18-1
Chapter 18
Audit of the Acquisition and Payment Cycle:
Tests of Controls, Substantive Tests of Transactions,
and Accounts Payable
Concept Checks
P. 616
1. There are several balance sheet and income statement accounts related
significant income statement accounts are COGS accounts (including
expense, repairs and maintenance, or legal expense.
2. A voucher is a document used by an organization to establish a formal
recording of purchases by facilitating the recording in numerical order at
3. The point at which goods and services are received is ordinarily when title to
the goods and services passes and a liability that should be included in the
financial statements is established.
P. 623
1. The acquisition and payment cycle includes the recording of liabilities that
time, reconciling the vendors’ statements and testing the cutoff as year–end
2. It is important that the cutoff of accounts payable be coordinated with that of
the physical inventory to determine that they are established at the same
18-2
Concept Check, P. 623 (continued)
and shipping documents) to assist in the determination that an accurate
cutoff was established.
3. To test for completeness of accounts payable, the auditor conducts
various out–of-period liability tests (also called a search for unrecorded
accounts payable) designed to uncover unrecorded accounts payable.
These tests include examining underlying documentation for cash
disbursements occurring subsequent to year-end and verifying that a
Review Questions
18–1 The accounts in the acquisition and payment cycle are the following:
a. Asset accounts:
Office supplies
Delivery equipment
b. Liability accounts:
Accounts payable
Accrued property taxes
c. Expense accounts:
Purchases, purchase returns & allowances,
18-3
18–1 (continued)
Fines and penalties
Advertising expense
Repairs and maintenance
the shipment, such as unit price and freight. The vendor’s statement can be
used to verify the correct balance in accounts payable for an individual vendor.
The statement contains the ending balance and the individual transactions
period.
18–4
TRANSACTION–RELATED
AUDIT OBJECTIVE
POSSIBLE
INTERNAL CONTROLS
COMMON TESTS
OF CONTROLS
1. Recorded cash
disbursements are for
goods and services
actually received
(occurrence).
There is adequate
segregation of duties
between accounts payable
and custody of signed
checks.
Supporting documentation
is examined before signing
of checks by an authorized
person.
Approval of payment noted
on supporting documents at
the time checks are signed.
Discuss with
personnel and
observe activities.
Discuss with
personnel and
observe activities.
Examine indication of
approval.
2. Existing cash
disbursement transactions
are recorded
(completeness).
Checks are prenumbered
and accounted for.
The bank reconciliation is
prepared monthly by an
employee independent of
recording cash disbursements
or custody of assets.
Account for a
sequence of checks.
Examine bank
reconciliations and
observe their
preparation.
3. Recorded cash
disbursement transactions
are accurate (accuracy).
Calculations and amounts
are internally verified.
The bank reconciliation is
prepared monthly by an
independent person.
Examine indication of
internal verification.
Examine bank recon–
ciliations and observe
their preparation.
4. Cash disbursement
transactions are properly
included in the accounts
payable master file and
are properly summarized
(posting and
summarization).
Accounts payable master
file contents are internally
verified.
Accounts payable master
file or trial balance totals
are compared with general
ledger balances.
Examine indication of
internal verification.
Examine initials on
general ledger
accounts indicating
comparison.
5. Cash disbursement
transactions are properly
classified (classification).
An adequate chart of
accounts is used.
Account classifications are
internally verified.
Examine procedures
manual and chart of
accounts.
Examine indication of
internal verification.
6. Cash disbursement
transactions are recorded
on the correct dates
(timing).
Procedures require
recording of transactions as
soon as possible after the
check has been signed.
Dates are internally verified.
Examine procedures
manual and observe
whether unrecorded
checks exist.
Examine indication
of internal verification.
18–5
TRANSACTION–RELATED
AUDIT OBJECTIVE
POSSIBLE
INTERNAL CONTROLS
COMMON TESTS
OF CONTROLS
1. Recorded acquisitions
are for goods and
services received,
consistent with the best
interests of the client
(occurrence).
Purchase requisition,
purchase order, receiving
report, and vendor’s
invoice are attached to the
voucher.
Acquisitions are approved
at the proper level.
Computer accepts entry of
purchases only from
authorized vendors in the
vendor master file.
Documents are cancelled
to prevent their reuse.
Vendors’ invoices,
receiving reports, purchase
orders, and purchase
requisitions are internally
verified.
Examine documents
in voucher package
for existence.
Examine indication
of approval.
Attempt to input
transactions with
valid and invalid
vendors.
Examine indication
of cancellation.
Examine indication
of internal
verification.
2. Existing acquisition
transactions are recorded
(completeness).
Purchase orders are
prenumbered and
accounted for.
Receiving reports are
prenumbered and
accounted for.
Vouchers are prenumbered
and accounted for.
Account for a
sequence of
purchase orders.
Account for a
sequence of
receiving reports.
Account for a
sequence of
vouchers.
3. Recorded acquisition
transactions are accurate
(accuracy).
Calculations and amounts
are internally verified.
Batch totals are compared
with computer summary
reports.
Acquisitions are approved
Examine indication of
internal verification.
Examine file of batch
totals for initials of
data control clerk;
compare totals to
summary reports.
Examine indication
summarization).
comparison.
18–5 (continued)
TRANSACTION–RELATED
AUDIT OBJECTIVE
POSSIBLE
INTERNAL CONTROLS
COMMON TESTS
OF CONTROLS
5. Acquisition
transactions are
properly classified
(classification).
Adequate chart of accounts
is used.
Account classifications are
internally verified.
Examine procedures
manual and chart of
accounts.
Examine indication of
internal verification.
6. Acquisition
transactions are
recorded on the correct
dates (timing).
Procedures require
recording transactions as
soon as possible after the
goods and services have
been received.
Dates are internally
verified.
Examine procedures
manual and observe
whether unrecorded
vendors’ invoices
exist.
Examine indication of
internal verification.
18–6 Auditing standards require that the tests of controls and substantive
tests of transactions cover the entire accounting period in order to determine
that the system was operating in a consistent manner throughout the period. In
18–7 The importance of cash discounts to the client is that the client can
produce a substantial savings if it makes use of the cash discounts available.
18–8 The difference in the purpose of the steps is that Procedure 1 ascertains
whether all existing acquisitions are recorded properly (completeness and
accuracy), whereas Procedure 2 is designed to determine whether recorded
18-7
18–9 The acquisition and payment cycle is related to the inventory accounts
in that normally all purchases of raw materials in the case of a manufacturing
operation or merchandise in the case of a distribution or retail company are
18–10 In order to streamline ordering and purchasing, many businesses
electronically link their internal accounting systems to suppliers’ systems. By
sharing information electronically, suppliers can access inventory records to
anticipate an order, or plan their own production schedule, or suppliers can
Companies may also make changes in the way inventory physically
moves through the supply or distribution channel. For example, a company may
18–11 The following are substantive analytical procedures related to
purchases and accounts payable, and the possible misstatements that may be
uncovered.
Substantive Analytical Procedure
Possible Misstatement
Compare acquisition–related expense
account balances with prior years
Misstatement of expenses and
account payable
Calculate the ratio of purchases to
accounts payable, and compare
with prior year
Unrecorded or nonexistent accounts,
or misstatements
Compare individual accounts payable
with previous years
Unrecorded or nonexistent accounts,
or misstatements
Review purchases by month and
compare trends with prior year
Misstatement (overstatement or
understatement) of expenses
18-8
Copyright © 2017 Pearson Education, Inc.
18–12 The procedure will most likely uncover the misstatement in item b. The
search for unrecorded invoices is designed to detect an understatement of
accounts payable.
18–13 Unless evidence is discovered that indicates that a different approach
should be followed, auditors traditionally follow a conservative approach in
selecting vendors for accounts payable confirmations and customers for accounts
the larger dollar balances and is not as concerned with “zero balances.”
18–14 There are several reasons why it is not as common to confirm accounts
payable at an interim date as it is for accounts receivable:
interim date.
In auditing accounts payable, it is common for the auditor to
confirm only those accounts for which vendors’ statements are not
of reducing year–end audit time.
18–15 F. O.B. destination means that the title to the goods passes when they
are received by the purchaser. F.O.B. origin signifies that the title passes to the
buyer when the goods are shipped by the seller.
Multiple Choice Questions From CPA Examinations
18–18 a. (2) b. (3) c. (4)
Discussion Questions and Problems
18–19
QUESTION
a.
TRANSACTION–
RELATED AUDIT
OBJECTIVE(S)
b.
TEST OF
CONTROL
c.
POTENTIAL
MISSTATEMENT(S)
d.
SUBSTANTIVE
PROCEDURE
1
Recorded
acquisitions and
payments are for
goods and
services
received,
consistent with
the best interests
of the client
(occurrence).
Observe and
inquire about
personnel
performing
purchasing,
shipping,
payables, and
disbursing
functions.
Goods received and
not recorded or
recorded and not
received.
Disbursements
made for goods
not received.
Vendor
statement
reconciliation.
Review of
physical
inventory
shortages.
2
Existing
acquisitions are
recorded
(completeness).
Account for
numerical
sequence of
receiving reports
and determine
that all were
recorded.
Receiving reports
are misplaced and
acquisitions not
recorded.
Vendor
statement
reconciliation.
3
Acquisitions are
recorded on the
correct dates
(timing).
Existing
acquisitions are
recorded
(completeness).
Observe and
inquire about the
procedure
performed by
mail clerk.
Compare date
mail is received
to date
accounting
received invoices.
Late recording or
non–recording of
liabilities to
suppliers.
Vendor
statement
reconciliation.
Search for
unrecorded
liabilities.
18-19 (continued)
QUESTION
a.
TRANSACTION–
RELATED AUDIT
OBJECTIVE(S)
b.
TEST OF
CONTROL
c.
POTENTIAL
MISSTATEMENT(S)
d.
SUBSTANTIVE
PROCEDURE
4
Acquisition
transactions are
properly
classified
(classification).
Examine
indication of
approval.
Acquisitions are
recorded in the
wrong account.
Examine
supporting
invoice for
reasonableness
of accounting
distribution.
5
Acquisitions are
recorded at the
proper amounts
(accuracy).
Examine
cancelled
invoices for
indication of
checking for
clerical
accuracy.
Acquisitions from
vendors are
recorded at
improper amounts.
Test extensions,
footings,
discounts, and
freight terms on
vendors’
invoices.
6
Payments are
recorded on the
correct dates
(timing).
Existing payments
are recorded
(completeness).
Observe whether
the system
automatically
posts checks
when they are
prepared.
Checks are
disbursed and not
recorded or they
are recorded in the
wrong time period.
Examine checks
clearing the
bank prior to
year–end to
determine that
they were
recorded in the
cash disburse–
ments journal
prior to year–
end.
7
Acquisitions are
for goods and
services
received,
consistent with
the best
interests of the
client
(occurrence).
Examine invoices
for which checks
have been
disbursed to
determine that
they have been
cancelled.
Invoices are
recorded and paid
more than once.
Examine vendor
statements,
noting any
unrecorded
payments
appearing on the
statement.
8
Recorded cash
disbursements
are for goods
and services
actually received
(occurrence).
Observe and
inquire about the
handling of
checks from the
time they are
mailed to
suppliers.
Checks are
disbursed and no
merchandise is
received. Checks
are received by
someone other
than the supplier
for whom they are
intended.
Trace checks to
supporting
invoice and
determine
reasonableness
of expenditure.
Reconcile
vendors’
statements.