Audit of the Acquisition and Payment Cycle: Tests of Controls,

Substantive Tests of Transactions, and Accounts Payable

Submitted to Fulfill the Task of Auditing 2

Lecturing Associated by:
Mr. Atta Putra Harjanto, S.E., M.Ak.

Arranged by:
Group 6
- Muhammad Rizal (7211420113)
- Farah Zata Yumnillah (7211420052)
- Esti Setianingsih (7211420098)

SEMARANG STATE UNIVERSITY

2022

INTRODUCTION
 Assalamualaikum Wr. Wb.
Bismillahirrahmanirrahim, praise be to Allah SWT, who with His mercy has made it
easy for us to compile our paper entitled "Audit of the Acquisition and Payment Cycle: Tests
of Transactions, Substantive Tests of Transactions, and Accounts Payable". We crafted this
paper to fulfill the task of the Auditing 2 course with the lecturer Mr. Atta Putra Harjanto,
S.E., M.Ak.
We wanted to thank him for giving us the task of making this Auditing 2 paper. With
this assignment, we hope that we can be more familiar with our material as well. We also
wanted to thank those who have been the source in the preparation of our paper.
We are very aware that this paper is far from perfect. Therefore, if there is any invalid
information or misspelled words, we are open to receive suggestions and criticisms from the
readers.
Wassalamualaikum Wr. Wb.

Semarang, February 19, 2022

Writer Team

TABLE OF CONTENT

PREFACE……………………………………………………………………….….…

ii
TABLE OF CONTENT……………………………………………………...……...iii

CHAPTER I INTRODUCTION………………………………………….……….

………….…….4

1.1 Background……………………………………….………………..…….….…4

1.2 Formulation of the Problem………………………………….………..……….4

1.3 Objectives……………………………………………….……………….……..4

CHAPTER II THEORY AND DISCUSSION

2.1 Accounts and Class of Transactions in The Acquisition Cycle and

Payment………………………………………………………………………..……6

2.2 Business Functions in the Cycle and Related Documents and Records….…….7

2.3 Methodology for Designing Tests of Controls and Substantive Tests of

Transactions……………………………………………………………..………..10

2.4 Methodology for Designing Tests of Details of Balances for Accounts

Payable……………………………………………………………..……..............11

CASE STUDY………………………………………………………...…..……........17

CHAPTER III CONCLUSION………………………………………………..…...18

REFERENCES…………………………………………………………………..….19

CHAPTER I

INTRODUCTION

1.1 Background
The acquisition of goods and services includes the acquisition of goods such as raw materials,
equipment, supplies, utilities, repair and maintenance, as well as research and development. It
is necessary to assess control risk and design tests of controls and substantive tests of
transactions for classes of transactions in the acquisition and payment cycle. Next, it is
necessary to carry out testing. Therefore, auditors must understand the business functions and
company documents and records before they can assess control risk and design tests of
controls and substantive tests of transactions.

1.2 Formulation of the Problem

1. What is the objective of audit of the acquisition and payments cycle ?
2. How many accounts and classes inside of the cycle?
3. What are the acquisition and payments cycle’s business functions?
4. What documents and reports that were used on the business functions?
5. How to design both test of control and substantive test of transaction?
6. How to design test of details of balances for account payable?

1.3 Objectives
1. Identify the accounts and the classes of transactions in the acquisition and
payment cycle.
2. Describe the business functions and the related documents and records in the
acquisition and payment cycle.
3. Understand internal control, and design and perform tests of controls and
substantive tests of transactions for the acquisition and payment cycle.
4. Describe the methodology for designing tests of details of balances for accounts
payable using the audit risk model.
5. Design and perform substantive analytical procedures for accounts payable.
6. Design and perform tests of details of balances for accounts payable, including
out-of-period liability tests.
7. Distinguish the reliability of vendors’ invoices, vendors’ statements, and
confirmations of accounts payable as audit evidence.
 CHAPTER II

THEORY AND DISCUSSION

2.1 Accounts and Class of Transactions in The Acquisition Cycle and Payment
The overall objective of an audit of the acquisition and payments cycle is evaluate whether
the accounts affected by the acquisition of goods and services and cash disbursements for the
acquisition are fairly presented in accordance with accounting standards. There are three
classes of transactions included in the cycle:

- Acquisition of goods and services

- Cash disbursement

- Purchase returns and allowances and purchase discounts

Picture 18.1 indicates that each transaction was debited or credited to accounts payable.
Because many companies make direct acquisitions using a check or petty cash.

2.2 Business Functions in The Cycle and Documents and Related Notes

The acquisition and payment cycle involves the necessary decisions and processes to acquire
goods and services to operate a business. This cycle generally begins with the creation of a
purchase requisition by the employee who authorized person who needs the goods and
services, then ends with payment accounts payable. In table 18.1 shows four function that
happens. The first three functions are recording the acquisition of goods and services on
credit, while the fourth function is to record cash disbursements for payment to vendors.
Here are the four business functions and documents that used during the process:

A. Processing Orders Purchase.

- Purchase requisition is used to request goods and services by authorized employees.

- Purchase order is a document that used to order goods and services from vendors. The
order includes description, quantity, and related information about the goods and
services you want purchased by a company. Company usually sends purchase order to
vendors that already have an electronic data interchange (EDI) system.

B. Receiving Goods and Services.

Its where most companies start recognizes the acquisition and related liability on its
records. If the goods have accepted, adequate controls will require audits to be carried
out on the description, quantity, timely arrival and condition. Receiving report a
document that crated when the goods are received, its conclude item description,
quantity received, date received, and other relevant data.

C. Granting Liabilities

Proper recognition of obligations for receipt of goods and services requires timely
and accurate recording. Initial recording will affect the report actual finance and cash
disbursements; Therefore, companies must be careful lists all acquisition transactions,
only the acquisitions made, and at the right amount. Common documents and records
include:

- Vendor’s Invoice, is accepted documents from the vendor and shows the amount
owed on an acquisition. It shows the description and quantity of goods and services
received, price (including freight), cash discount terms, billing date and total the
amount.
- Debit Memo, is an accepted document from the vendor clan indicates a reduction in
the amount owed to the vendor due to the return of goods or the reduction given.
- Voucher, usually used by organization in determining how formal to record and
control acquisitions, especially by allowing each acquisition transaction is numbered
sequentially.
- Acquisition Transactions File. This file contains all the information that included in
the clan system includes information about each transaction, such as vendor name,
 date, amount, account classification or classification, and description and quantity of
goods and services purchased. The file can also accommodate returns clan reduction
of purchases or can be maintained a separate file for the transactions
- Acquisitions Journal, or listing or purchase journal generally created from transaction
files acquisitions and generally include vendor name, date, amount, and account
classification or classification of each transaction, such as repair and maintenance,
inventory,or utility. Its also identifies whether the acquisition was carried out cash or
with accounts payable. Journals or listings can cover any period of time. The same
transactions recorded in journals or listings are also posted simultaneously to the
general ledger of the clan, if done by credit, goes to the accounts payable master file.
- Accounts Payable Master File, record acquisition transactions, cash disbursements,
and acquisition returns and allowances for each vendor. This master file is updated
from the acquisition transaction file, clan returns deductions, and computerized cash
disbursements. Total each account balance in the master file equals the total balance
of accounts payable in the general ledger.
- Accounts Payable Trial Balance, its list the amounts owed to each vendor or from
each invoice or voucher at a point in time. The trial balance will immediately created
from accounts payable’s master file
- Vendor's Statement, are documents that prepared monthly by the vendor and shows
opening balances, acquisitions, returns and deductions, payments to vendors, and
ending balances. Balance and activity This represents the vendor's representation of
the transactions made during the period running, not the client. Except for the
disputed amount and difference time, the client's accounts payable master file should
be the same as the vendor's report.

D. Processing and Records Cash Disbursement

- Checks, this document is generally used to pay for acquisitions when payment expired
and usually done on computer. Usually checks are made in multi-copy format, in
whichever original is given to the payee, one copy is archived with vendor invoices
and other supporting documents, and others are archived numerically. In most cases,
each check is recorded in the transaction file cash disbursement. Once a check is
signed by an authorized person, the check becomes an asset. When the check is
cashed by the vendor or cleared by the client's bank, the check is referred to as a
canceled check. At that point, the check is no longer an asset, but a document.
 - Cash Disbursement Transaction File, its a computer-generated file that lists all
transactions cash disbursements processed by the accounting system during some
period.
- Cash Disbursement Journal or Listing, this listing or report created from a cash
disbursement transaction file that lists all transactions during each time period

2.3 Methodology for Designing Tests of Controls and Substantive Tests of Transactions

Accounts receivable, inventory, fixed assets, accounts payable, and expense accounts are
directly related to the acquisition and payment cycle. Details of these account balances can be
tested using tests of controls and substantive tests to save time.

Type of control and substantive tests of transactions for the acquisition and payment cycle:

1. Acquisition tests processing purchase orders, receiving goods and services, and
recognizing the liability.
2. Payment tests processing and recording cash disbursement.

Understand Internal Control

Internal control for the acquisition and payment cycle is used by the auditor to carry out risk
assessment procedures. With the existence of internal control, companies can control and
overcome risks so that the company’s operational activities can run well and protect company
assets.

Assess Planned Control Risk

1. Authorization of Purchases

It is carried out to avoid excessive acquisition of goods and services. Example:

1) Fixed asset acquisition in excess of a specified dollar limit requires approval by the
BOD.
2) Items acquired relatively infrequently, such as insurance policies and long-term
service contracts, are approved by certain officers.
 3) Supplies and services costing less than a designated amount are approved by
supervisors and department heads.

After the purchase requisition for an acquisition has been approved, a purchase order to
acquire the goods and services must be initiated. For effective internal control, the purchasing
department should be separate from those who authorize the acquisition or receive the goods.

2. Separation of Asset Custody from Other Functions

Most companies ask the receiving department to make receiving reports for receipt and
inspection of goods as evidence. One copy is usually submitted to the raw materials
warehouse and the other to the accounts payable department which requires the information.

3. Timely Recording and Independent Review of Transactions

An important control in the accounts payable and IT departments is the requirement that the
personnel who record acquisition do not have access to cash, marketable securities, and other
assets. It aims so that each department can carry out its duties independently.

4. Authorization of Payments

Cash disbursement control:

1) The check signing by a proper individual.

2) Responsibility separation for signing check and performing the accounts payable
function.
3) Careful examination of supporting documents by the check signer at the time the
check is signed.

Determine Extent of Tests of Controls

Auditors identify key internal control weakness and assess control risk. If auditors want to
assess the initial control risk below the maximum, auditors should carry out a control test to
obtain evidence that the control is operating effectively. After it is improved by additional
control test, the auditors will be able to reduce substantive tests.

Control objectives related to acquisition transactions (SA 330):

 1. Recorded acquisitions are for goods and services received, consistent with the best
interests of the client (occurrence).
2. Existing acquisitions are recorded (completeness).
3. Acquisitions are accurately recorded (accuracy).
4. Acquisitions are correctly classified (classification).

2.4 Methodology for Designing Tests of Details of Balances for Accounts Payable
Accounts payable are unpaid obligations for goods and services received in the ordinary
course of business. Accounts payable includes obligations for the acquisition of raw
materials, equipment, utilities, repairs, and many other types of goods and services that were
received before the end of the year. Figure 18-3 summarizes the methodology for designing
tests of details for accounts payable.
The methodology for designing tests of details for accounts payable:
1. Identify Significant Risks and Assess The Risk of Material Misstatement for
Accounts Payable (Phase I)
A large number of transactions can affect accounts payable. The balance is often
significant and made up of a large number of vendor balances, and it is relatively expensive
to audit the account. For these reasons, auditors often assess inherent risk as medium or high.
As part of the process of identifying significant risks and assessing the risk of material
misstatement in accounts payable, the auditor considers any recent changes in the acquisition
and payment cycle. The focus by many companies on improving their supply-chain
management activities has led to numerous changes in the design of systems used to initiate
and record acquisition and payment activities. Efforts to streamline the purchasing of goods
and services, including increased sharing of information with suppliers and the use of
technology and e-commerce to transact business, are changing all aspects of the acquisition
and payment cycle for many companies. Significant client business risks may arise from
these changes.
SA 315
For financial reporting purposes, the entity's risk assessment process includes how
management identifies business risks that are relevant to the preparation of financial
statements in accordance with the entity's applicable financial reporting framework, estimates
the significance of these business risks, assesses the likelihood of their occurrence, and
decides on actions to respond to and manage those risks and the results of the risk assessment
process.
2. Set Performance Materiality (Phase I)
Because a large number of transactions affect accounts payable, its balance is often
significant and made up of multiple vendor balances, and it is relatively expensive to audit,
auditors typically set performance materiality for accounts payable relatively high. These are
the same reasons that result in a higher assessed inherent risk.
SA 320
Performance materiality is an amount determined by the auditor, at a lower level than
materiality for the financial statements as a whole, to reduce to an appropriately low level the
probability of uncorrected and undetected misstatements that in the aggregate exceed
materiality for overall financial statements. Where applicable, performance materiality may
be determined by the auditor at a lower amount than materiality for certain classes of
transactions, account balances or disclosures.

3. Assess Control Risk and Design and Perform Tests of Controls and Substantive
Tests of Transactions (Phases I and II)
Auditor assess control risk based on an understanding of internal control. The auditor’s
ultimate substantive tests depend on the relative effectiveness of internal controls related to
accounts payable. The effects of the client’s internal controls on accounts payable tests can be
illustrated by two examples:
● Assume that the client has highly effective internal controls over recording and paying
for acquisitions. The receipt of goods is promptly documented by prenumbered receiving
reports; prenumbered vouchers are promptly and efficiently prepared and recorded in the
acquisition transactions file and the accounts payable master file. Cash disbursements are
made promptly when due and immediately recorded in the cash disbursements
transactions file and the accounts payable master file. Individual accounts payable
balances in the master file are reconciled monthly with vendors’ statements, and the
computer automatically reconciles the master file total to the general ledger. Under these
circumstances, the verification of accounts payable should require little audit effort once
the auditor concludes that internal controls are operating effectively.
● Assume that receiving reports are not used, the client defers recording acquisitions until
cash disbursements are made, and because of cash shortages, bills are often paid several
months after their due date. When an auditor faces such a situation, there is a high
likelihood of an understatement of accounts payable; therefore, extensive tests of details
 of accounts payable are necessary to determine whether accounts payable is correctly
stated on the balance sheet date.
SA 315
Risk assessment procedures for obtaining audit evidence about the design and
implementation of relevant controls may include:
1. Inquire from entity personnel.
2. Observing the implementation of certain controls.
3. Inspect documents and reports.
4. Tracing transactions through information systems that are relevant to financial
reporting.

4. Design and Perform Substantive Analytical Procedures (Phase III)

Table 18-4 illustrates analytical procedures for the balance sheet and income statement
accounts in the acquisition and payment cycle that are useful for uncovering areas in which
additional investigation is desirable. Auditors should compare current year expense totals
with prior years to uncover misstatements of accounts payable as well as in the expense
accounts. Because of double-entry accounting, a misstatement of an expense account usually
also results in an equal misstatement of accounts payable.

SA 520
The auditor may inquire of management about the availability and reliability of information
needed to apply substantive analytical procedures, and the results of analytical procedures
performed by the entity.

5. Design and Perform Tests of Details of Accounts Payable Balance (Phase III)
 Table 18-5 includes the balance-related audit objectives and common tests of details of
balances procedures for accounts payable. The auditor’s actual audit procedures vary
considerably depending on the nature of the entity, the materiality of accounts payable, the
nature and effectiveness of internal controls, and inherent risk. As auditors perform tests of
details of balances for accounts payable and other liability accounts, they may also gather
evidence about the four presentation and disclosure objectives, especially when performing
completeness objective tests.

Out-of-period Liability tests

The extent of tests to uncover unrecorded accounts payable, often called the search for
unrecorded accounts payable, depends heavily on assessed control risk and the materiality of
the potential balance in the account. The same audit procedures used to uncover unrecorded
payables are applicable to the accuracy objective. The following are typical audit procedures:
● 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
● Trace Vendors’ Statements That Show a Balance Due to the Accounts Payable Trial
Balance
● Send Confirmations to Vendors with Which the Client Does Business
● Cutoff tests
Relationship of Cutoff to Physical Observation of Inventory. The auditor should review
the procedures in the receiving department to determine that all inventory received was
counted, and the auditor should record in the audit documentation the last receiving report
number of inventory included in the physical count. Subsequent to the physical count date,
the auditor should then test the accounting records for cutoff. The auditor should trace the
previously documented receiving report numbers to the accounts payable records to verify
that they are correctly included or excluded. When the client’s physical inventory takes place
before the last day of the year, the auditor must still perform an accounts payable cutoff at the
time of the physical count in the manner described in the preceding paragraph. In addition,
the auditor must verify whether all acquisitions that took place between the physical count
and the end of the year were added to the physical inventory and accounts payable.
Inventory in Transit. In accounts payable, auditors must distinguish between acquisitions of
inventory that are on an FOB destination basis and those that are made FOB origin. For FOB
destination, title passes to the buyer when the inventory is received, so only inventory
received on or before the balance sheet date should be included in inventory and accounts
payable at year-end. When an acquisition is FOB origin, the company must record the
inventory and related accounts payable in the current period if shipment occurred on or
before the balance sheet date. Auditors should examine invoices for merchandise received
shortly after year-end to determine whether they were on an FOB origin basis. For those that
were, and when the shipment dates were on or before the balance sheet date, the inventory
and related accounts payable must be recorded in the current period if the amounts are
material.

Reliability of Evidence
Auditors need to understand the relative reliability of the three primary types of
evidence ordinarily used for verifying accounts payable: vendors’ invoices, vendors’
statements, and confirmations.
Distinction Between Vendors’ Invoices and Vendors’ Statements
Auditors get highly reliable evidence about individual transactions when they examine
vendors’ invoices and related supporting documents, such as receiving reports and purchase
orders. A vendor’s statement is not as desirable as invoices for verifying individual
transactions because a statement includes only the total amount of the transaction. The units
acquired, price, freight, and other data are not included. The vendor’s statement is superior
for verifying accounts payable because it includes the ending balance. The auditor can
compare existing vendors’ invoices with the client’s list and still not uncover missing ones,
which is the primary concern in accounts payable. The vendor’s invoice is superior for
verifying transactions because the auditor is verifying individual transactions and the invoice
shows the details of the acquisitions.

Difference Between Vendors’ Statements and Confirmations

The most important distinction between a vendor’s statement and a confirmation of
accounts payable is the source of the information. A vendor’s statement has been prepared by
the vendor (an independent third party) but is in the hands of the client at the time the auditor
examines it. This provides the client with an opportunity to alter a vendor’s statement or to
withhold certain statements from the auditor. A response to a confirmation request for
accounts payable is normally an itemized statement sent directly to the CPA’s office by the
vendor. It provides the same information as a vendor’s statement but is more reliable.
CASE STUDY

Comptronix Corporation is a company engaged in the construction industry. One of the

advantages of Comptronix Corporation is managing their fixed assets such as acquiring large
equipment and reselling these assets. The number of equipment on the company's balance
sheet is greater than other current assets. However, based on the examination carried out,
there were several sales that had no evidence and were not recorded, and there were also
some sales that were not recorded. It is recommended that the company management pay
attention to the purchasing and receiving department in order to monitor acquisition
transactions and cash disbursements when placing an order for the purchase of the equipment.
As well as the accounting department in processing equipment receipt reports and vendor
invoices before payment which needs to be authorized by the treasurer to avoid discrepancies
in equipment numbers that may be intentionally done by overstating company profits.

Discussion :

Auditors need to disclose fraud detection in Comptronix comp. If you observe the
case above, what the company faces is the risk of Integrity, namely the risk of failure
by management or company employees, illegal actions, or other irregularities that can
reduce the reputation in the world, or can reduce the company's ability to maintain its
life.

The existence of such risks requires internal auditors to develop preventive

measures to prevent events such as those described in the previous section. However,
it is quite fun, internal auditors must understand how to detect early when fraud
occurs.

These detection measures cannot be generalized to all frauds. Each type has its
own uniqueness, so as to be able to detect the need for a good understanding of the
types of violations that may arise within the company. Signs of existence are indicated
by the appearance of symptoms (symptoms) such as changes in a person's lifestyle or
behavior, complaints from or suspicions from co-workers. At first, this vulnerability
will arise due to the emergence of certain characteristics, both environmental
conditions, and behavior of a person. Characteristics that are certain conditions /
situations, the behavior / conditions of a personal person is a red flag (indicator of
fraud).

Although the appearance of these danger signs is not always an indication of an

incident, these warning signs usually appear in every case that occurs. Further
understanding and analysis of these Red flags can help in the next steps to identify
early or detect fraud.
 CHAPTER III
CONCLUSION

The acquisition and payment cycle involves the decisions and processes required to acquire
goods and services to operate a business. The cycle usually begins with the creation of a
purchase requisition by an authorized employee who requires a piece of service, and ends
with the payment of accounts payable.

REFERENCES
Romney, Marshall, Paul Steinbart. 2018. 14E Accounting Information Systems. USA:
Pearson.