Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 17
Audit of the Acquisition and
Payment Cycle: Tests of
Controls, Substantive Tests of
Transactions, and Accounts
Payable

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Accounts and Classes of
Transactions in the Acquisition and
Payment Cycle
• There are three classes of transactions included in the
cycle:
– Acquisitions of goods and services
– Cash disbursements
– Purchase returns and allowances and purchase
discounts

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Figure 17.1 Accounts in the
Acquisition and Payment Cycle

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Let’s Discuss (1 of 7)
List five asset accounts, three liability accounts, and five
expense accounts included in the acquisition and payment
cycle for a typical manufacturing company.

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Business Functions in the Cycle and
Related Documents and Records
• There are four business functions in the acquisition
and payment cycle:
– Processing purchase orders
– Receiving goods and services
– Recognizing the liability
– Processing and recording cash disbursements

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Table 17.1 Classes of Transactions,
Accounts, Business Functions, and
Related Documents and Records for
the Acquisition and Payment Cycle

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Methodology for Designing Tests of
Controls and Substantive Tests of
Transactions (1 of 3)
• The most time-consuming accounts to verify by
substantive tests of details of balances are:
– Accounts receivable, inventory, fixed assets, accounts
payable, and expense accounts
– Four of these five are directly related to the acquisition
and payment cycle

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Methodology for Designing Tests of
Controls and Substantive Tests of
Transactions (2 of 3)
• The methodology for designing tests of controls and
substantive tests of transactions for the acquisition
and payment cycle include (1 of 2):
– Understand internal control
– Assess planned control risk
– Determine extent of tests of controls

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Methodology for Designing Tests of
Controls and Substantive Tests of
Transactions (3 of 3)
• The methodology for designing tests of controls and
substantive tests of transactions for the acquisition
and payment cycle include (2 of 2):
– Design tests of controls and substantive tests of
transactions for acquisitions
– Design tests of controls and substantive tests of
transactions for cash disbursements
– Sampling for tests of controls and substantive tests of
transactions

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Figure 17.2 Methodology for Designing Tests of
Controls and Substantive Tests of Transactions
for the Acquisition and Payment Cycle

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Let’s Discuss (2 of 7)
• What are the most significant balance sheet and income
statement accounts related to the acquisition and payment
cycle?
• What is meant by a voucher?
– Explain how its use can improve an organization’s
internal controls.
• Explain why most auditors consider the receipt of goods
and services the most important point in the acquisition
and payment cycle.

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Let’s Discuss (3 of 7)
• If an audit client does not have prenumbered checks, what
type of misstatement has a greater chance of occurring?
– Under the circumstances, what audit procedure can
the auditor use to compensate for the deficiency?
• What is the importance of cash discounts to the client and
how can the auditor verify whether they are being taken in
accordance with company policy?

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Methodology for Designing Tests of
Details of Balances for Accounts
Payable (1 of 2)
• All acquisition and payment cycle transactions typically
flow through accounts payable, this account is critical to
any audit of the acquisition and payment cycle
• Accounts payable tend to be material for most companies,
and auditors almost always perform some tests of details
of balances

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Methodology for Designing Tests of
Details of Balances for Accounts
Payable (2 of 2)
• The methodology for designing tests of details for
accounts payable include:
– Identify significant risks and assess the risk of material
misstatement for accounts payable
– Set performance materiality
– assess control risk and design and perform tests of
controls and substantive tests of transactions

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Figure 17.3 Methodology for
Designing Tests of Details of
Balances for Accounts Payable

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Design and Perform Substantive
Analytical Procedures
• The use of analytical procedures is as important in the
acquisition and payment cycle as it is in every other cycle,
especially for uncovering misstatements in accounts
payable
• 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

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Table 17.4 Substantive Analytical
Procedures for the Acquisition and
Payment Cycle
Substantive Analytical Procedure Possible Misstatement

Compare acquisition-related expense Misstatement of accounts payable and

account balances with prior years. expenses.

Review list of accounts payable for Classification misstatement for nontrade

unusual, non vendor, and interest- liabilities.
bearing payables.

Compare individual accounts payable with Unrecorded or nonexistent accounts, or

previous years. misstatements.

Calculate ratios, such as purchases Unrecorded or nonexistent accounts, or

divided by accounts payable, and misstatements.
accounts payable divided by current
liabilities.

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Let’s Discuss (4 of 7)
• Describe two major changes a client may make to its
supply-chain management system and discuss how those
changes might increase or decrease the risk of material
misstatement in specific accounts.
• Identify two types of substantive analytical procedures an
auditor may perform in testing purchases.

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Design and Perform Tests of Details
of Accounts Payable Balance (1 of 3)
• The overall objective in the audit of accounts payable is to
determine whether the accounts payable balance is fairly
stated and properly disclosed
• There is an important difference in emphasis in the
audit of assets and liabilities:
– In auditing assets, auditors are concerned about
overstatements
– For liabilities, auditors are concerned about
understatements

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Design and Perform Tests of Details
of Accounts Payable Balance (2 of 3)
• Because of the emphasis on understatements in liability
accounts, search for unrecorded accounts payable (out-
of-period liability) tests are important
• The following are typical audit procedures (1 of 2):
– Examine underlying documentation for subsequent
cash disbursements
– Examine underlying documentation for invoices not
paid several weeks after the year-end

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Design and Perform Tests of Details
of Accounts Payable Balance (3 of 3)
• The following are typical audit procedures (2 of 2):
– Trace receiving reports issued before year-end to
related vendors’ invoices
– Send confirmations to vendors with which the client
does business
– Cutoff tests
– Relationship of cutoff to physical observation of
inventory
– Audit inventory in transit

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Reliability of Evidence (1 of 3)
• Auditors need to understand the relative reliability of
the three primary types of evidence ordinarily used
for verifying accounts payable:
– Vendors’ invoices
– Vendors’ statements
– Confirmations

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Reliability of Evidence (2 of 3)
• Auditors should distinguish:
– Between vendors’ invoices and vendors’ statements in
verifying the amount due to a vendor
– Between a vendor’s statement and a confirmation of
accounts payable in verifying account balances. The
primary difference is the source of the information.

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Reliability of Evidence (3 of 3)
• The auditor must also consider sample sizes in the audit
of accounts payable
• Sample sizes for accounts payable tests vary
considerably, depending on such factors as:
– The materiality of accounts payable
– The number of accounts outstanding
– Assessed control risk
– The results of the prior year

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Let’s Discuss (5 of 7)
• Explain the relationship between tests of the acquisition
and payment cycle and tests of accounts payable.
– Give specific examples of how these two types of tests
affect each other.
• What is the primary audit procedure the auditor performs
to test the completeness of accounts payable?

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Let’s Discuss (6 of 7)
• In testing the cutoff of accounts payable at the balance
sheet date, explain why it is important that auditors
coordinate their tests with the physical observation of
inventory.
– What can the auditor do during the physical inventory
to enhance the likelihood of an accurate cutoff ?

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Let’s Discuss (7 of 7)
• Distinguish between FOB destination and FOB origin.
What procedures should the auditor follow concerning
acquisitions of inventory on an FOB origin basis near
year-end?
• Explain why it is common for auditors to send confirmation
requests to vendors with “zero balances” on the client’s
accounts payable listing but uncommon to follow the same
approach in verifying accounts receivable.

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