Audit of the Acquisition
and Payment Cycle: Tests
of Controls, Substantive
Tests of Transactions and
Accounts Payable.
Chapter 19
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19 - 1
Learning Objective 1
Identify the accounts and the
classes of transactions in the
acquisition and payment cycle.
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Transactions in the Acquisition
and Payment Cycle
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances
and purchase discounts
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Accounts in the Acquisition
and Payment Cycle
Cash in Bank
Purchase Returns
and Allowances
Purchase
Discounts
Accounts Payable
Cash Acquisitions
disbursements of goods and
services
Purchase
returns and
allowances
Purchase
discounts
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Raw Material
Purchases
Property, Plant
and Equipment
Prepaid
Expenses
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Accounts in the Acquisition
and Payment Cycle
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities
Accounts Payable
Selling Expense Control Account
Subsidiary accounts
Commissions
Travel, delivery expenses
Repairs, Advertising
Acquisitions
of goods and
services
Administrative Expense Control Account
Subsidiary accounts
Supplies, Officers’ travel
Legal fees
Auditing fees, Taxes
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Learning Objective 2
Describe the business functions
and the related documents and
records in the acquisition and
payment cycle.
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Classes of Transactions
and Accounts
 Inventory
 Property, plant, and equipment
 Prepaid expenses
 Leasehold improvements
 Accounts payable
 Manufacturing expenses
 Selling and administrative expenses
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Classes of Transactions
and Accounts
 Cash in bank (from cash disbursements)
 Accounts payable
 Purchase discounts
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Business Functions in the Cycle
Processing purchase orders
Receiving goods and services
Recognizing the liability
Processing and recording cash disbursements
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Related Documents and Reports
Processing purchase orders
Purchase requisition
Purchase order
Receiving goods and services
Receiving report
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Related Documents and Reports
Recognizing the liability
Acquisitions transaction file
Acquisitions journal or listing
Vendor’s invoice
Debit memo
Voucher
A/P master file
A/P trial balance
Vendor’s statement
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Related Documents and Reports
Processing and recording cash disbursements
Check
Cash disbursements transaction file
Cash disbursements journal or listing
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Learning Objective 3
Describe how e-commerce
affects the acquisition of
goods and service.
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How E-Commerce Affects the
Acquisition and Payment Cycle
Internet-based technologies
allow for electronic linkages
between suppliers and customers.
Suppliers
Customers
EDI
EDI
Purchase
orders
Customer
orders
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How E-Commerce Affects the
Acquisition and Payment Cycle
Information about products is available over
the Internet.
Some companies use extranets which allow
companies to communicate and conduct
business in a secure setting.
Other companies use business-to-business
auctions hosted on the Internet to
negotiate purchases.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Learning Objective 4
Understand internal control, and
design and perform tests of
controls and substantive tests
of transactions for the acquisition
and payment cycle.
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Methodology for Designing Tests
of Balances: Accounts Receivable
Understand internal
control – acquisitions
and cash disbursements.
Assess planned control
risk – acquisitions and
cash disbursements.
Determine extent of testing controls.
Design tests of controls and substantive tests of
transactions for acquisitions and cash disbursements
to meet transaction-related audit objectives.
Audit
procedures
Sample
size
Items to
select
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Timing
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Understand Internal Control
The auditor gains an understanding of internal
control for the acquisition and payment cycle
by studying the client’s flowcharts, preparing
internal control questionnaires, and performing
walk-through tests for acquisitions and cash
disbursements.
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Assess Planned Control Risk
Authorization of purchases
Separation of asset custody from
other functions
Timely recording and independent
review of transactions
Authorization of payments
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Evaluate Cost-Benefit of Testing
Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk.
The auditor decides whether substantive tests
will be reduced sufficiently to justify the cost
of performing tests of controls.
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Controls and Substantive Tests of
Transactions for Acquisitions
Recorded acquisitions are for goods and services
received, consistent with the best interests of the
client (existence).
Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy).
Acquisitions are correctly classified (classification).
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Attributes Sampling
Because of the importance of tests of controls
and substantive tests of transactions for
acquisitions and cash disbursements,
the use of attributes sampling is
common in this audit area.
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Learning Objective 5
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
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Methodology for Designing Tests
of Details of Balances for A/R
Phase I
Identify client business risks affecting accounts
payable.
Set tolerable misstatement and assess inherent
risk for accounts payable.
Assess control risk for accounts payable.
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Methodology for Designing Tests
of Details of Balances for A/R
Phase II
Design and perform tests of controls and
substantive tests of transactions for the
acquisition and payment cycle.
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Methodology for Designing Tests
of Details of Balances for A/R
Phase III
Design and perform analytical procedures for
the acquisition and payment cycle.
Design tests of details of accounts payable
balance to satisfy balance-related audit objectives.
Audit
Sample
procedures size
Items to
select
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Timing
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Learning Objective 6
Design and perform analytical
procedures for accounts payable.
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Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Possible misstatement
Compare acquisition-related
expense account balances
with prior years.
Misstatement of accounts
payable and expenses.
Review list of accounts payable Classification
for unusual, nonvender, and
misstatement
interest-bearing payables.
for nontrade liabilities.
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Analytical Procedures for the
Acquisition and Payment Cycle
Analytical procedure
Possible misstatement
Compare individual accounts
payable with previous years.
Unrecorded or
nonexistent accounts,
or misstatements.
Calculate ratios, such as
Unrecorded or
purchases divided by accounts
nonexistent accounts,
payable, and accounts payable
or misstatements.
divided by current liabilities.
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Learning Objective 7
Design and perform tests of
details of balances for accounts
payable, including out-of-period
liability tests.
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Out-of-Period Liability Tests
Examine underlying documentation for
subsequent cash disbursements.
Examine underlying documentation for bills not
paid several weeks after the year-end.
Trace receiving reports issued before year-end
to related vendors’ invoices.
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Out-of-Period Liability Tests
Trace vendors’ statements that show a balance
due to the accounts payable trial balance.
Send confirmations to vendors with which
the client does business.
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Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit
FOB destination
FOB origin
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Learning Objective 8
Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable as audit
evidence.
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Reliability of Evidence
Distinction between vendors’
invoices and vendors’ statements.
Difference between vendors’
statements and confirmations.
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Sample Size
Sample sizes for accounts payable tests vary
considerably, depending on many factors.
Statistical sampling is less commonly used
for the audit of accounts payable than
for accounts receivable.
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Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Cash in
Bank
Acquisition
Expenses
Payments
Expenses
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by AP and TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
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Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts
Payable
Acquisition
Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
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End of Chapter 19
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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