Audit CH-4

Audit of the Acquisition
and Payment Cycle
Chapter 4
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 18 - 1
Learning Objective 1
Identify the accounts and the

classes of transactions in the
acquisition and payment cycle.
Transactions in the Acquisition and Payment
Cycle
1. Acquisitions of goods and services

2. Cash disbursements
3. Purchase returns and allowances
and purchase discounts
Accounts in the Acquisition
and Payment Cycle
Raw Material
Cash in Bank Accounts Payable Purchases
Cash Acquisitions
disbursements of goods and
services
Purchase Returns Purchase Property, Plant,
and Allowances returns and and Equipment
allowances
Purchase Purchase Prepaid

Discounts discounts Expenses
Accounts in the Acquisition
and Payment Cycle
Accounts Payable
Acquisitions
of goods and
services
Manufacturing Selling Expense Administrative
Expense Control Control Expense Control
Subsidiary Subsidiary Subsidiary
accounts accounts Accounts
Repair and Commissions Supplies
maint. Travel expense Officers’
Taxes Delivery expense travel
Supplies Repairs Legal fees
Freight in Advertising Auditing fees
Utilities Taxes
Describe the business functions

and the related documents
and records in the acquisition
and payment cycle.
Classes of Transactions
and Accounts
Inventory
Property, plant, and equipment
Prepaid expenses
Leasehold improvements
Accounts payable
Manufacturing expenses
Selling and administrative expenses
Classes of Transactions
and Accounts
Cash in bank (from cash disbursements)

Accounts payable
Purchase discounts
Business Functions
in the Cycle
Processing Purchase Orders
Receiving Goods and Services
Recognizing the Liability
Processing and Recording Cash Disbursements

Related Documents
and Reports
Processing Purchase Orders
Purchase requisition Purchase order
Receiving Goods and Services
Receiving report
Related Documents
and Reports
Recognizing the Liability
Acquisitions transaction file

Acquisitions journal or listing
Vendor’s invoice Debit memo
Voucher A/P master file
A/P trial balance Vendor’s statement
Related Documents
and Reports
Processing and Recording Cash Disbursements
Check
Cash disbursements transaction file
Cash disbursements journal or listing
Describe how e-commerce

affects the acquisition of
goods and services.
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 Customer
orders orders
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 business-
to-business auctions hosted on the
Internet to negotiate purchases.
Understand internal control and

design and perform tests of
controls and substantive tests
of transactions for the
acquisition and payment cycle.
Methodology for Designing Tests of
Balances – Accounts Receivable
Understand internal control –
acquisitions and cash disbursements.
Assess planned control risk –

Evaluate cost-benefit
of testing controls.
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
audit objectives. Timing
Understand Internal Control
The auditor gains an understanding of internal

control for the acquisition and payment
cycle by studying the client’s flowcharts,
preparing internal control questionnaires,
and performing walk-through tests for
Assess Planned Control Risk
Authorization of purchases
Separation of asset custody
from other functions
Timely recording and
independent review
of transactions
Authorization of payments
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.
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).
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.
Describe the methodology for

designing tests of details of
balances for accounts payable
using the audit risk model.
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.
Phases I and II
Assess control risk and design and

perform tests of controls and substantive
tests of transactions.
Phase III
Design and perform analytical procedures.
Design and perform tests of details of

accounts payable balance.
Design and perform analytical

procedures for accounts payable.
Analytical Procedures for the Acquisition and
Payment Cycle
Analytical Procedure Possible Misstatement

Compare acquisition- Misstatement of
related expense account accounts payable
balances with prior years. and expenses
Review list of accounts Classification
payable for unusual, misstatement for
Non-vender, and interest- nontrade liabilities
bearing payables.
Analytical Procedures for the Acquisition and
Payment Cycle
Analytical Procedure Possible Misstatement

Compare individual Unrecorded or
accounts payable with nonexistent accounts,
previous years. or misstatements
Calculate ratios such as Unrecorded or
purchases divided by nonexistent accounts,
accounts payable, and or misstatements
accounts payable divided
by current liabilities.
Design and perform tests

of details of balances for
accounts payable, including
out-of-period liability tests.
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.
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.
Cutoff Tests
 Relationship of cutoff to physical

observation of inventory
 Inventory in transit
Distinguish the reliability of

vendors’ invoices, vendors’
statements, and confirmations
of accounts payable
as audit evidence.
Reliability of Evidence
Distinction between vendors’

invoices and vendors’ statements
Difference between vendors’

statements and confirmations
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.
Types of Audit Tests for the
Acquisition and Payment Cycle
Cash in Accounts Acquisition

Bank Payable Expenses
Payments Expenses
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP
Ending Ending
balance balance
Audited by Audited by
AP and TDP AP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
Types of Audit Tests for the
Acquisition and Payment Cycle
Accounts Acquisition
Payable Assets
Acquisition
of assets
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
AP and TDP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
End of Chapter 4

Audit CH-4

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Audit of the Acquisition

and Payment Cycle

Identify the accounts and the

1. Acquisitions of goods and services

Purchase Purchase Prepaid

Describe the business functions

Cash in bank (from cash disbursements)

Processing Purchase Orders

Receiving Goods and Services

Recognizing the Liability

Processing and Recording Cash Disbursements

Processing Purchase Orders

Purchase requisition Purchase order

Receiving Goods and Services

Recognizing the Liability

Acquisitions transaction file

Processing and Recording Cash Disbursements

Describe how e-commerce

Electronic data interchange (EDI) is the

Information about products is

Understand internal control and

Assess planned control risk –

Design tests of controls Audit procedures

The auditor gains an understanding of internal

The auditor identifies the key internal controls

Recorded acquisitions are for goods and services

The assumption underlying these controls

Describe the methodology for

Set tolerable misstatement and assess inherent risk.

Assess control risk and design and

Design and perform analytical procedures.

Design and perform tests of details of

Design and perform analytical

Analytical Procedure Possible Misstatement

Analytical Procedure Possible Misstatement

Design and perform tests

Examine underlying documentation for

Trace vendors’ statements that show a balance

 Relationship of cutoff to physical

Distinguish the reliability of

Distinction between vendors’

Difference between vendors’

Sample sizes for accounts payable tests vary

Statistical sampling is less commonly used

Cash in Accounts Acquisition

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