Audit of the Acquisition

and Payment Cycle

Chapter 18

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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
Cash
Acquisitions
disbursements
of goods and
services

Purchase Returns Purchase

and Allowances returns and
allowances
Purchase
Discounts

Purchase
discounts

Raw Material
Purchases

Property, Plant,
and Equipment

Prepaid
Expenses

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Accounts in the Acquisition

and Payment Cycle
Accounts Payable
Acquisitions
of goods and
services
Manufacturing
Expense Control
Subsidiary
accounts
Repair and
maint.
Taxes
Supplies
Freight in
Utilities

Selling Expense
Administrative
Control
Expense Control
Subsidiary
Subsidiary
accounts
Accounts
Commissions
Supplies
Travel expense
Officers
Delivery expense
travel
Repairs
Legal fees
Advertising
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
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 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
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 10

Related Documents
and Reports
Recognizing the Liability
Acquisitions transaction file
Acquisitions journal or listing
Vendors invoice

Debit memo

Voucher

A/P master file

A/P trial balance

Vendors statement

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 11

Related Documents
and Reports
Processing and Recording Cash Disbursements
Check
Cash disbursements transaction file
Cash disbursements journal or listing

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

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 13

How E-Commerce Affects the

Acquisition and Payment Cycle
Electronic data interchange (EDI) is the
electronic exchange of information between
companies and their suppliers and consumers.
Suppliers

Customers

EDI

EDI
Purchase
orders

Customer
orders

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 14

How E-Commerce Affects the

Acquisition and Payment Cycle
Information about products is
available over the Internet.
Some companies use extranets which link
the intranets of two or more companies.
Other companies use businessto-business auctions hosted on the
Internet to negotiate purchases.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 15

Learning Objective 4
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for the
acquisition and payment cycle.
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Methodology for Designing Tests of

Balances Accounts Receivable
Understand internal control
acquisitions and cash disbursements.
Assess planned control risk
acquisitions and cash disbursements.
Evaluate cost-benefit
of testing controls.
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Methodology for Designing Tests of

Balances Accounts Receivable
Design tests of controls Audit procedures
and substantive tests
of transactions for
Sample size
acquisitions and cash
disbursements to meet Items to select
transaction-related
Timing
audit objectives.
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Understand Internal Control

The auditor gains an understanding of internal
control for the acquisition and payment
cycle by studying the clients flowcharts,
preparing internal control questionnaires,
and performing walk-through tests for
acquisitions and cash disbursements.
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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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Evaluate Cost-Benefit of
Testing Controls
The auditor identifies the key internal controls
and weaknesses and assesses control risk.
The auditor decides whether substantive tests
will be reduced sufficiently to justify the cost
of performing tests of controls.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 21

Controls and Substantive Tests of

Transactions for Acquisitions
Recorded acquisitions are for goods and services
received, consistent with the best interests
of the client (existence).
Existing acquisitions are recorded (completeness).
Acquisitions are accurately recorded (accuracy).
Acquisitions are correctly classified (classification).
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 22

Controls and Substantive Tests of

Transactions for Cash Disbursements
The assumption underlying these controls
and audit procedures is separate cash
disbursements and acquisitions journals.
The acquisitions and cash disbursements
tests are typically performed concurrently.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 23

Learning Objective 5
Describe the methodology for
designing tests of details of
balances for accounts payable
using the audit risk model.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 24

Methodology for Designing Tests

of Details of Balances for A/P
Phase I
Set tolerable misstatement and assess inherent risk.
Identify client risks affecting
accounts payable.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 25

Methodology for Designing Tests

of Details of Balances for A/P
Phases I and II
Assess control risk and design and
perform tests of controls and substantive
tests of transactions.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 26

Methodology for Designing Tests

of Details of Balances for A/P
Phase III
Design and perform analytical procedures.
Design and perform tests of details of
accounts payable balance.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 27

Learning Objective 6
Design and perform analytical
procedures for accounts payable.

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 28

Analytical Procedures for the

Acquisition and Payment Cycle
Analytical Procedure
Compare acquisitionrelated expense account
balances with prior years.
Review list of accounts
payable for unusual,
nonvender, and interestbearing payables.

Possible Misstatement
Misstatement of
accounts payable
and expenses
Classification
misstatement for
nontrade liabilities

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Analytical Procedures for the

Acquisition and Payment Cycle
Analytical Procedure
Compare individual
accounts payable with
previous years.
Calculate ratios such as
purchases divided by
accounts payable, and
accounts payable divided
by current liabilities.

Possible Misstatement
Unrecorded or
nonexistent accounts,
or misstatements
Unrecorded or
nonexistent accounts,
or misstatements

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 30

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.

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Cutoff Tests
Relationship of cutoff to physical
observation of inventory

Inventory in transit

2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 34

Learning Objective 8
Distinguish the reliability of
vendors invoices, vendors
statements, and confirmations
of accounts payable
as audit evidence.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 35

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.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 37

Types of Audit Tests for the

Acquisition and Payment Cycle
Cash in
Bank

Accounts
Payable

Acquisition
Expenses

Payments

Expenses

Audited by
TOC, STOT, and AP

Audited by
TOC, STOT, and AP

Ending
balance

Audited by
AP and TDP

Ending
balance
Audited by
AP

TOC + STOT + AP + TDP

= Sufficient competent evidence per GAAS
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 38

Types of Audit Tests for the

Acquisition and Payment Cycle
Accounts
Payable

Acquisition
of assets

Acquisition
Assets

Audited by
TOC, STOT, and AP

Ending
balance

Audited by
AP and TDP

TOC + STOT + AP + TDP

= Sufficient competent evidence per GAAS
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 39

End of Chapter 18

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