Audit of the Acquisition and

Payment Cycle: Tests of

Controls, Substantive Tests
of Transactions, and
Accounts
Payable.
Chapter 19

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

Raw Material
Purchases

Cash Acquisitions
disbursements of goods and
services
Purchase Returns
and Allowances

Purchase
Discounts

Purchase
returns and
allowances
Purchase
discounts

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Property, Plant
and Equipment

Prepaid
Expenses

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Accounts in the Acquisition

and Payment Cycle
Manufacturing Expense Control Account
Subsidiary accounts
Repair and maintenance
Taxes, Supplies
Freight in, Utilities
Accounts Payable

Selling Expense Control Account

Subsidiary accounts
Commissions
Travel, delivery expenses
Repairs, Advertising

Acquisitions
of goods and
services

Administrative Expense Control Account

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Subsidiary accounts
Supplies, Officers travel
Legal fees
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
Acquisitions:
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 disbursements:
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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Related Documents
and Reports
Processing purchase orders:
Purchase requisition
Purchase order
Receiving goods and services:
Receiving report

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Related Documents
and Reports
Recognizing the liability:
Vendors invoice
Debit memo
Voucher
Acquisitions transaction file

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Related Documents
and Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendors statement

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Related Documents
and Reports
Processing and recording cash disbursements:
Check
Cash disbursements transaction file
Cash disbursements journal or listing

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 3
Describe how e-commerce
affects the acquisition of
goods and service.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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How E-Commerce Affects the

Acquisition and Payment Cycle
Internet-based technologies allow for electronic
linkages between suppliers and customers.
Information about products is available over
the Internet.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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How E-Commerce Affects the

Acquisition and Payment Cycle
Some companies use extranets which allow
companies to communicate and conduct
business in a secure setting.
Other companies use business-to-business
auctions hosted on the Internet to
negotiate purchases.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Controls

and Substantive Tests
Understand internal control
acquisitions and cash disbursements
Assess planned control risk
acquisitions and cash disbursements
Determine extent of testing controls
Design tests of controls and
Audit procedures
substantive tests of transactions
Sample size
for acquisitions and cash
Items to select
disbursements to meet
Timing
transaction-related audit objectives
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Understand Internal Control

Study the clients flowcharts
Review internal control questionnaires
Perform walk-through tests

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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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Determine Extent of Testing

of Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk
The auditor performs tests of controls to obtain
evidence that controls are operating effectively

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Controls and Substantive Tests

of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Acquisitions are accurately recorded
(accuracy)

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Controls and Substantive Tests

of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and
summarization)
Acquisitions are correctly classified
(classification)
Acquisitions are recorded on the
correct dates (timing)
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Attributes Sampling
Because of the importance of tests of controls
and substantive tests of transactions for
acquisitions and cash disbursements, the use
of attributes sampling is common in this
audit area.

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Important Differences
Larger number of transactions
Significant judgment
Wide range of dollar amount

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Balances for Accounts Payable
Identify client business
risks affecting
accounts payable

Phase I

Set tolerable misstatement

and assess inherent risk Phase I
for accounts payable
Assess control risk for
the acquisition and
payment cycle

Phase I

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Balances for Accounts Payable
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the acquisition
and payment cycle

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Methodology for Designing Tests

of Balances for Accounts Payable
Design and perform
analytical procedures
Phase III
for accounts
payable balance
Design tests of
Audit procedures
details of accounts
Sample size
payable balance to
satisfy balanceItems to select
related audit
Timing
objectives
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Phase III

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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

Possible misstatement

Compare acquisition-related
expense account balances
with prior years.

Misstatement of accounts
payable and expenses

Review list of accounts payable Classification misstatement

for nontrade liabilities
for unusual, nonvendor, and
interest-bearing payables

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Analytical Procedures for the

Acquisition and Payment Cycle
Analytical procedure

Possible misstatement

Compare individual accounts

payable with previous years

Unrecorded or nonexistent
accounts, or misstatements

Calculate ratios, such as

Unrecorded or nonexistent
purchases divided by accounts accounts, or misstatements
payable, and accounts payable
divided by current liabilities

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit

FOB destination

FOB origin

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Types of Audit Tests for the

Acquisition and Payment Cycle
Accounts
Payable

Cash in
Bank

Acquisition
Expenses

Payments

Expenses

Audited by
TOC, STOT, and AP

Audited by
TOC, STOT, and AP

Ending
balance
Audited by
AP and
TDB

Ending
balance
Audited
by AP

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Types of Audit Tests for the

Acquisition and Payment Cycle
Accounts
Payable

Acquisition
Assets
Acquisition
of assets

Audited by
TOC, STOT, and AP

Ending
balance
Audited by
AP and
TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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End of Chapter 19

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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