What accounts are in the acquisition and payment cycle?
auditors must perform preliminary analytical procedures. Show
-some expectations include: Inventory Ratios are also helpful! A/P ratios -IF UNUSUAL RELATIONSHIP EXISTS, PLANNED AUDIT PROCEDURES (test of controls, substantive procedures, etc.) WOULD BE ADJUSTED TO ADDRESS POTENTIAL MATERIAL MISSTATEMENT. -ex: It's easy for things to go wrong in a company's acquisition and payment cycle. Companies can overstate the value of the inventory they purchase, which makes assets look bigger than they actually are. Management can omit or undervalue their accounts payable, which exaggerates financial strength. To prevent this from happening, management and auditors closely monitor internal controls and key acquisition accounts. Assess RisksA business may have different threats in its acquisition cycle depending on surrounding factors. Companies in a highly competitive industry that sell low-margin products have a strong incentive to fiddle with their margins through inventory and cost-of-goods-sold valuation. Businesses that don't have strong accounting department employees with experience in operations may not be properly tracking purchasing and cash disbursement documents. Auditors will focus more attention on personalized risk factors depending on the inherent strengths and weaknesses of the company. Ensure Controls Are in PlaceThe stronger internal controls the company has in place, the less likely it is that there are errors or fraud in the purchasing system. Smart companies require their purchasing agents to use a list of approved vendors and review vendors on a regular basis. This reduces the risk of fraud and kickbacks for purchases. Auditors will check that there is separation of duties and approval needed in the purchasing and cash disbursement process. These controls dissuade employees from attempting to misappropriate money and help businesses catch honest errors. Evaluate Inventory and Cost of Goods SoldSince inventory is a significant asset, auditors want to ensure it's not overstated. Auditors will observe a physical inventory count to ensure numbers add up, and they'll also perform their own sample count. They'll test inventory purchase transactions near a financial cutoff period to make sure transactions were recorded at the right time. They'll pay special attention to older inventory that the company hasn't been able to sell, since there's a high chance it may have lost value over time. Look at Accounts Payable and Related ExpensesAccounts payable makes up a large amount of money that the company owes to others, so auditors will search for unrecorded accounts payable. They'll often pull transactions from a subsidiary accounts payable ledger and check that they are also recorded in the general ledger, which determines the financial statements. They may contact large vendors and suppliers and confirm they agree with what the company purports they owe them. Purchasing also affects inventory value, so they'll test transactions to see if inventory values agree with the vendor's sales price. References
Resources Writer Bio Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University. Image Credit Thomas Northcut/Digital Vision/Getty Images Chapter 10 Purchase and Payment Cycle LEARNING OBJECTIVES 1. Describe the related documents in the purchase and payment cycle. 1. Documents and Records 1.1 Purchase requisition (請購單) – a form detailing the request for goods or services by an authorized employee of the user department and it is then passed from the user
department to the purchase department. For example, order of materials by a factory/storeroom supervisor. 2. Control Risks Assessment of Purchase and Payment Cycle 2.1 Assertions used by the auditor in purchase and payment cycle 2.1.1 Classes of purchases transactions
2.1.2 Classes of cash payments transactions
2.1.3 Accounts payable balances
2.2 Internal controls and test of controls 2.2.1 Internal controls for purchase and payment cycle is mainly concerned about the following aspects: (a) Classes of purchase transactions
(b) Classes of cash payment transactions
(c) Accounts payable balances
3. Substantive Procedures for Purchases and Payments Transactions 3.1 Analytical procedures
3.2 Substantive procedures – purchases transactions 3.2.1 Examples of substantive tests for purchases transactions are as follows:
3.3 Substantive procedures – payments transactions 3.3.1 Examples of substantive tests for payments transactions are as follows:
4. Tests of Details of Accounts Payable 4.1 Analytical procedures
4.2 Tests of details of accounts payable balances
4.3 Out-of-liability tests for accounts payable 4.3.1 The following table shows the audit procedures to uncover unrecorded accounts payable in the financial statements.
4.4 Accounts payables’ circularization (發函詢證) 4.4.1 The samples of balances selected for sending confirmation might include: 4.5 Cut-off tests 4.5.1 These test are intended to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period.
Question 1 You have worked on this audit assignment for a few years and this year you are the senior in charge of the audit. A newly recruited accounting graduate who has no practical experience is assigned as your assistant. You have already conducted tests of controls for the transaction cycles, and control risks are assessed as medium for these cycles. You decide to let the assistant carry out some substantive procedures for the accounts payable section. Required: (a) What are the analytical procedures for accounts payable? (3
marks) 5. Relative Reliability of Invoices, Statements and Confirmation 5.1
When assessing whether sufficient appropriate audit evidence has been collected for verifying accounts payable, it is essential that the auditor understand the relative reliability of the primary types of evidence including suppliers’ invoices, suppliers’ statements, and creditors’ confirmation. 5.3
Determinants of reliability of audit evidence Appendix I – Purchases and Payment Cycle Flowchart Additional Examination Style Questions Question 2
Note I: All the suppliers are on FOB origin terms, i.e. the title of goods passes to the buyer when the goods are shipped. Only goods received on or before 31 December 2007 have been taken up as purchases of Quadran Manufacturing Co. Ltd. For the year ended 31 December 2007. Required: (a) Why do the auditors have to obtain the number of the last GRN on or before the year-end, and why do they have to obtain the number of the first GRN after the year-end? When should this be performed?
(3 marks) (c) For cut-off error identified in (b), prepare the necessary journal. Question 3 Policies on raising purchase orders
Procedures on placing purchase orders
Observations during the course of audit
Required: Identify TEN weaknesses and make recommendations for improvement. Source: https://hkiaatevening.yolasite.com/resources/PBEAuditNotes/Ch20-PurchaseCycle.doc If you are the author of the text above and you not agree to share your knowledge for teaching, research, scholarship (for fair use as indicated in the United States copyrigh low) please send us an e-mail and we will remove your text quickly. Fair use is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work. In United States copyright law, fair use is a doctrine that permits limited use of copyrighted material without acquiring permission from the rights holders. Examples of fair use include commentary, search engines, criticism, news reporting, research, teaching, library archiving and scholarship. It provides for the legal, unlicensed citation or incorporation of copyrighted material in another author's work under a four-factor balancing test. (source: http://en.wikipedia.org/wiki/Fair_use) The information of medicine and health contained in the site are of a general nature and purpose which is purely informative and for this reason may not replace in any case, the council of a doctor or a qualified entity legally to the profession. The texts are the property of their respective authors and we thank them for giving us the opportunity to share for free to students, teachers and users of the Web their texts will used only for illustrative educational and scientific purposes only. What are the classes of transactions in the acquisition and payment cycles?There are three classes of transactions included in the cycle: Acquisitions of goods and services. Cash disbursements. Purchase returns and allowances and purchase discounts.
What are the five major phases of the acquisition and payment process?The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received.
Which of the following is not included in the acquisition and payment cycle?The acquisition and payment cycle consists of one class of transactions. The cash account is not part of the acquisitions and payment cycle.
What is payment cycle in accounting?Accounts Payable cycle, also known as 'Procure to Pay' or 'P2P cycle, is a series of processes involving the company's purchase and payments department and carrying out all necessary activities from placing an order to suppliers purchasing goods and making final payments to the suppliers.
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