18
Chapter
Learning ObjeCtives
After studying this chapter, you should
be able to
18-1 Identify the accounts and
the classes of transactions in
the acquisition and payment
cycle.
18-2 Describe the business
functions and the related
documents and records in the
acquisition and payment cycle.
18-3 Understand internal control,
and design and perform tests
of controls and substantive
tests of transactions for the
acquisition and payment cycle.
18-4 Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
18-5 Design and perform
substantive analytical
procedures for
accounts payable.
18-6 Design and perform tests
of details of balances for
accounts payable, including
out-of-period liability tests.
18-7 Distinguish the reliability of
vendors’ invoices, vendors’
statements, and confirmations
of accounts payable as audit
evidence.
Audit of thE
Acquisition And
pAymEnt cyclE: tEsts of
controls, substAntivE
tEsts of trAnsActions,
And Accounts pAyAblE
False Purchases Camouflage Overstated Profits
Comptronix Corporation announced that senior members of its management team overstated
profits, and there would be material adjustments to the prior years’ audited financial state-
ments. Central to the fraud was the use of fictitious purchases of large equipment items to
overstate fixed assets and hide fictitious sales.
the senior executives circumvented Comptronix’s existing internal controls by bypassing the
purchasing and receiving departments so that no one at Comptronix could discover the scheme.
Comptronix employees usually created a fairly extensive paper trail for equipment purchases.
Company internal controls over acquisition and cash disbursement transactions typically required
a purchase order, receiving re-
port, and vendor invoice before
payment could be authorized
by the chief operating officer
or the controller/treasurer,
who were both participants in
the fraud. as a result, the exec-
utives were able to bypass con-
trols over cash disbursements
and authorize payment for
nonexistent purchases without
creating any documents for the
fictitious transactions.
the company also created fictitious sales and related receivables. the company issued checks
to pay for the false purchase transactions. the checks were then redeposited into the com-
pany’s bank account and recorded as collections on the fictitious receivables. as a result, it
appeared that the fictitious sales were collected, and that payments were made to support the
false fixed asset purchases.
the fraud scheme grossly exaggerated the company’s performance by reporting profits when
the company was actually incurring losses. On the day that the public announcement of the
fraud was made, Comptronix’s common stock price declined abruptly by 72 percent! the SEC
ultimately charged the executives with violating the antifraud provisions of the Securities act
of 1933 and the Securities Exchange act of 1934. the SEC permanently barred the executives
from serving as officers or directors of any public company, ordered them to repay bonuses and
trading losses avoided, and imposed civil monetary penalties against them.
Source: Based on Accounting and Auditing Enforcement Release No. 543, Commerce Clearing
House, Inc., Chicago.