Chapter 10
acquisition and expenditure cycle
including audit of accounts
payable and inventory existence
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1.Typical activities
•
•
•
•
•
•
(1)purchasing goods and services.
(2)paying the bills.
Authorization
custody
recording
periodic reconciliation
2
To vendor
Cash
disbursement
Cheques
Start here
Request for
purchases
Recording
Purchase
requisition
Cheque copy
Requisition
Purchase order
Receiving report
custody
Invoice
Voucher
envelope
Receive goods
and services
Receive
vendor invoice
Voucher
invoice
Cash
disbursement
transaction
file
Purchase
order
Authorization
Enter accounts
payable
Accounts
payable
master
file
Asset
and expense
accounts
Perpetual
inventory
record
To vendor
Receiving
report
Put goods in inventory
put fixed assets in productive
service
Put services to use
Accounts/Records:
Raw materials
Work in process
Finished goods
Property, plant, equipment
Insurance
Supplies
Various expenses
Cash disbursements
Accounts payable
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Accounts/Records:
Raw materials
Work in process
Finished goods
Property, plant, equipment
Insurance
Supplies
Various expenses
Cash disbursements
Accounts payable
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Segregation of responsibility
• authorization
• Custody
recording
• reconciliation
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(1)Authorization
• A.PURCHASES ARE REQUESTED.
• B.purchasing department seeks the best prices
and quality,issues a purchase order.
• obtaining competitive bids.
• C.cash disbursements are authorized
• (order,invoices,internal receiving reports)
• D.cheques are sighed(over a certain amount, 2;
vouchers be marked “paid”---付讫）
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(2)custody
• A.inspect the good received (a receiving report).
• B.put in the hands(other responsible person)
• C.cash “custody” rest largely,authorized to sign
cheques.
• D.access to blank documents.
• Forge a false purchase order to fictitious vendor,
receiving report, invoice,
• company cheque, supplier
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(3)recording
• A.TIME: PERCHASE ORDER,INVOICE,
RECEIVING REPORT ARE IN HAND.
• B. DR: inventory, fixed asset,expense account
•
CR:ACCOUNTS PAYABLE
• C. DR: ACCOUNTS PAYABLE
•
CR:CASH
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(4)periodic reconciliation
• EXISTING ASSETS TO RECORDED AMOUNT
• (账实核对）
• A.inventory on hand, perpetual inventory records
• B.book cash balance, bank cash balance
• C.fixed assets, detail records
• D.detail of accounts payable, the control account.
• E.internal audit confirmation of accounts payable to
compare vender`s report to recorded liabilities .
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2.audit evidence in management
reports
• (1)open purchase orders
• market prices have fallen below
• (2)unmatched receiving reports
• material unrecorded liability
• (3)unmatched vendor invoice
• compare to (2)
• material unrecorded liability
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(4)accounts payable trial balance
• List by vendor control ac
invoice
All paid and unpaid accounts payable
should be supported by voucher
voucher:a cover sheet, folder,envelope
that contain all the supporting document.
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(5)purchases journal
• Sample selection of transactions for detail
test of controls audit of supporting document
• for validity,authorization,accuracy,
classification,accounting,and proper period
recording.
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(6)inventory reports
(trial balance)
(7)fixed asset reports
• (A) to scan for unusual conditions(-, over)
• (B) as a population for sample selection
•
observation
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(8)cash disbursements report
• Sample selection for detail test of controls
audit of supporting document in the voucher
• for validity,authorization,accuracy,
classification,accounting,and proper period
recording.
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3.control risk assessment
•
•
•
•
• Account balance
(1)general control considerations
(2)detail test of controls audit procedures
(3) detail test of controls for inventory
records
(4) summary:control risk assessment
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(1)general control considerations
• A.Segregation of responsibility
• B.Detail control checking procedures
INTERNAL CONTROL QUESTIONNAIRE
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(1)general control considerations
• Segregation of responsibility
• authorization
• Custody
recording
• reconciliation
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Segregation of responsibility
• A.authorization(requisitioning, purchase
ordering).
• Custody, recording, reconciliation
• B. Custody of inventory and cash
• .authorize purchase, recording,
reconciliation
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Segregation of responsibility
• C.recording(accounting)
• .authorization, Custody, reconciliation
• E. Reconciliation
• .authorization, Custody, recording
• combination of 2 of more
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(1)general control considerations
•
•
•
•
• Detail control checking procedures
A.Purchase requisitions and orders,sighed
B.inventory warehouses,fixed asset locations,
security
C.accountants, supporting documentation,date
D.vendor invoice, compare to purchase order
and receiving report (price,quantity).
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(1)general control considerations
• C.INTERNAL CONTROL QUESTIONNAIRE
• appendix 10A
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(2)detail test of controls audit
procedures
• Objective Exhibit 10-2
• detail test of control procedure:
• A.样本总体 (population)
• B.取证方法（action)
• action: vouching, tracing, observing,
scanning, recalculating
• Exhibit 10-3 重要
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(3) detail test of controls for
inventory records
• Direction of the test
• completeness, validity
• E 10-4
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(4) summary:control risk
assessment
• CONTROL RISK IS LOW
• observation test-count,
• a date prior to the year-end
• the sample size can be fairly small
• CONTROL RISK IS high
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4.audit cases: substantive audit
procedures
• Casette 10.1
printing (copying)money
Argus production,inc.
M.welby
Quickprint
company
Real printing
business
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Casette 10.1
printing (copying)money
• Problem
improper expenditures
For copy services
charged to motion picture production
costs.
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method
•
•
•
•
• M.Welby
authority and responsibility for obtaining copies.
1.arrange for outside script copying services.
2.receive the copies
3.approve the bills for payment.
• Purchasing, receiving, accounting
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method
•
•
•
•
• Fraud
A.fictitious company,
Quickprint Company.
B.a post office box number
C.letterhead stationery
D.nicely printed invoices.
• No printing equipment.
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Argus production,inc.
Bill(fictitious)
3.invoice
(extra copy)
2.bill
Real printing
business
Quickprint
conpany
1.转包
4.Paid
Took the rest
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Paper trail
A. Argus`s production cost files, all the Q bills
B.created files for proposed films, no production.
C.NO COPYING SERVICE BILLS
FROM OTRERS
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Amount
5 years, $475,000
• copy cost were capitalized,
Amortized over 2-3 years
• net income was overstated
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Audit approach
• Objective
existence, valuation
• control
segregation
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Test of controls
• Weakness:combination of duty
lack of managerial review.
• No controls to test
other than to see whether Welby had
approved the copying cost bills.
• Procedures: Direction of the test
project files,vouch,source document
Expenditures,trace, project cost records
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Audit of balance
• A. Show evidence of projects that had never
gone into production.
•
Chance (a pattern of Q)
• B.locate the Q
• C.interview with M.Welby.
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Casette 10.2
real cash paid to phony doctors
• Problem
• fictitious medical benefit claims were paid
Self-Insured up to $5000 per employee
• the expense account that included
legitimate and false charges
was “employee medical benefits”
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Method
• Martha Lee
• manager of the claims payment department
• she never missed a day of work in 10 years.
• best employees
• best efficiency rating
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Method
•
•
•
•
•
• Control
(1) the patient was a Beta employee.
(2) medical treatments were covered in the plan.
(3) the charges were within approved guidelines
and not covered by the provincial plan.
(4)the cumulative claims did not exceed $50,000.
(5)the calculation for payment was correct.
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Method
• Weakness
• After verification processing, claims were sent to
the payment department to pay the doctor directly.
• No payments ever went directly to employees.
• Nobody ever verified claims information with the
employee.
• No one verified the credentials of the doctors.
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Method
•
•
•
•
•
• Fraud
false claims on real employees.
Forging the signature of various claims processors.
Adding her own review approval.
Naming bogus doctors.
Various post office box address and to her
husband`s business address.
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Paper trail
• Falsified claims forms.
• Fictitious employee names,processor
signatures, doctor`s bill, phony doctors and
addresses.
• Cancelled cheques (endorsements).
• Accounts opened in various banks.
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Amount
• 7, $3,500,000
• until the last, no one noticed anything
unusual
about the total amount of claim paid.
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Audit approach
• Objective
• medical benefits “existed”
• valid claims paid to valid doctors.
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Control
• No controls that connected the
claims data with outside sources.
• Such as employee acknowledgment
or doctor investigation.
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Test of control
• “thinking like a crook”
• the holes in the controls:
• nobody seeks to verify data with
external sources.
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Audit of balance
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•
•
•
•
Balance: medical benefits.
Objective: valid existence of payment.
Procedure:
(1)A list of doctors and dentists paid.
(2)determine whether their addresses are
valid business addresses.
• (3)compare claims processors` signatures
on various forms.
• (4) compare doctors` addresses.
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Discovery summary
• 8 “doctors” were not licensed.
• 5: post office box, M.L
• 3: mailing address, her husband
business.
• Further investigation
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5.special note: the completeness
• Completeness and obligations
assertions.
• Search for unrecorded liabilities.
• A useful list of procedures
• p420
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6.special note:
physical inventory observation
• A.the best opportunity
• 客户盘点，审计监盘
• (seldom actually count the entire inventory)。
• B. Instruction(11).
• C. Dual-direction testing
• (existence,completeness).
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D.physical inventory
not on year-end date
• reconcile
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E.cycle inventory counting
• Company Never take a complete count on a
single date.
• Understand the cycle or sampling plan and
evaluate its appropriateness.
• Present for some counting operations
• only under unusual circumstances and as an
“extended procedure”:observe all counts
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F.auditors not present at client`s
inventory count
• On the first audit
• review the client`s plan for the already
completed count as before.
• Some test counts and trace to current
records..
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G.inventories located off the
client`s premises
• If mounts are material
• if control is not strong
• on-site test count
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H.inventory existence existence
and completeness
• After the observation is complete
• sufficient appropriate evidence of the following:
A.goods in the perpetual records but not
owned were excluded from the inventory
compilation.
B.Goods on hand were counted and included
in the inventory compilation.
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H.inventory existence existence
and completeness
C.Goods consigned-out or stored in
outside warehouse were included in the
inventory compilation
D.Goods in transit were added to the
inventory count and included in the
inventory compilation
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H.inventory existence existence
and completeness
E.Goods on hand already sold (but not
yet delivered) were not counted and
were excluded from the inventory
compilation
F. Goods CONSIGNED-IN (goods on
hand but not owned ) were excluded
from the inventory compilation
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Auditing assignments(ch10)
• 1.casette 10.3, 10.4, 10.5, 10.6/team
• 2.下列各题，每人均做，书面完成 。
• 10.31--10.45
• 3. 10.6, 10.14,10.18
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