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1) Processing Purchase Orders
Purchase Requisition
• To request goods and services by an authorized employees.
• Companies rely on pre-specified reorder points used by the computer to initiate inventory
purchase requisitions automatically.
Purchase Order
• To order goods and services from vendors.
• Companies often submit purchase orders to vendors for electronic data interchange (EDI).

2) Receiving Goods and Services

Receiving Report
• A paper or electronic document prepared at the time goods are received.
3) Recognizing the Liability
Vendor’s Invoice
◦ Received from the vendor and shows the amount owed for an acquisition.
◦ Important because it indicates the amount recorded in the acquisition transaction file.

Debit Memo
◦ Received from vendor and indicates a reduction in the amount owed to a vendor
because of returned goods or allowance granted.
◦ To supports reductions in accounts payable.
◦ To establish a formal means of recording and controlling acquisitions.
◦ Primarily by enabling each acquisition transaction to be sequentially numbered.
Acquisitions Transaction File
◦ Computer generated file that includes all acquisition transactions processed by the
accounting system for a period.
◦ Used for a variety records, listings or reports such as an acquisitions journal, account
payable master file, and transactions for certain account balance or division.

Acquisitions Journal
◦ To identifies whether the acquisition was for cash or account payable.
◦ Posted simultaneously to the general ledger and if they are on account, to the
accounts payable master file.

Accounts Payable Master File

◦ Records acquisition, cash disbursements, and acquisition returns and allowances
transactions for each vendor.
Accounts Payable Trial Balance
◦ Listing amount owed to each vendor or voucher at a point in time.
◦ Prepared directly from accounts payable master file.

Vendor’s Statement
◦ Prepared monthly by the vendor and indicates the beginning balance, acquisitions,
returns and allowances, payment to vendor, and ending balance.

4) Processing and Recording Cash Disbursements

◦ Used to pay for the acquisition when payment is due.
◦ Prepared in a multi-copy format, with the original going to the payee and one copy filed
with vendor’s invoice.
Cash Disbursements Transaction File
◦ File includes all cash disbursements transaction processed by the accounting system for
a period.

Cash Disbursements Journal

◦ This is a listing or report from cash disbursement file that includes all transaction for any
time period.
◦ Including all relevant information that included in the account payable master file and
general ledger.
Understand Internal Control
◦ Study the client’s flowcharts

◦ Review internal control questionnaires

◦ Perform walk-through tests

Assess Planned Control Risk
◦ Separation of asset custody form other functions

◦ Timely recording and independent

◦ Authorization of payments
Determine Extent of Testing of
◦ 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
Controls and Substantive Tests of
Transactions for Acquisitions

◦ Recorded acquisitions are for goods and services received (

◦ Existing acquisitions are recorded ( completeness)
◦ Acquisitions are accurately recorded (accuracy)
◦ Acquisitions are correctly classified (classification)
Methodology for Designing Tests of
Balances for Accounts Payable
Identify client business risks affecting Phase 1
accounts payable

Set tolerable misstatement and assess Phase 1

inherent risk for accounts payable

Assess control risk for the acquisition and Phase 1

payment cycle
Methodology for Designing Tests of
Balances for Accounts Payable

Design and perform tests of controls and

substantive tests of transactions for the Phase II
acquisition and payment cycle
Methodology for Designing Tests of
Balances for Accounts Payable

Design and perform analytical

procedures for accounts payable Phase III

-Audit procedures
Design tests of details of accounts payable -Sample size Phase III
balance to satisfy balance- related audit -Item to select
objectives -Timing
Balance-related audit objective
1. Out-of-period liability tests
• The extent of test to uncover unrecorded account payable, often called
the search for unrecorded account payable.
2. Examine underlying documentation for subsequent cash disbursement
• Auditor examine supporting documentation for cash disbursement
subsequent to balance sheet date to determine whether a cash
disbursement was for current period liability.
3. Examine underlying documentation for bills not paid several week after
the year end
• For example , in an audit with a March 31 year end , assume the auditor
examine the supporting documentation for checks paid through June 28. Bill
that are still unpaid on June 28 should be examined to determine whether
they are obligation at March 31
Balance-related audit objective
4. Trace receiving reports issued before year end to related vendor invoices
• All merchandise received before the year end of the accounting period
should be included as account payable.
5. Trace vendor’s statement that show a balance due
• To the account payable trial balances if client maintains a file of vendor’s
statement, auditors can trace any statement that has a balance due at the
balance sheet date to listing to make sure it is included as an account
6. Send confirmations to vendor with which the client does business
• Auditor use them occasionally to test for vendor omitted from the account
payable list, omitted transaction, and misstated account balances.
Balance-related audit objective
7. Cutoff tests
• Account payable cutoff tests are done to determine whether
transaction recorded a few day before and after the balance
sheet date are included in the correct period.
8. Relationship of cutoff to physical observation of inventory
• To determine that the the account payable cutoff is correct, its is
essential that cutoff tests be coordinated with the physical
observation of inventory.
9. Inventory in transit
• In account payable, auditor must distinguish between
acquisition of inventory that are on an FOB destination basis and
those that are made FOB origin.
Reliability of evidence
1. Distinction Between Vendor’s Invoices and Vendor’s Statement

Auditor should distinguish between vendor’s invoices and vendor’s statement in

verifying the amount due to vendor.

Auditor get reliable evidence about individual transaction when they examine
vendor’s invoice and related supporting document, such as receiving report and
purchases order.
◦ 2. Difference between vendor statement and confirmation

The most important is the source of information. A vendor statement has been prepared
by the vendor but is in the hand of client at the time the auditor examines it.
Example is an invoice received from a supplier show the item purchased, the cost per
unit, the total of all item listed on the invoice.
Sample Size
 Sample size for account payable test vary considerably, depending on such factor
such factor as the materiality of account payable, the number of account outstanding,
assessed control risk. And the result of the prior year.

 Statistical sampling is less commonly used for the audit of account payable than for
account receivable