Modern Auditing:

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Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 15 – Auditing the Expenditure Cycle
Chapter Overview
The Expenditure Cycle
Develop Audit Objectives
Understanding the Entity and
Environment
Inherent Risk, Including the Risk
of Fraud
• Management Misstatement of
Expenditures
– Understate expenses
– Understate payables
• Other Misstatement Factors
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High volume of transactions
Unauthorized purchases
Misappropriation
Duplication of payments
Analytical Procedures
Consideration of Internal Control
Components
• Control Environment
• Risk Assessment
• Information and Communication
• Monitoring
Purchase Transactions –
Documents and Records
• Purchase requisition
• Purchase order
• Approved vendor master file
• Open purchase order file
• Receiving report
• Receiving file
• Vendor Invoice
Purchase Transactions – Common
Documents and Records
• Voucher
• Exception reports
• Voucher summary
• Voucher register
• Purchase transactions file
• Accounts payable master file
• Suspense files
Purchase Transactions –
Functions and Control Activities
• Initiating Purchases
– Placing vendors on an authorized vendor list
– Requisitioning goods and services
– Preparing purchase orders
• Receipt of Goods and Services
– Receiving the goods
– Storing goods received for inventory
– Returning goods to vendor
• Recording Liabilities
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
Systems Flowchart – Purchase
Transaction
Cash Disbursement Transactions–
Common Documents and Records
• Check
• Check Summary
• Cash Disbursements Transaction File
• Cash Disbursements Journal or
Check Register
Cash Disbursement TransactionsFunction and Control Activities
• Computerized System
– Paying the Liability
– Recording the Disbursement
• Manual System
– Paying the Liability
– Recording the Disbursement
Systems Flowchart – Cash
Disbursement Transactions
Purchase Adjustment Transactions–
Common Documents and Records
• Purchase Return Authorization
• Shipping Report
• Debit Memo
Purchase Adjustment Function and
Controls
• Purchase Returns and Allowances
• Other Controls
• Tests of Controls
Substantive Tests of Accounts
Payable Balances
• Determining Detection Risk for Tests of
Details
– Existence and Occurrence
– Completeness
– Rights and Obligations
– Valuation and Allocation
– Presentation and Disclosure
Designing Substantive Tests
• Initial Procedures
• Analytical Procedures
Designing Substantive Tests
• Tests of Details of Transactions
– Vouch Recorded Payables to Supporting
Documentation
– Perform Cutoff Tests
• Purchases cutoff tests
• Cash disbursement cutoff tests
• Purchase return cutoff tests
– Perform Search for Unrecorded Payables
• Subsequent payments
Designing Substantive Tests
• Tests of Details of Balances
– Accounts Payable Confirmations
– Reconcile Unconfirmed Payables to
Vendor Statements
• Tests of Details of Disclosures
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