Audit of the Acquisition and
Payment Cycle: Tests of Controls,
Substantive Tests of Transactions,
and Accounts Payable
Chapter 14
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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
Accounts Payable
Cash
Acquisitions
disbursements
of goods and
services
Purchase Returns Purchase
and Allowances returns and
allowances
Purchase
Discounts
Purchase
discounts
Raw Material
Purchases
Property, Plant,
and Equipment
Prepaid
Expenses
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Accounts in the Acquisition
and Payment Cycle
Accounts Payable
Acquisitions
of goods and
services
Manufacturing
Expense Control
Subsidiary
accounts
Repair and
maint.
Taxes
Supplies
Freight in
Utilities
Administrative
Selling Expense
Expense Control
Control
Subsidiary
Subsidiary
accounts
Accounts
Commissions
Supplies
Travel expense
Officers’
Delivery expense
travel
Repairs
Legal fees
Advertising
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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Documents and Records
Processing purchase orders
Purchase requisition
Purchase order
Receiving goods and services
Receiving report
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Documents and Records
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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Documents and Records
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 services.
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How E-Commerce Affects the
Acquisition and Payment Cycle
Electronic data interchange (EDI) is the
electronic exchange of information between
companies and their suppliers and consumers.
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 link
the intranets of two or more companies.
Other companies use businessto-business auctions hosted on the
Internet to negotiate purchases.
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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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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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Controls and Substantive Tests of
Transactions for Acquisitions
Acquisition transactions are recorded
on the correct dates (timing).
Acquisition transactions are properly included
in the accounts payable and inventory master
files and are properly summarized
(posting and summarization).
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Controls and Substantive Tests of
Transactions for Cash Disbursements
The assumption underlying these controls
and audit procedures is separate cash
disbursements and acquisitions journals.
The acquisitions and cash disbursements
tests are typically performed concurrently.
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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/P
Identify client risks affecting accounts payable.
Set tolerable misstatement and assess inherent risk.
Assess control risk and design and
perform tests of controls and substantive
tests of transactions.
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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
Compare acquisitionrelated expense account
balances with prior years.
Review list of accounts
payable for unusual,
nonvender, and interestbearing payables.
Possible Misstatement
Misstatement of
accounts payable
and expenses
Classification
misstatement for
nontrade liabilities
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Analytical Procedures for the
Acquisition and Payment Cycle
Analytical Procedure
Compare individual
accounts payable with
previous years.
Calculate ratios such as
purchases divided by
accounts payable, and
accounts payable divided
by current liabilities.
Possible Misstatement
Unrecorded or
nonexistent accounts,
or misstatements
Unrecorded or
nonexistent accounts,
or misstatements
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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
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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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End of Chapter 14
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