Audit of the Acquisition and

Payment Cycle: Tests of

Controls, Substantive Tests of
Transactions, and Accounts
Payable.
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
Three classes of transactions:
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

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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
Acquisitions:

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 disbursements:

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

Recognizin
g the
Liability

Processing &
Recording
cash
disbursement
s

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Related Documents
and Reports
Processing purchase orders:
Purchase requisition
Purchase order

Receiving goods and services:

Receiving report

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Related Documents
and Reports
Recognizing the liability:
Vendors invoice
Debit memo
Voucher
Acquisitions transaction file
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Related Documents
and Reports
Recognizing the liability:
Acquisitions journal or listing
Accounts payable master file
Accounts payable trial balance
Vendor statement
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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
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

Controls and Substantive Tests
Understand internal control
acquisitions and cash disbursements
Assess planned control risk
acquisitions and cash disbursements
Determine extent of testing controls
Design tests of controls and Audit procedures
substantive tests of transactions Sample size
for acquisitions and cash
Items to select
disbursements to meet
transaction-related audit objectives Timing
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Understand Internal Control

Study the clients flowcharts
Review internal control questionnaires
Perform walk-through tests

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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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Determine Extent of Testing

of Controls

The auditor identifies the key internal controls

and weaknesses and assesses control risk

The auditor performs tests of controls to obtain

evidence that controls are operating effective

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Controls and Substantive Tests

of Transactions for Acquisitions
Recorded acquisitions are for goods
and services received (occurrence)
Existing acquisitions are recorded
(completeness)
Acquisitions are accurately recorded
(accuracy)

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Controls and Substantive Tests

of Transactions for Acquisitions
Acquisitions are correctly included
in the master files (posting and
summarization)
Acquisitions are correctly classified
(classification)
Acquisitions are recorded on the
correct dates (timing)
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Attributes Sampling

Because of the importance of tests of controls

and substantive tests of transactions for
acquisitions and cash disbursements, the use
of attributes sampling is common in this
audit area.

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Important Differences
Compared to other Cycles

Acquisitions and Payments Cycle transactions

Larger number of transactions
Significant judgment
Wide range of dollar amount

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Learning Objective 4
Describe the methodology for
designing tests of details of balances
for accounts payable using the audit
risk model.

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Methodology for Designing Tests

of Balances for Accounts Payable
Identify client business
risks affecting
Phase I
accounts payable
Set tolerable misstatement
and assess inherent risk Phase I
for accounts payable
Assess control risk for
the acquisition and
Phase I
payment cycle
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Methodology for Designing Tests

of Balances for Accounts Payable
Design and perform
tests of controls and
substantive tests
Phase II
of transactions
for the acquisition
and payment cycle

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Methodology for Designing Tests

of Balances for Accounts Payable
Design and perform
analytical procedures
Phase III
for accounts
payable balance
Design tests of
Audit procedures
details of accounts
Sample size
payable balance to
satisfy balanceItems to select
related audit
Timing
objectives
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Phase III

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Learning Objective 5
Design and perform analytical
procedures for accounts payable.

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Analytical Procedures for the

Acquisition and Payment
Cycle
Analytical procedure

Possible misstatement

Compare acquisitionrelated expense account

balances with prior years

Misstatement of account
payable and expenses

Review list of accounts

payable for unusual,
nonvendor, and interestbearing payables

Classification
misstatement for
nontrade liabilities

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Analytical Procedures for the

Acquisition and Payment
Cycle
Analytical procedure

Possible misstatement

Compare individual
accounts payable with
previous years

Unrecorded or
nonexistent accounts,
or misstatements

Calculate ratios, such as

purchases divided by
accounts payable, and
accounts payable divided
by current liabilities

Unrecorded or
nonexistent accounts,
or misstatements

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Learning Objective 6
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 balanc

due to the accounts payable trial balance
Send confirmations to vendors with whom
the client does business

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Cutoff Tests
Relationship of cutoff to physical
observation of inventory
Inventory in transit
FOB destination
FOB origin

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Learning Objective 7
Distinguish the reliability of vendors
invoices, vendors statements, and
confirmations of accounts payable as
audit
evidence.

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Reliability of Evidence
Distinction between vendors invoices
and vendors statements
Difference between vendors statements
and confirmations

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Accounts Payable
Confirmation

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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.

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Types of Audit Tests for the

Acquisition and Payment
Cycle
Accounts
Acquisition

Cash in
Bank

Payable

Expenses

Payments

Expenses

Audited by
TOC, STOT, and AP

Audited by
TOC, STOT, and AP

Ending
balance
Audited by
AP and
TDB

Ending
balance
Audited
by AP and
TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
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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
TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence per GAAS
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End of Chapter 18

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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