Audit of the Acquisition and

Payment Cycle: Tests of Controls,

Substantive Tests of Transactions,
and Accounts Payable
Lecture 5
Outline

• Accounts and classes of transactions in acquisition and payment cycles

• Business functions, documents and records in the cycle
• Methodology for designing tests of control and substantive tests for
acquisitions
• Methodology for designing tests of balances for accounts payable
• Reliability of evidence
Classes of transactions in the Acquisition and Payment Cycle

1. ACQUISITIONS OF 2. CASH DISBURSEMENTS 3. PURCHASE RETURNS

GOODS AND SERVICES AND ALLOWANCES AND
PURCHASE DISCOUNTS
 Basic business process

Make payment Receive payment

(cheque) (receipt)

Order goods Order goods

(order form) (order form)
Business Customer
Supplier
entity
Deliver goods Dispatch goods
(delivery note) (delivery docket)
Issue invoice Issue sales invoice

Receive statement Send statement

of account of account
Business
PROCESSING PURCHASE RECEIVING GOODS AND
ORDER SERVICES

Functions in
the Cycle

RECOGNISING THE PROCESSING AND

LIABILITY RECORDING CASH
DISBURSEMENTS
Related Documents and Reports
 Accounts in
the
Acquisition
and Payment
Cycle
Methodology
for Designing
TOC and
Substantive
Tests
TOC and STOT for acquisition and payment
cycle

Tests of acquisitions:
processing purchase Tests of payments:
orders, receiving processing and
goods and services, recording cash
and recognizing the disbursements
liability
Key internal controls

Authorization of purchases

Separation of Asset Custody from

Other Functions

Timely Recording and

Independent Review of
Transactions

Authorization of Payments
 Relate each of the internal controls to
transaction-related audit objectives

Design TOC &

STOT - Relate tests of controls to internal
controls

Acquisitions
Relate substantive tests of transactions
to transaction-related audit objectives
after considering controls and
deficiencies in the system
 Transaction-related audit objectives - acquisition

Occurrence Recorded Acquisitions Are for Goods and Services Received

Completeness Existing Acquisitions Are Recorded

Accuracy Acquisitions Are Accurately Recorded

Classification Acquisitions Are Correctly Classified

Timing Acquisition transactions are recorded on the correct dates

Posting and Acquisition transactions are properly recorded in the accounts

summarisation payable and inventory master file and are correctly summarized
• TABLE 18- 2(P612)
• Table 18.3 (p615)
Methodology for
Designing Tests
of Balances for
Accounts Payable
Analytical Procedures for the Acquisition and Payment Cycle
Design and
perform tests
of details of Two types of liability tests
balances for • Out-of-period liability tests
accounts • Cut-off test
payable
Out-of-liability tests

Examine underlying Examine underlying

Trace receiving reports
documentation for documentation for bills
issued before year-end to
subsequent cash not paid several weeks
related vendors’ invoices
disbursements after the year-end

Trace vendors’
statements that show a Send confirmations to
balance due to the vendors with which the
accounts payable trial client does business
balance
 Relationship of Cutoff to
Physical Observation of
Inventory

Cut-off test
Inventory in Transit
 Reliability of Evidence

A vendor's statement is a document made by the vendor but is in

the hands of the client

A confirmation is sent directly to the auditor by the vendor

 A vendor's statement includes
only total amounts of the
transaction
Reliability of
Evidence
A vendor’s invoice includes
units acquired, price, and other
data
 THE END!

Exercise:
18-19, 18-20, 18-24
Reference: C210, E230, E231, E233