Chapter 12
Auditing Acquisitions and Payments
Processes: Cash Disbursements and
Related Activities in the Automotive
Industries
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Learning Objectives
1. Learn the activities, transactions, risks, and accounts
associated with acquisition and payments in a variety of
business environments.
2. Understand the significant characteristics of the automotive
industry that affect acquisitions and payments.
3. Learn the common business processes, ICFR, and
documents associated with acquisitions and payments.
4. Link management assertions, risks, procedures, and audit
evidence, including the purposes and execution of tests of
controls for acquisitions and payments and related
accounts.
Chapter 12-1
Learning Objectives
5. Describe the extension of control tests into dual purpose
tests, and the financial statement audit purposes that the
extension accomplishes for acquisition and payment and
related accounts.
6. Link management assertions, risks, procedures, and audit
evidence, including the purposes and execution of
substantive analytical procedures and tests of details of
balances for acquisitions and payments and related
accounts.
7. Apply the assertions, controls, and audit tests for purchase
and payment transactions to prepaid expenses, accrued
liabilities, expenses, fixed assets, and intangible assets.
Chapter 12-2
ACQUISITION AND PAYMENT ASPECTS OF RETAILING
 Retailers must decide what inventory to purchase for resale.
 For any business whose primary activity is the purchase of
merchandise and resale of that merchandise to others, the
inventory account is a major part of the company’s balance
sheet
 Retailers pay for the goods and services purchased when
the payment is due, using a cash disbursements process.
 The cash disbursement may result from physically
preparing a paper check or initiating an electronic transfer.
Chapter 12 -3
Learning Objective #1
THE AUTOMOTIVE INDUSTRY: AN OVERVIEW
 The industry term for the large companies that we usually
think of as the leaders in the industry is automotive
Original Equipment Manufacturers (OEM).
Chapter 12 -4
Learning Objective #2
Business Risks Associated with Purchasing Activities
 Acquisition and payment activities may seem like routine
“back-office” operations, but they are actually critical to the
companies in the automotive sector as they strive to
accomplish their market-related goals.
 The success of businesses in the automotive industry is
often linked to the performance of the suppliers from which
they purchase parts and components.
 To manage these purchasing risks, automotive companies
may investigate suppliers before committing to them and
inspect suppliers’ operations on an ongoing basis.
Chapter 12 -5
Learning Objective #2
Managing Acquisition-Related Costs
 Generally, companies seek to mitigate the risk that their
costs of manufacturing inputs and inventory will increase,
and want to be certain they will have the required supply
of inputs.
 When an automotive company uses significant amounts of
commodities such as steel, aluminum, and rubber, it is
common to use financial instruments to hedge (or offset the
risk of) commodity price changes.
 A practice common in the automotive industry is to enter
into purchase obligation arrangements or execute blanket
purchase orders to suppliers.
Chapter 12 -6
Learning Objective #2
BUSINESS PROCESSES, DOCUMENTS, AND INTERNAL CONTROL
 All requests for purchases and purchase transactions
should be authorized.
 All cash disbursements are for goods and services
that are actually received by the company and for
correct amounts.
 Another management objective is to properly post
transactions.
Chapter 12 -7
Learning Objective #3
Documents and Processes
Chapter 12-8
Learning Objective #3
Documents and Processes
Chapter 12-9
Learning Objective #3
Documents and Processes
Chapter 12-10
Learning Objective #3
Documents and Processes
Chapter 12-11
Learning Objective #3
Documents and Processes
 The purchase requisition, purchase order, receiving report,
and vendor invoice or statement comprise a payment
support package.
 The payment support packages goes through an approval
process prior to the cash being disbursed.
 Final approval for the payment should be given by the
“treasury” or cashier department of the business and
should take place before the disbursement.
 The cash disbursement is recorded, updating the cash
disbursements journal or report, accounts payable
subsidiary ledger, and general ledger.
Chapter 12 -12
Learning Objective #3
Purchase and Payment Activities
EXHIBIT 12-1
Chapter 12 -13
Learning Objective #3
Potential Misstatements and Controls
 Many of the potential misstatements associated with
purchases and cash disbursements are prevented or
detected by the following:
 Segregation of duties
 Authorized approval
 Reliance on the documentation of the authorized approval
 Safeguarding the assets
 Controls over the process and outcomes of recording
transactions
Chapter 12 -14
Learning Objective #3
Business Activities and Related Documents
EXHIBIT 12-2
Chapter 12 -15
Learning Objective #3
Segregation of Duties
 The following functions should be conducted by
individuals or within departments that are
independent of each other:
• Approving the need for the purchase
• Executing the purchase
• Receiving the shipment
• Recording the account payable
• Authorizing the cash disbursement
Chapter 12 - 16
Learning Objective #3
TESTS OF CONTROLS FOR PURCHASE AND EXPENDITURE
TRANSACTIONS
Management’s overall assertions continue to
apply to all cycles of the business. As a reminder,
they are:
1. Existence or occurrence
2. Completeness
3. Rights and obligations
4. Valuation or allocation
5. Presentation and disclosure
Chapter 12 - 17
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 18
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 19
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 20
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 21
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 22
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 23
Learning Objective #4
Examples of Tests of Controls for Purchase
Transactions
EXHIBIT 12-3
Chapter 12 - 24
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-25
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-26
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-27
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-28
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-29
Learning Objective #4
Examples of Tests of Controls for Cash
Disbursements
EXHIBIT 12-4
Chapter 12-30
Learning Objective #4
Examples of Dual Purpose Tests for Purchase Transactions
EXHIBIT 12-5
Chapter 12-31
Learning Objective #5
Examples of Dual Purpose Tests for Purchase Transactions
EXHIBIT 12-5
Chapter 12-32
Learning Objective #5
Examples of Dual Purpose Tests for Purchase Transactions
EXHIBIT 12-5
Chapter 12-33
Learning Objective #5
Examples of Dual Purpose Tests for Cash Disbursements
EXHIBIT 12-6
Chapter 12-34
Learning Objective #5
Examples of Dual Purpose Tests for Cash Disbursements
EXHIBIT 12-6
Chapter 12-35
Learning Objective #5
Examples of Dual Purpose Tests for Cash Disbursements
EXHIBIT 12-6
Chapter 12-36
Learning Objective #5
SUBSTANTIVE ANALYTICAL PROCEDURES
 The auditor performs substantive analytical procedures to
obtain audit evidence for the financial statement audit.
 Substantive analytical procedures augment the audit
evidence collected through dual purpose tests and tests of
details of balances.
 Analytical procedures can involve comparing an account
balance with prior years, a budget, or an industry
benchmark
 Analytical procedures also take the form of calculating a
ratio or statistic and using the outcome of the calculation for
comparison.
Chapter 12-37
Learning Objective #6
Examples of Substantive Analytical Procedures
EXHIBIT 12-7
Chapter 12-38
Learning Objective #6
TESTS OF DETAILS OF BALANCES
 The bigger audit concern for accounts payable is completeness.
 The auditor addresses the risk that some accounts payable are
omitted or recorded at less than their full amounts.
 A major audit goal is to identify any un- or underrecorded
payables.
Chapter 12-39
Learning Objective #6
Search for Unrecorded Liabilities
 An example of an unrecorded liability is an
accrued expense that goes unrecorded because the
service provider’s invoice for utilities used during the
year under audit was not received by year end.
 Another example is when inventory is received
before year end, but the invoice is not received until
the following fiscal year.
Chapter 12-40
Learning Objective #6
Search for Unrecorded Liabilities
The following procedures are generally included in the search for
unrecorded liabilities:
1. Ask the client what procedures it has established and followed to be
sure that all liabilities are recorded.
2. Review cash disbursements and related supporting documents in the
subsequent accounting period.
3. Review invoices and statements and relating supporting documents for
liabilities not paid at the time the audit work at the client’s location is
completed.
4. Understand the client’s year-end cutoff policies for inventory.
5. Perform analytical procedures for the reasonableness of the accounts
payable balance.
6. Read contracts that may indicate any purchase commitments that may
need to be recorded or disclosed in the financial statements.
Chapter 12-41
Learning Objective #6
Examples of Tests of Details of Balances
EXHIBIT 12-8
Chapter 12-42
Learning Objective #6
AUDIT OF PREPAID EXPENSES AND ACCRUED LIABILITIES
Chapter 12-43
Learning Objective #7
AUDIT OF PREPAID EXPENSES AND ACCRUED LIABILITIES
Chapter 12-44
Learning Objective #7
Examples of Substantive Analytical Procedures
EXHIBIT 12-9
Chapter 12-45
Learning Objective #7
AUDIT OF EXPENSES
Chapter 12-46
Learning Objective #7
AUDIT OF PROPERTY, PLANT AND EQUIPMENT
EXHIBIT 12-10
Chapter 12-47
Learning Objective #1
Sample Property, Plant and Equipment Work Paper
Chapter 12-48
Learning Objective #7
Examples of Substantive Analytical Procedures
EXHIBIT 12-11
Chapter 12-49
Learning Objective #1
AUDIT OF INTANGIBLE ASSETS
 Intangible assets are very important in some
industries, yet virtually nonexistent in others.
 Dual purpose tests, substantive analytical
procedures, and tests of details of balances
similar to those applied to property, plant, and
equipment and depreciation are appropriate for
identifiable intangible assets.
 Information from the company’s legal counsel is
also used by the auditor when the information
indicates other impairment of an intangible
asset’s value.
Chapter 12-50
Learning Objective #7
AUDITING ACQUISITIONS AND PAYMENTS IN THE
AUTOMOTIVE INDUSTRY
 Businesses in the automotive industry usually have a high
volume of inventory purchase transactions for many
different items and from multiple vendors.
 Assuming an automotive industry client has good ICFR, the
most challenging consideration for testing expenses or
assets and related accounts payable and cash
disbursements is the large volume of transactions.
 Many automotive companies engage in global purchase
and sale activities.
 Consequently, the companies receive or extend payment for
transactions using foreign currencies. This exposes the
companies to foreign currency exchange risks.
Chapter 12-51
Learning Objective #1
Review Question
Which of the following sets of accounts is
not affected by the acquisition and payment
cycle?
(a) Cash, inventory, intangible assets
(b) Accounts payable, prepaid assets,
accrued liabilities
(c) Accounts receivable, capital stock,
retained earnings
(d) Cash, fixed assets, accounts payable
Chapter 12-52
Review Question
Information about inventory is extremely
important for retailers and wholesalers to
conduct business. Identify which of the
following is not relevant information for
retailers and wholesalers concerning their
inventory.
(a) How many items were last purchased
(b) How many items remain in inventory
(c) The date the items were received
(d) All of the above are relevant.
Chapter 12-53
Review Question
Retail and wholesale businesses may need to
return some of the inventory items that they purchase,
or may receive a discount when items are
paid for in a certain time frame. This process of
purchase returns and allowances is the “mirror”
image of
(a) the sales returns and allowances transaction.
(b) purchasing fixed assets from outside parties.
(c) the sale of inventory to the end user.
(d) financing a purchase by using a trade account.
Chapter 12-54
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