Audit & Assurance Chapter 19

Front 1

What is the overall objective in the audit of the acqusition and payment cycle.

Back 1

To evaluate whether the accounts affected by the acqusitionsof goods and services and the related cash disbursements are fairly presented in accordance with GAAP.

Front 2

What are the three classes of transactions included in the cycle?

Back 2

1. Acqusitions of goods and services
2. Cash Disbursements
3. purchase returns and allowances.

Front 3

What is the acquisition cycle?

Back 3

The decisions and processes neccessary for obtaining ggods and services for operating a business.

Front 4

What are the three business functions in acquisition transactions?

Back 4

1. Processing purchase orders
2.Receiving Goods and AServices
3. Recognizing the liability

Front 5

What business functions are in the cash disbursements function

Back 5

processing and recording cash disbursements

Front 6

What is the starting point of the cycle?

Back 6

the request for goods and services by the clients personnel

Front 7

What are the two common documents for initiating the cycle?

Back 7

1.purchase requisition
2.purchase order

Front 8

What is a purchase requisition?

Back 8

it is used to requset goods and services by an authorized employee.

Front 9

What is an purchase order?

Back 9

a document used to order goods and services from vendors

Front 10

What is on a purchase order?

Back 10

the description, quantity, and related information for goods and services

Front 11

Why is the receiving of goods and services a critical point in the cycle?

Back 11

It is when most companies first recognize the acqusition and related liability.

Front 12

What is a receiving report?

Back 12

document prepared at the time the goods are received. Description, qty, date received, and other relevant data.

Front 13

How can companies assure prompt and accurate recording of the liability.

Back 13

include all transactions, only transactions that occured, and at the correct amounts.

Front 14

What are the documents involved with recording the liability?

Back 14

Venders invoice, debit memo, voucher, acquisitions transaction file, aquisitions journal, accts payable master file, accts payable trial bal, vendors statement

Front 15

Vendors invoice

Back 15

a document received from the vendor and shows the amount owed for an aquisition.
description and qty, price, cash discount terms, date of billing, and total. It is the amount recorded in the acqusition transaction file

Front 16

debit memo

Back 16

a document received from the vendor and indicates a reduction in the amount owed to a vendor because of returned goods or an allowance granted.

Front 17

voucher

Back 17

commonly used by organizations to establish a formal means of recording and controlling aquisitions (by sequential numbering)

Front 18

What is included in a voucher

Back 18

It is a pckage of documents usually the purchase order, packing slip, receiving report, vendors invoice, cancelled check.

Front 19

acqusitions transaction file

Back 19

a computer generated file that includes all acqusition transactions processed by the accounting system for a period.

Front 20

What info is recorded by the acqusitions transaction file

Back 20

vendor name, date, amount, account classification, description, qnty.

Front 21

What can the acqusitions transaction file also be used for?

Back 21

recording purchase returns and allowances.

Front 22

How is the acqusition transaction file used?

Back 22

for records, listings, reports.
Acqusitions journal, accts pay master file, and for specific accts or division

Front 23

acqusitions journal or listing

Back 23

listing or report is generated from the acqusitions transaction file. includes vendor name, date, amount, acct classification, indicates whether cash or accts payable. can cover any time period.

Front 24

Accounts payable master file

Back 24

records acqusitions, cash disbursements, and acqusition returns and allowances by vendor.

Front 25

printout of the accounts payable master file shows

Back 25

by vendor, the beg bal in accts payable each acqusition, return and allowance, cash disbursement, and the ending balance.

Front 26

Accounts payable trial balance

Back 26

includes the amount owed to each vendor or for each invoice or voucher. prepared form the acct payable master file

Front 27

vendors statement

Back 27

document prepared monthly by the vendor. indicates the beginning bal acqusitions, returns/allownaces, payments to the vendor, and ending balance.

Front 28

What documents associated with the disbursement process do auditors examine?

Back 28

checks, cash disbursements transaction file, cash disbursements journal.

Front 29

Check

Back 29

commonly used to pay for the acqusition. After a check is signed by an authorized person it becomes an asset. When it becomes a cancelled check it is no longer an asset but a document

Front 30

Cash disbursements transaction files

Back 30

computer generated file that includes all cash disbursements transactions processed by thye accounting system for a period.

Front 31

cash disbursements journal or listing?

Back 31

a listing or report from the cash disbursements transaction file that includes all transactions for any time period.

Front 32

How does e commerce affect the acqusition of goods and services?

Back 32

companies use the internet and other e commerce options to streamline processes. Information about products is more readily avail, extranets (which allow suppliers and customers to conduct business)

Front 33

EDI

Back 33

Electronic data interchange-now available for small suppliers and customers

Front 34

Which are the most time consuming accounts to audit by substantive tests of balances

Back 34

accounts receivable, inventory, fixed assets, accounts payable, and expense accounts.

Front 35

How can an auditor reduce tests of details of the account balances

Back 35

by using tests of controls and substantive tests of transactions to verify the effectiveness of internal controls for acqusitions and cash disbursements.

Front 36

What two areas are tests of controls and substantive tests of transactions for the acqusition and payment cycle divided into?

Back 36

1. tests of acqusitions (processing purchase orders, receiving goods and services, and recognizing the liability)
2. tests of payments (processing and recording cash disbursements)

Front 37

Methodology for designing tests of controls and substantive tests of transactions for the acqusition and payment cycle

Back 37

1. Understand internal control
2. Assess planned control risk
3. determine extent of testing controls
4. design tests of controls and substantive tests of transactions for acqusitions and cash disbursements to meet transaction related audit objectives (audit procedures, sample size, items to select, timing)

Front 38

Extent of testing of controls is determined by

Back 38

planned reliance on controls. For public ocmpanies testing must be sufficient to issue an opinion on internal control over financial reporting.

Front 39

Understand internal control for the acqusition and payment cycle

Back 39

the auditor gains an understanding by performing risk assessment procedures(studying clinets flowcharts, reviewing internal control questionaires, and performing walkthrough tests for acqusition and cash disbursement transactions

Front 40

Key internal controls for each of the business functions are

Back 40

authorization of purchases
seperation of the custody of the received goods from other functions, timely recording and independent review of transactions, and authorization of payments to vendors

Front 41

authorization of purchases

Back 41

ensures purchases are for the company, avoids excessive or unneccessary purchases.
Many companies have diff levels of approval depending on the dollar amount or type

Front 42

purchasing department

Back 42

ensure adequate quality of goods & services at a minimum price.

Front 43

Internal control of purchasing dept

Back 43

should be seperate from those who authorize the acqusition or recive the goods. All PO's should be prenumbered

Front 44

Seperation of asset custody from other functions

Back 44

receiving dept initiate a receiving report as evidence of receipt. Goods should be physically controlled. Receiving should be independent of storeroom and accounting

Front 45

Timely recording and independent review of transactions.

Back 45

some comp record the liability on the basis of receipt of goods. others defer recording until vendors invoice is received.

Front 46

Who is responsible for verifying the appropriateness of acqusitions

Back 46

The accounts payable dept.

Front 47

How is the appropriateness of acqusitions verified.

Back 47

compare the details on the purchase order, the recieving report, and the vendors invoice, to determine that the descriptions, prices, qty's, terms and freight, are correct

Front 48

what else should accounts payable do to ensure the completeness objective is satisfied.

Back 48

account for all recieving reports.

Front 49

An important internal control for persons who record acqusitions

Back 49

that they do not have access to cash, marketable securities, or other assets.

Front 50

Most important controls over cash disbursements

Back 50

1. the signiong of checks by an individual with proper authority
2. Seperation of responsibilites for signing checks and performing the accounts payable function
3. careful examination of supporting documentsby the check signer at the time the check is signed.

Front 51

Checks should be

Back 51

prenumbered and on paper that can't be altered

Front 52

How can companies prevent reuse

Back 52

by having a proper method for cancelling supporting documents. (write the check number on the document)

Front 53

how do auditors assess control risk

Back 53

by identifying key internal controls and deficiences

Front 54

How can an auditor reduce substantive testing

Back 54

The auditor performs tests of controls to obtain evidence that controls are operating effectively. AS the operating effectiveness of controls improves and is supported by additional tests of controls.

Front 55

Which four of the six transaction related audit objectives require special attention for acqusitions.

Back 55

Occurence, completeness, accuracy, classification.

Front 56

Occurence objective

Back 56

recorded acqusitions are for goods and services received. Tests for improper transactions and recorded transactions that did not occur, unintentional recording of acqusitions that did not occur, recording duplicate acqusitions, The extent of testing depends on internal controls

Front 57

completeness objective

Back 57

existing acqusitions are recorded. failure to record may overstate NI and owners equity.

Front 58

Accuracy objective

Back 58

Acqusitions are accurately recorded.

Front 59

Classification objective

Back 59

acqusitions are correctly classified

Front 60

recorded acqusitions are for goods and services received, consistent with the best interests of the client (occurence)...
Key internal controls...

Back 60

1. Purchase requsition, purchase order, receiving report, and vendors invoice are attached to the voucher
2. Acqusitions are approved at the proper level
3. Computer accepts entry of purchases only from authorized vendors in the vendor master file
4. documents are cancelled to prevent their misuse
5. vendors invoices, receiving reports, po's, and purchase requisitions are internally verified.

Front 61

recorded acqusitions are for goods and services received, consistent with the best interests of the client(occurence)...
Common test of controls

Back 61

1. Examine documents in voucher package for existence
2. examine indication of approval
3. attempt to input transactions with valid and invalid vendors
4. examine indication of cancellation
5. examine indication of internal verification

Front 62

recorded acqusitions are for goods and services received, consistent with the best interests of the client(occurence)...
Common Substantive tests of transactions...

Back 62

1. review the acquisitions journal, general ledger, and accts pay master file for large or unusual amounts
2. examine underlying documents for reasonableness and authenticity (vendors invoices, receiving reports, po's, and purchase requisitions
4. Examine vendor master file for unusual vendors
5. trace inventory acqusitions to inventory master file
6. examine fixed assets acquired.

Front 63

Existing acqusition transactions are recorded (completeness)
Key Internal Controls

Back 63

1. Purchase orders are prenumbered and accounted for
2. receiving reports are prenumbered and accounted for
3. vouchers are prenumbered and accounted for

Front 64

Existing acqusition transactions are recorded (completeness)
Common Tests of Controls

Back 64

1. Accounts for a sequence of purchase orders
2. Accounts for a sequence of receiving reports
3. account for a sequence of vouchers

Front 65

Existing acqusition transactions are recorded (completeness)
Common Substantive tests of transactions

Back 65

1. Trace froma file of receiving reports to the acqusitions journal
2. trace from a file of vendors invoices to to the acqusitions journal

Front 66

Recorded acqusition transactions are accurate (accuracy)
Key internal controls

Back 66

1. Calculations and amounts are inernally verified
2. batch totals are compared with computer summary reports
3. acqusitions are approved for prices and discounts

Front 67

Recorded acqusition transactions are accurate (accuracy)
Common Tests of Controls

Back 67

1. Examine indication of internal verification
2. examine file of batch totals for initials of data control clerk; compare totals to summary reports.
3. Examine indication of approval

Front 68

Recorded acqusition transactions are accurate (accuracy)
Common Substantive tests of transactions

Back 68

1. Compare recorded transactions in the acqusitions journal with the vendors invoice, receiving report, and other supporting documentation.
2. recompute the clerical accuracy on the vendors invoice, including discounts and freight.

Front 69

Acqusitions transactions are correctly included in the accounts payable master files and are correctly summarized (posting and summarization)
Key Internal Controls

Back 69

1. Accounts payable master file contents are internally verified
2. accounts payable master file or trial balance totals are compared with general ledger balances

Front 70

Acqusitions transactions are correctly included in the accounts payable master files and are correctly summarized (posting and summarization)
Common Tests of control

Back 70

1. examine indication of internal verification
2. examine initials on general ledger accounts indicating comparison.

Front 71

Acqusitions transactions are correctly included in the accounts payable master files and are correctly summarized (posting and summarization)
Common Substantive tests of transactions

Back 71

1. Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable and inventory master files

Front 72

Acqusitions transactions are correctly classified (classification)
key internal controls

Back 72

1. an adequate chart of accounts is used
2. account classifications are internally verified

Front 73

Acqusitions transactions are correctly classified (classification)
Common tests of balances

Back 73

1. Examine procedures manual and chart of accounts
2. Examine indication of internal verification

Front 74

Acqusitions transactions are correctly classified (classification)
Common Substantive tests of transactions

Back 74

1. compare classification with chart of accounts by referring to vendors invoices

Front 75

Acqusition transactions are recorded on the correct dates (timing)
Key internal controls

Back 75

1. Procedures require recording transactions as soon as possible after the goods and services have been recieved
2. dates are internally verified

Front 76

Acqusition transactions are recorded on the correct dates (timing)
Common tests of controls

Back 76

1. examine procedures manual and observe whether unrecorded vendors invoices exist.
2. examine indication of internal verification

Front 77

Acqusition transactions are recorded on the correct dates (timing)
Common Substantive tests of transactions

Back 77

Compare dates of receiving reports and vendors invoices with dates in the acqusitions journal.

Front 78

Recorded Cash disbursements are for goods and services actually received (occurrence)
Key internal Controls

Back 78

1. There is adequate segregation of duties between accounts payable and custody of signed checks
2. Supporting documentation is examined before signing of checks by an authorized person
3. Approval of payment on supporting documents is given at the time checks are signed

Front 79

Recorded Cash disbursements are for goods and services actually received (occurrence)
Common tests of Controls

Back 79

1. Discuss with personnel and observe activities
2. Discuss with personnel and observe activities
3. examine indication of approval

Front 80

Recorded Cash disbursements are for goods and services actually received (occurrence)
Common Substantive Tests of Transactions

Back 80

1. review the cash disbursements journal, general ledger, and accounts payable master file for large or unusual amounts.
2. trace the cancelled check to the related acqusitions journal entry and examine for payee name and amount
3. Examine cancelled check for authorized signature, proper endorsement, and cancellation by the bank
4. Examine supporting documents as part of the tests of acqusitions

Front 81

Existing cash disbursement transactions are recorded. (completeness)
Key internal controls

Back 81

1. Checks are prenumbered
2. The bank reconciliation is prepared monthly by an employee independent of recording cash disbursements or custody of assets

Front 82

Existing cash disbursement transactions are recorded. (completeness)
Common tests of controls

Back 82

1. Account for a sequence of checks
2. Examine bank reconciliations and observe their preparation

Front 83

Existing cash disbursement transactions are recorded. (completeness)
Common substantive tests of transactions

Back 83

reconcile cash disbursements witht the cash disbursements on the bank statement (proof of cash disbursements)

Front 84

recorded cash disbursement transactions are accurate (accuracy)
key internal controls

Back 84

1. calculations and amounts are internally verified
2. the bank reconciliation is prepared monthly by an independent person

Front 85

recorded cash disbursement transactions are accurate (accuracy)
Common tests of controls

Back 85

1. examine indication of internal verification
2. examine bank reconciliations and observe their preparation

Front 86

recorded cash disbursement transactions are accurate (accuracy)
Common substantive tests of transactions

Back 86

1. compare cancelled checks with the related acqusitions journal and cash disbursements journal entries
2. recompute cash discounts
3. prepare a proof of cash disbursements

Front 87

Cash disbursement transactions are correctly included in the accounts payable master file and are correctly summarized (posting and summarization)
Key internal controls

Back 87

1. accounts payable master file contents are internally verified
2. accts payable master file or trial balance totals are compared with general ledger balances

Front 88

Cash disbursement transactions are correctly included in the accounts payable master file and are correctly summarized (posting and summarization)
common tests of controls

Back 88

1. examine indication of internal verification
2. examine initials on general ledger accounts indicating comparison

Front 89

Cash disbursement transactions are correctly included in the accounts payable master file and are correctly summarized (posting and summarization)
Common substantive tests of transactions

Back 89

test clerical accuracy by footing journals and tracing postings to general ledger and accounts payable master file

Front 90

cash disbursement transactions are correctly classified (classification)
key internal controls

Back 90

1. an adequate chart of accounts is used
2. account classifications are internally verified

Front 91

cash disbursement transactions are correctly classified (classification)
Common tests of controls

Back 91

1. examine procedures manual and chart of accounts
2. examine indication of internal verification

Front 92

cash disbursement transactions are correctly classified (classification)
Common substantive tests of transactions

Back 92

compare classifications with chart of accounts by referring to vendors invoices and acquisitions journal.

Front 93

Cash disbursement transactions are recorded on the correct dates (timing)
Key internal controls

Back 93

1. procedures require recording as soon as possible after the check has been signed
2. dates are internally verified

Front 94

Cash disbursement transactions are recorded on the correct dates (timing)
common tests of controls

Back 94

1. examine procedures manual and observe whether unrecorded checks exist
2. examine indication of internal verification

Front 95

Cash disbursement transactions are recorded on the correct dates (timing)
common substantive tests of transactions

Back 95

1. compare dates on cancelled checks with the cash disbursements journal
2. compare dates on cancelled checks with the bank cancellation date.

Front 96

3 important differences in acqusitions and payments compared withother cycles

Back 96

1. a larger # of accounts (increased potential for classification misstatements)(auditors reduce tolerable exception rate for classification)
2. Transactions often require significant judgement. (Construction & Leases) (reduce tolerable exception rate for accuracy)
3. Dollar amounts cover a wide range (audits will test large and unusual items 100%)

Front 97

Accounts payable

Back 97

unpaid obligations for goods and services received in the ordinary course of business.

Front 98

methodology for designing tests of detail balances for accounts payable

Back 98

1. Identify client risks affecting accounts payable
2. Set tolerable misstatement and assess inherent risk for accounts payable
3. Assess control risk for the acqusition and payment cycle
4. design and perform tests of controls and substantive tests of transactions for the acqusition and payment cycle
5. design and perform analytical procedures for accounts payable
6. design tests of details of accounts payable to satisfy balance-related audit objectives (audit procedures, sample size, items to select, timing)

Front 99

Analytical procedure-

compare acquisition related expense account balances with prior years

Back 99

possible misstatement-

misstatement of accounts payable and expenses

Front 100

Analytical procedure-

review list of accounts payable for unusual nonvendor and interest bearing payables

Back 100

possible misstatement-

classification misstatement for non trade liabilities

Front 101

Analytical procedure-

compare individual accounts payable with previous years

Back 101

possible misstatement-

unrecorded or nonexistent accounts, or misstatements

Front 102

Analytical procedure-

calculate ratios such as purchases divided by accounts payable, and accounts payable divided by current liabilities

Back 102

possible misstatement-

unrecorded or nonexistent accounts, or misstatements

Front 103

overall objective of in the audit of accounts payable

Back 103

determine whether the accounts payable balance is fairly stated and properly diclosed.

Front 104

Whisc of the 8 balance related objectives is not applicable to liabilities?

Back 104

realizable value

Front 105

What is the main concern when auditors verify assets? liabilities?

Why?

Back 105

overstatements

Understatements or ommitions

Because these would negatively affect owners equity and result in the possible lawsuit of the cpa

Front 106

Balance related audit objective- Detail tie in

Back 106

accounts payable in tha accounts payable list agree with related master file, and the total is correctly added and agrees with the general ledger.

Front 107

Common tests of details of balances procedures- Detail tie in

Back 107

re add or use the computer to toatl the accts payable list
trace the total to the general ledger
trace individual vendors invoices to master file for names and amounts

Front 108

Common tests of details of balances procedures- Existence

Back 108

Trace from accts payable list to vendors invoices and statemnets
Confirm accts payable, emphasizing large and unusual amounts

Front 109

Common tests of details of balances procedures- Completeness

Back 109

perform out of period liability tests (search for unrecorded accts pay)

Front 110

Common tests of details of balances procedures- Accuracy

Back 110

perform same procedures as those used for existence objective and out of priod liability tests.

Front 111

Common tests of details of balances procedures-Classification

Back 111

review the list and master file for related parties, notes or other interest bearing liabilities, long term payables, and debit balances.

Front 112

Common tests of details of balances procedures- Cutoff

Back 112

perform out of period liability tests
perform detailed tests as part of physical observation of inventory
test for inventory in transit.

Front 113

Common tests of details of balances procedures-obligations (not rights and obligations liabilities do not have rights)

Back 113

examine vendors statements and confirm accounts payable

Front 114

existence (balance related AO)

Back 114

accounts payable in the ap list exist

Front 115

completeness (balance related AO)

Back 115

existing accounts payable are included in the accounts payable list

Front 116

accuracy (balance related AO)

Back 116

accts payable in the accounts payable list are accurate

Front 117

classification (balance related AO)

Back 117

accts payable in the accts payable list are correctly classified

Front 118

cut off (balance related AO)

Back 118

transactions in the acquisition and payment cycle are recorded in the proper period

Front 119

obligations (balance related AO)

Back 119

The company has na obligation to pay the liabilities included in accts payable.

Front 120

Search for unrecorded accts payable (out of period)

Back 120

examine underlying documentation for subsequent cash disbursements and for bills not paid several weeks after year end.
Trace receiving reports issued before y/e to related vendors invoices.
trace vendors statements to AP trial Balance.
Cutoff Tests
inventory in transit

Front 121

auditors get highly reliable evidence about individual transactions from?

Back 121

vendors invoices, receiving reports, and purchase orders.

A vendors statement is not desirable since it only shows the total amt of the transaction

Front 122

what is the superior document for verifuing the correct balance in accts payable?

Back 122

The vendor's statement is superior for verifying the correct balance because it includes the ending balance.

Front 123

difference between a vedor statement and confirmation

Back 123

A vendors statement has been prepared by the vendor but is in the hands of the client.
Aconfirmation provides the same info but is sent to the CPA.