This page covers the audit of the acquisition, payment cycle and expenditure cycle including test of control, substantive testing and analytical procedures.
[vc_row][vc_column][vc_video link=”https://youtu.be/c2cs4AK3U50″ title=”Introduction to Acquisition and Payment Cycle”][vc_video link=”https://youtu.be/3fQD77a-hEY” title=”Acquisition and Payment Cycle Test of control and Substantive Testing of Transaction”][vc_video link=”https://youtu.be/miAZ81atMYU” title=”Analytical Procedures for Acquisition and Payment Cycle”][vc_video link=”https://youtu.be/FBw6pPLIkTM” title=”Test of details balance accounts payable”][vc_video link=”https://youtu.be/PQp4GH2-BHs” title=”Accounts Payable and Inventory Cutoff Test”][vc_video link=”https://youtu.be/QKLBjHwF_jI” title=”Audit Property Plants and Equipment “][vc_video link=”https://youtu.be/5FIVCc996Pk” title=”Auditing Prepaid Expenses “][vc_video link=”https://youtu.be/zEK3PrruoCk” title=”Auditing Accrued Liabilities “][vc_video link=”https://youtu.be/GIY9QvcT_pk” title=”Auditing Expense and Income Account “][vc_video link=”https://youtu.be/ueGYrO4eYds” title=”Audit Evidence, Audit Procedures and Audit Objectives”][vc_video][/vc_column][/vc_row]
Purchasing Goods and Services ①
The expenditure cycle begins when an individual or department needs supplies, materials, equipment, or services. The individual or department requests these items by sending a purchase requisition to the purchasing department. The purchase requisition will include the name of the department asking for the items, a listing of the items being requested, an account number where the cost of the material is to be charged when received, and an authorization signature from someone with the authority to commit the department to that amount of expense. The requisition may also include a recommended vendor.
The purchasing department reviews the purchase requisition and, if everything is in order, seeks to order the items where the best price, quality, and appropriate delivery can be obtained. Generally, the vendor must be on the approved vendor list. The approved vendor list includes only vendors that have been inspected by the organization and are authorized for purchases. It often requires several departments to approve a vendor. Purchasing usually approves the vendor for appropriate pricing, payment terms, and delivery; quality control may approve a vendor for both the quality of the product it makes and its system of quality control used during the vendor’s manufacturing process; and production (or engineering) may approve the items as appropriate for its purposes on the purchasing company’s production line. There have been several frauds where only one person approved a vendor for inclusion on the approved vendor list. The individual was able to add to the list fictitious companies or disreputable firms willing to provide kickbacks to the individual.
There are three important assertions for accounts payable: completeness, cutoff, and valuation. Completeness and cutoff go hand-in-hand because management may desire to improve the books by not recording an obligation in the correct period. An incomplete listing of accounts payable at the end of the period lowers current liabilities (and corresponding expenses). Because vendors do need to be paid eventually, management may accomplish this by delaying the recording of accounts payable until the subsequent period—in other words, by closing the books early so end-of-period obligations become the obligations of the subsequent period. Accounts payable may also be understated. Obligations may not reflect the total cost of the purchase such as freight, tariff, and taxes. On large purchases, this may be substantial and may be the result of an error or an intentional act to reduce the accounts payable liability.
Unmatched Receiving Reports
Liabilities should be recorded on the date the goods and services are received and accepted by the receiving department or by another responsible person. Sometimes, however, vendor invoices arrive later. In the meantime, the accounts payable department holds the purchase order and receiving reports unmatched with invoices, awaiting enough information to record an accounting entry. Auditors can inspect the unmatched receiving report file to determine whether the company has material unrecorded liabilities on the financial statement date for goods that were received but not matched to invoices.
Unmatched Vendor Invoices
Sometimes vendor invoices arrive in the accounts payable department before the receiving activity is complete. Such invoices are held unmatched with receiving reports, awaiting information that the goods and services were actually received and accepted. Auditors can inspect the unmatched invoice file and compare it with the unmatched receiving report file to determine whether liabilities that have been incurred are unrecorded. Systems failures and human coding errors can cause unmatched invoices and related unmatched receiving reports to sit around unnoticed when all of the information for recording a liability is actually in hand. Sometimes, however, unmatched invoices are indicators of fraudsters looking for an easy score, as noted in the following Auditing Insight.