchart of EarthWear’s purchasing process.
Types of Documents and Records
Purchasing documents and records . . .
1. Purchase requisition – request to purchase goods or services.
2. Purchase order – includes description, quality, and quantity of goods or services being purchased.
3. Receiving report – records the receipt of goods.
4. Vendor invoice – the bill from the vendor.
5. Voucher – serves as the basis for recording a vendor’s invoice.
6. Voucher register/purchases journal – used to record vouchers for goods and services.
7. Accounts payable subsidiary ledger – includes amount owed to individual vendors.
8. Vendor statement – represents the purchase activity with vendor.
9. Check/EFT – pays for goods or services.
10. Cash disbursements journal/check register – contains columns to record credits to cash and debits to accounts payable and cash discounts.
LO# 4
11-*
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Purchasing documents and records . . .
1. Purchase requisition – request to purchase goods or services.
2. Purchase order – includes description, quality, and quantity of goods or services being purchased.
3. Receiving report – records the receipt of goods.
4. Vendor invoice – the bill from the vendor.
5. Voucher – serves as the basis for recording a vendor’s invoice.
6. Voucher register/purchases journal – used to record vouchers for goods and services.
7. Accounts payable subsidiary ledger – includes amount owed to individual vendors.
8. Vendor statement – represents the purchase activity with vendor.
9. Check/EFT – pays for goods or services.
10. Cash disbursements journal/check register – contains columns to record credits to cash and debits to accounts payable and cash discounts.
The Major Functions
LO# 5
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The Major Functions:
Requisitioning: Initiation and approval of requests for goods and services by authorized individuals consistent with management criteria.
Purchasing: Approval of purchase orders and proper execution as to price, quantity, quality, and vendor.
Receiving: Receipt of properly authorized goods and services.
Invoice processing: Processing of vendor invoices for goods and services received; also, processing of adjustments for allowances, discounts, and returns.
Disbursements: Processing of payment to vendors.
Accounts payable: Recording of all vendor invoices, cash disbursements, and adjustments in individual vendor accounts.
General ledger: Proper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general ledger.
RP21
| Functions of the Purchasing Process | |||
| Requisitioning | Initiation and approval of requests for goods and services by authorized individuals consistent with management criteria. | ||
| Purchasing | Approval of purchase orders and proper execution as to price, quantity, quality, and vendor. | ||
| Receiving | Receipt of properly authorized goods and services. | ||
| Invoice processing | Processing of vendor invoices for goods and services received; also, processing of adjustments for allowances, discounts, and returns. | ||
| Disbursements | Processing of payment to vendors. | ||
| Accounts payable | Recording of all vendor invoices, cash disbursements, and adjustments in individual vendor accounts. | ||
| General ledger | Proper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general ledger. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Key Segregation of Duties
LO# 6
11-*
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Key segregation of duties:
The purchasing function should be segregated from the requisitioning and receiving functions. Helps prevent: If one individual is responsible for the requisition, purchasing, and receiving functions, fictitious purchases can be made. This can result in the theft of goods and possibly payment for unauthorized purchases.
The invoice-processing function should be segregated from the accounts payable function. Helps prevent: If one individual is responsible for the invoice-processing and accounts payable function, purchase transactions can be processed at the wrong price or terms, or a cash disbursement can be processed for goods not received. This can result in overpayment of goods or the theft of cash.
The disbursement function should be segregated from the accounts payable function. Helps prevent: If one individual is responsible for the disbursement function and has access to the accounts payable records, unauthorized checks supported by fictitious documents can be issued, and unauthorized transactions can be recorded. This can result in theft of the entity's cash.
The accounts payable function should be segregated from the general ledger function. Helps prevent: If one individual is responsible for the accounts payable records and for the general ledger, that individual can conceal any defalcation that would normally be detected by reconciling subsidiary records with the general ledger control account.
RP21
| Segregation of Duties | Possible Errors or Fraud | ||
| The purchasing function should be segregated from the requisitioning and receiving functions. | If one individual is responsible for the requisition, purchasing, and receiving functions, fictitious purchases can be made. This can result in the theft of goods and possibly payment for unauthorized purchases. | ||
| The invoice-processing function should be segregated from the accounts payable function. | If one individual is responsible for the invoice-processing and accounts payable function, purchase transactions can be processed at the wrong price or terms, or a cash disbursement can be processed for goods not received. This can result in overpayment of goods or the theft of cash. | ||
| The disbursement function should be segregated from the accounts payable function. | If one individual is responsible for the disbursement function and has access to the accounts payable records, unauthorized checks supported by fictitious documents can be issued, and unauthorized transactions can be recorded. This can result in theft of the entity's cash. | ||
| The accounts payable function should be segregated from the general ledger function. | If one individual is responsible for the accounts payable records and for the general ledger, that individual can conceal any defalcation that would normally be detected by reconciling subsidiary records with the general ledger control account. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
The Key Segregation of Duties
LO# 6
11-*
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Refer to Table 11-4 in the text for a graphical representation of key segregation of duties.
Inherent Risk Assessment
Industry-Related Factors
1.
Is the supply of
raw materials
adequate?
2.
How volatile are
raw material
prices?
LO# 7
11-*
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Inherent Risk Assessment
Industry-Related Factors:
- Is the supply of raw materials adequate?
- How volatile are raw material prices?
Inherent Risk Assessment
Misstatements Detected in Prior Audits
Generally, the purchasing process is not difficult to audit and does not present contentious accounting issues. However, the auditor’s experience in past audits must be considered when assessing inherent risk.
LO# 7
11-*
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Misstatements Detected in Prior Audits:
Generally, the purchasing process is not difficult to audit and does not present contentious accounting issues. However, the auditor’s experience in past audits must be considered when assessing inherent risk.
Control Risk Assessment
Major steps in setting control risk for the purchasing process.
Understand and document the purchasing process based on a reliance strategy.
LO# 8
11-*
Plan and perform tests of controls on purchase transactions.
Set and document the control risk for the purchasing process.
Control Risk Assessment
Major steps in setting control risk for the purchasing process:
Understand and document the purchasing process based on a reliance strategy.
Plan and perform tests of controls on purchase transactions.
Set and document the control risk for the purchasing process.
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Control Risk Assessment
Information Systems and Communication
LO# 8
11-*
For each major class of transactions in the purchasing process, the auditor should obtain the following information:
1. How purchase, cash disbursements, and purchase return transactions are initiated.
2. The accounting records, supporting documents, and accounts involved in processing purchases, cash disbursements, and purchase returns.
3. The flow of each type of transaction from initiation to inclusion in the financial statements, including computer processing of data.
4. The process used to estimate accrued liabilities.
Information Systems and Communication
For each major class of transactions in the purchasing process, the auditor should obtain the following information:
1. How purchase, cash disbursements, and purchase return transactions are initiated.
2. The accounting records, supporting documents, and accounts involved in processing purchases, cash disbursements, and purchase returns.
3. The flow of each type of transaction from initiation to inclusion in the financial statements, including computer processing of data.
4. The process used to estimate accrued liabilities.
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Control Risk Assessment
After testing controls, the auditor sets the achieved level of control risk. When tests of controls support the planned level of control risk, no modifications are necessary to planned detection risk. The auditor may proceed with the substantive procedures as planned.
When tests do not support the planned control risk, the auditor lowers the level of planned detection risk leading to more substantive procedures.
LO# 8
11-*
After testing controls, the auditor sets the achieved level of control risk. When tests of controls support the planned level of control risk, no modifications are necessary to planned detection risk. The auditor may proceed with the substantive procedures as planned. When tests do not support the planned control risk, the auditor lowers the level of planned detection risk leading to more substantive procedures.
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Control Activities and Tests of Controls – Purchase Transactions
Assertions about Classes of Transactions and Events for the Period under Audit
LO# 9
11-*
Assertions about Classes of Transactions and Events for the Period under Audit
Occurrence: All purchase and cash disbursements have been recorded and have occurred and pertain to the entity.
Completeness: All purchase and cash disbursements that should have been recorded have been recorded.
Authorization: All purchase and cash disbursements are properly authorized.
Accuracy: Amounts relating to recorded purchase and cash disbursements have been recorded appropriately and properly accumulated from journals and ledgers.
Cutoff: Purchase and cash disbursements have been recorded in the correct accounting period.
Classification: Purchase and cash disbursements have been recorded in the proper account.
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RP21
| Occurrence | All purchase and cash disbursements have been recorded and have occurred and pertain to the entity. | ||
| Completeness | All purchase and cash disbursements that should have been recorded have been recorded. | ||
| Authorization | All purchase and cash disbursements are properly authorized. | ||
| Accuracy | Amounts relating to recorded purchase and cash disbursements have been recorded appropriately and properly accumulated from journals and ledgers. | ||
| Cutoff | Purchase and cash disbursements have been recorded in the correct accounting period. | ||
| Classification | Purchase and cash disbursements have been recorded in the proper account. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Control Activities and Tests of Controls – Purchase Transactions
LO# 9
11-*
Assertions Tests of Controls
Occurrence Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation.
Completeness Review procedures for accounting for numerical sequence of purchase orders, receiving reports, and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal.
Authorization Examine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process.
Accuracy Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report.
Cutoff Compare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal.
Classification Review purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification.
*
RP21
| Assertions | Tests of Controls | ||
| Occurrence | Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation. | ||
| Completeness | Review procedures for accounting for numerical sequence of purchase orders, receiving reports, and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal. | ||
| Authorization | Examine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process. | ||
| Accuracy | Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report. | ||
| Cutoff | Compare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal. | ||
| Classification | Review purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Control Activities and Tests of Controls – Cash Disbursement Transactions
Occurrence of Cash Disbursement Transactions
The auditor is concerned with a misstatement caused by a cash disbursement being recorded in the entity’s record when no payment was made. The primary control activities to prevent such misstatements include proper segregation of duties, independent reconciliation and review of vendor statements, and monthly bank reconciliations.
LO# 9
11-*
Occurrence of Cash Disbursement Transactions
The auditor is concerned with a misstatement caused by a cash disbursement being recorded in the entity’s record when no payment was made. The primary control activities to prevent such misstatements include proper segregation of duties, independent reconciliation and review of vendor statements, and monthly bank reconciliations.
*
Control Activities and Tests of Controls – Cash Disbursement Transactions
Completeness of Cash Disbursement Transactions
The major audit concern is that a cash disbursement is made but not recorded in the records. In addition to the example control tests discussed for occurrence, the auditor should also account for the numerical sequence of checks and reconcile the daily cash disbursements with posting to the accounts payable subsidiary records.
LO# 9
11-*
Completeness of Cash Disbursement Transactions
The major audit concern is that a cash disbursement is made but not recorded in the records. In addition to the example control tests discussed for occurrence, the auditor should also account for the numerical sequence of checks and reconcile the daily cash disbursements with posting to the accounts payable subsidiary records.
*
Control Activities and Tests of Controls – Cash Disbursement Transactions
Authorization of Cash Disbursement Transactions
Proper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. The individual who approves a purchase should not have direct access to the cash disbursement.
LO# 9
11-*
Authorization of Cash Disbursement Transactions
Proper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. The individual who approves a purchase should not have direct access to the cash disbursement.
*
Control Activities and Tests of Controls – Cash Disbursement Transactions
Accuracy of Cash Disbursement Transactions
One of the major audit concerns is that the payment amount is recorded incorrectly. To detect such an error, entity personnel should reconcile the total of the checks and EFTs issued each day with the daily cash disbursements report.
LO# 9
11-*
Accuracy of Cash Disbursement Transactions
One of the major audit concerns is that the payment amount is recorded incorrectly. To detect such an error, entity personnel should reconcile the total of the checks and EFTs issued each day with the daily cash disbursements report.
*
Control Activities and Tests of Controls – Cash Disbursement Transactions
Cutoff of Cash Disbursement Transactions
The auditor’s tests of controls include reviewing the reconciliation of cash disbursements with postings to the cash disbursements journal and accounts payable subsidiary records. The auditor also tests cash disbursements before and after year-end to ensure that transactions are recorded in the proper period.
LO# 9
11-*
Cutoff of Cash Disbursement Transactions
The auditor’s tests of controls include reviewing the reconciliation of cash disbursements with postings to the cash disbursements journal and accounts payable subsidiary records. The auditor also tests cash disbursements before and after year-end to ensure that transactions are recorded in the proper period.
*
Control Activities and Tests of Controls – Cash Disbursement Transactions
Classification of Cash Disbursement Transactions
The auditor is concerned that a cash disbursement may be charged to the wrong general ledger account. The use of a chart of accounts, as well as independent approval and review of the account code on the voucher should provide adequate control.
LO# 9
11-*
Classification of Cash Disbursement Transactions
The auditor is concerned that a cash disbursement may be charged to the wrong general ledger account. The use of a chart of accounts, as well as independent approval and review of the account code on the voucher should provide adequate control.
*
Control Activities and Tests of Controls – Purchase Return Transactions
Generally, the number and magnitude of purchase return transactions are not material. The auditor normally does not test controls relating to purchase returns. Substantive analytical procedures are used to test the reasonableness of the amount.
LO# 9
11-*
Generally, the number and magnitude of purchase return transactions are not material. The auditor normally does not test controls relating to purchase returns. Substantive analytical procedures are used to test the reasonableness of the amount.
*
Relating the Assessed Level of Control Risk to Substantive Procedures
If the results of the tests of controls support the planned level of control risk, the auditor conducts substantive procedures at the planned level. If the results do not support the planned level of control risk, the auditor reduces the detection risk, which will increase substantive procedures over the planned level.
LO# 10
11-*
If the results of the tests of controls support the planned level of control risk, the auditor conducts substantive procedures at the planned level. If the results do not support the planned level of control risk, the auditor reduces the detection risk, which will increase substantive procedures over the planned level.
*
Auditing Accounts Payable and Accrued Expenses
LO# 10
11-*
Auditing Accounts Payable and Accrued Expenses
Assertions about Account Balances at the Period End:
Existence. Accounts payable and accrued expenses are valid liabilities.
Rights and obligations. Accounts payable and accrued expenses are obligations of the entity.
Completeness. All accounts payable and accrued expenses have been recorded.
Valuation and allocation. Accounts payable and accrued expenses are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.
*
RP21
| Assertions about Account Balances at the Period End: | ||||
| Existence. Accounts payable and accrued expenses are valid liabilities. | ||||
| Rights and obligations. Accounts payable and accrued expenses are obligations of the entity. | ||||
| Completeness. All accounts payable and accrued expenses have been recorded. | ||||
| Valuation and allocation. Accounts payable and accrued expenses are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Auditing Accounts Payable and Accrued Expenses
LO# 10
11-*
Auditing Accounts Payable and Accrued Expenses
Assertions about Presentation and Disclosure:
Occurrence and rights and obligations. All disclosed events, transactions, and other matters relating to accounts payable and accrued expenses have occurred and pertain to the entity.
Completeness. All disclosures relating to accounts payable and accrued expenses that should have been included in the financial statements have been included.
Classification and understandability. Financial information relating to accounts payable and accrued expenses is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation. Financial and other information relating to accounts payable and accrued expenses are disclosed fairly and in appropriate amounts.
*
RP21
| Assertions about Presentation and Disclosure: | ||||
| Occurrence and rights and obligations. All disclosed events, transactions, and other matters relating to accounts payable and accrued expenses have occurred and pertain to the entity. | ||||
| Completeness. All disclosures relating to accounts payable and accrued expenses that should have been included in the financial statements have been included. | ||||
| Classification and understandability. Financial information relating to accounts payable and accrued expenses is appropriately presented and described, and disclosures are clearly expressed. | ||||
| Accuracy and valuation. Financial and other information relating to accounts payable and accrued expenses are disclosed fairly and in appropriate amounts. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Auditing Accounts Payable and Accrued Expenses
Substantive Analytical Procedures
LO# 11
11-*
Substantive Analytical Procedures might include:
Compare payables turnover and days outstanding in accounts payable to previous years' and industry data.
Compare current-year balances in accounts payable and accruals with prior years' balances.
Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior years.
Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years' and industry data.
Possible Misstatement Detected
Under- or overstatment of liabilities and expenses.
Under- or overstatement of purchase returns.
*
RP21
| Substantive Analytical Procedure | Possible Misstatement Detected | ||
| Compare payables turnover and days outstanding in accounts payable to previous years' and industry data. | Under- or overstatment of liabilities and expenses. | ||
| Compare current-year balances in accounts payable and accruals with prior years' balances. | Under- or overstatment of liabilities and expenses. | ||
| Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior years. | Under- or overstatment of liabilities and expenses. | ||
| Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years' and industry data. | Under- or overstatement of purchase returns. |
RB22
| Schedule | Title of Schedule | ||||
| 1 | Sales Budget | ||||
| 2 | Production Budget | ||||
| 3 | Direct-Materials Budget | ||||
| 4 | Direct-Labor Budget | ||||
| 5 | Manufacturing Overhead Budget | ||||
| 6 | Selling, General, and Administrative Expense Budget (SG&A) | ||||
| 7 | Cash Receipts Budget | ||||
| 8 | Cash Disbursements Budget | ||||
| 9 | Cash Budget | ||||
| 10 | Budgeted Schedule of Cost of Goods Manufactured and Sold | ||||
| 11 | Budgeted Income Statement | ||||
| 12 | Budgeted Balance Sheet |
Sheet3
Tests of Details of Transactions, Account Balances, and Disclosures
Completeness
LO# 12
11-*
The auditor should conduct a search for unrecorded liabilities that includes the following:
1. Ask management about control activities used to identify unrecorded liabilities and accruals at the end of an accounting period. These controls should be part of the closing process.
2. Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end; examine the date on each receiving report of vendor invoice to determine if the liability relates to the current audit period.
3. Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities.
Completeness:
The auditor should conduct a search for unrecorded liabilities that includes the following:
1. Ask management about control activities used to identify unrecorded liabilities and accruals at the end of an accounting period. These controls should be part of the closing process.
2. Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end; examine the date on each receiving report of vendor invoice to determine if the liability relates to the current audit period.
3. Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Existence
The auditor’s major concern is whether the recorded liabilities are valid obligations of the entity. The auditor should vouch a sample of items on the listing of accounts payable to other supporting documents.
LO# 12
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Existence
The auditor’s major concern is whether the recorded liabilities are valid obligations of the entity. The auditor should vouch a sample of items on the listing of accounts payable to other supporting documents.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Cutoff
The auditor attempts to determine if all purchase transactions are recorded in the proper period. On most audits, the purchase cutoff is coordinated with the entity’s physical inventory count. Proper cutoff should also be determined for purchase return transactions.
LO# 12
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Cutoff
The auditor attempts to determine if all purchase transactions are recorded in the proper period. On most audits, the purchase cutoff is coordinated with the entity’s physical inventory count. Proper cutoff should also be determined for purchase return transactions.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Rights and Obligations
There is little risk related to this assertion because entities seldom have an incentive to record liabilities that are not obligations of the entity.
LO# 12
11-*
Rights and Obligations
There is little risk related to this assertion because entities seldom have an incentive to record liabilities that are not obligations of the entity.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Valuation
Accounts payable are recorded at either the gross amount of the invoice or net of cash discount amount. The valuation of accruals depends upon the type and nature of the accrued expense. Most accruals are relatively easy to value.
LO# 12
11-*
Valuation
Accounts payable are recorded at either the gross amount of the invoice or net of cash discount amount. The valuation of accruals depends upon the type and nature of the accrued expense. Most accruals are relatively easy to value.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Classification, Presentation, and Disclosure
Major classification issues include . . .
- Identifying and reclassifying any material debits contained in accounts payable.
- Segregating short-term and long-term payables.
- Ensuring that different types of payables are properly classified.
LO# 12
11-*
Classification, Presentation, and Disclosure
Major classification issues include . . .
- Identifying and reclassifying any material debits contained in accounts payable.
- Segregating short-term and long-term payables.
- Ensuring that different types of payables are properly classified.
*
Tests of Details of Transactions, Account Balances, and Disclosures
Disclosure Items for the Purchasing Process
Payables by type (trade, officers, employees, etc.).
Short- and long-term payables.
Long-term purchase contracts, including any unusual purchase commitments.
Purchases from and payables to related parties.
Dependence on a single vendor or a small number of vendors.
Costs by reportable segment of the business.
LO# 12
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Disclosure Items for the Purchasing Process
Payables by type (trade, officers, employees, etc.).
Short- and long-term payables.
Long-term purchase contracts, including any unusual purchase commitments.
Purchases from and payables to related parties.
Dependence on a single vendor or a small number of vendors.
Costs by reportable segment of the business.
*
Accounts Payable Confirmations
Accounts payable confirmations are used less often than accounts receivable confirmations. The auditor is able to examine externally created source documents relating to accounts payable. When confirmations are used, they are usually positive and referred to as blank confirmations. The vendor is asked to supply the balance owed by the entity.
LO# 13
11-*
Accounts Payable Confirmations
Accounts payable confirmations are used less often than accounts receivable confirmations. The auditor is able to examine externally created source documents relating to accounts payable. When confirmations are used, they are usually positive and referred to as blank confirmations. The vendor is asked to supply the balance owed by the entity.
*
Evaluating the Audit Findings
All identified misstatements should be aggregated (including any consideration for sampling risk). The projected misstatement is then compared to tolerable misstatement. If the projected misstatement is less than the tolerable misstatement, the auditor has evidence that the account is fairly presented. Conversely, if the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the account is not fairly presented.
LO# 14
11-*
Evaluating the Audit Findings
All identified misstatements should be aggregated (including any consideration for sampling risk). The projected misstatement is then compared to tolerable misstatement. If the projected misstatement is less than the tolerable misstatement, the auditor has evidence that the account is fairly presented. Conversely, if the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the account is not fairly presented.
*
Auditing the Tax Provision and Related Balance Sheet Accounts
Use of specialist:
Temporary differences.
Permanent differences.
Accounting for uncertain tax positions.
Multiple locations/foreign operations.
Business combinations.
Changes in ownership or tax status.
LO# 15
The basics:
GAAP accounting vs. Tax accounting.
Deferred tax assets – Valuation issues.
11-*
Auditing the Tax Provision and Related Balance Sheet Accounts
The basics:
GAAP accounting vs. Tax accounting.
Permanent differences.
Temporary differences.
Use of specialist:
Multiple locations/foreign operations.
Business combinations.
Changes in ownership or tax status.
Accounting for uncertain tax positions.
Deferred tax assets – Valuation issues.
*
End of Chapter 11
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Type of TransactionAccount Affected
Purchase TransactionAccounts payable
Inventory
Purchases or cost of goods sold
Various asset and expense accounts
Cash disbursement transactionCash
Accounts payable
Cash discounts
Various asset and expense accounts
Purchase return transactionPurchase returns
Purchase allowances
Accounts payable
Various asset and expense accounts
Functions of the Purchasing Process
Requisitioning Initiation and approval of requests for goods and services by authorized individuals consistent with management criteria.
Purchasing Approval of purchase orders and proper execution as to price, quantity, quality, and
Receiving Receipt of properly authorized goods and
Invoice processing Processing of vendor invoices for goods and services received;; also, processing of adjustments for allowances, discounts, and
Disbursements Processing of payment to vendors.
Accounts payable Recording of all vendor invoices, cash disbursements, and adjustments in individual
General ledger Proper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general
Functions of the Purchasing Process
Requisitioning
Initiation and approval of requests for goods
and services by authorized individuals
consistent with management criteria.
Purchasing
Approval of purchase orders and proper
execution as to price, quantity, quality, and
ReceivingReceipt of properly authorized goods and
Invoice processing
Processing of vendor invoices for goods and
services received; also, processing of
adjustments for allowances, discounts, and
DisbursementsProcessing of payment to vendors.
Accounts payable
Recording of all vendor invoices, cash
disbursements, and adjustments in individual
General ledger
Proper accumulation, classification, and
summarization of purchases, cash
disbursements, and payables in the general
Segregation of Duties Possible Errors or Fraud The purchasing function should be segregated from the requisitioning and receiving functions.
If one individual is responsible for the requisition, purchasing, and receiving functions, fictitious purchases can be made. This can result in the theft of goods and possibly payment for unauthorized purchases.
The invoice-processing function should be segregated from the accounts payable function.
If one individual is responsible for the invoice-processing and accounts payable function, purchase transactions can be processed at the wrong price or terms, or a cash disbursement can be processed for goods not received. This can result in overpayment of goods or the theft of cash.
The disbursement function should be segregated from the accounts payable function.
If one individual is responsible for the disbursement function and has access to the accounts payable records, unauthorized checks supported by fictitious documents can be issued, and unauthorized transactions can be recorded. This can result in theft of the entity's cash.
The accounts payable function should be segregated from the general ledger function.
If one individual is responsible for the accounts payable records and for the general ledger, that individual can conceal any defalcation that would normally be detected by reconciling subsidiary records with the general ledger control account.
Segregation of Duties Possible Errors or Fraud
The purchasing function should be
segregated from the requisitioning and
receiving functions.
If one individual is responsible for the requisition, purchasing,
and receiving functions, fictitious purchases can be made.
This can result in the theft of goods and possibly payment for
unauthorized purchases.
The invoice-processing function should
be segregated from the accounts payable
function.
If one individual is responsible for the invoice-processing and
accounts payable function, purchase transactions can be
processed at the wrong price or terms, or a cash disbursement
can be processed for goods not received. This can result in
overpayment of goods or the theft of cash.
The disbursement function should be
segregated from the accounts payable
function.
If one individual is responsible for the disbursement function
and has access to the accounts payable records, unauthorized
checks supported by fictitious documents can be issued, and
unauthorized transactions can be recorded. This can result in
theft of the entity's cash.
The accounts payable function should be
segregated from the general ledger
function.
If one individual is responsible for the accounts payable
records and for the general ledger, that individual can conceal
any defalcation that would normally be detected by reconciling
subsidiary records with the general ledger control account.
Occurrence
All purchase and cash disbursements have been
recorded and have occurred and pertain to the entity.
Completeness
All purchase and cash disbursements that should have
been recorded have been recorded.
Authorization
All purchase and cash disbursements are properly
authorized.
Accuracy
Amounts relating to recorded purchase and cash
disbursements have been recorded appropriately and
properly accumulated from journals and ledgers.
Cutoff
Purchase and cash disbursements have been recorded
in the correct accounting period.
Classification
Purchase and cash disbursements have been recorded
in the proper account.
AssertionsTests of Controls
Occurrence
Observe and evaluate proper segregation of duties. Test a sample
of vouchers for the presence of an authorized purchase order and
receiving report. Examine paid vouchers and supporting documents
for indication of cancellation.
Completeness
Review procedures for accounting for numerical sequence of
purchase orders, receiving reports, and vouchers. Trace a sample
of receiving reports to their vendor invoices and vouchers. Trace a
sample of vouchers to the purchases journal.
Authorization
Examine purchase requisitions or purchase orders for proper
approval. Review client's competitive bidding process.
Accuracy
Recompute the mathematical accuracy of vendor invoice. Agree
information in the sample of vouchers for product, quantity, and
price. Examine reconciliation of vouchers to daily accounts payable
report.
Cutoff
Compare the dates on receiving reports with the dates on the
relevant vouchers. Compare the dates of vouchers with the dates
they were recorded in the purchases journal.
Classification
Review purchases journal and general ledger for reasonableness.
Examine a sample of vouchers for proper classification.
Assertions about Account Balances at the Period End:
Existence
. Accounts payable and accrued expenses are valid
liabilities.
Rights and obligations
. Accounts payable and accrued
expenses are obligations of the entity.
Completeness
. All accounts payable and accrued expenses have
been recorded.
Valuation and allocation
. Accounts payable and accrued
expenses are included in the financial statements at appropriate
amounts, and any resulting valuation or allocation adjustments are
appropriately recorded.
Assertions about Presentation and Disclosure:
Occurrence and rights and obligations.
All disclosed events,
transactions, and other matters relating to accounts payable and accrued
expenses have occurred and pertain to the entity.
Completeness.
All disclosures relating to accounts payable and accrued
expenses that should have been included in the financial statements have been
included.
Classification and understandability.
Financial information relating to
accounts payable and accrued expenses is appropriately presented and
described, and disclosures are clearly expressed.
Accuracy and valuation.
Financial and other information relating to
accounts payable and accrued expenses are disclosed fairly and in
appropriate amounts.
Substantive Analytical ProcedurePossible Misstatement Detected
Compare payables turnover and days
outstanding in accounts payable to
previous years' and industry data.
Under- or overstatment of liabilities and
expenses.
Compare current-year balances in accounts
payable and accruals with prior years'
balances.
Under- or overstatment of liabilities and
expenses.
Compare amounts owed to individual
vendors in the current year's accounts
payable listing to amounts owed in prior
years.
Under- or overstatment of liabilities and
expenses.
Compare purchase returns and allowances
as a percentage of revenue or cost of sales
to prior years' and industry data.
Under- or overstatement of purchase
returns.
