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In this chapter, the learning objectives are Understand why knowledge of an entitys expense and liability recognition policies is important to the audit, understand the purchasing process, know the types of transactions in the purchasing process and the financial statement accounts affected, be familiar with the types of documents and records used in the purchasing process.
Chapter Eleven Auditing the Purchasing Process © The McGraw-Hill Companies 2010 Expense and Liability Recognition (IASB) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants © The McGraw-Hill Companies 2010 A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Overview of the Purchasing Process A purchase transaction usually begins with a purchase requisition generated by the user department The purchasing department prepares a purchase order that is sent to the vendor When the goods are received or the services rendered, a liability is recorded Finally, the entity pays the vendor Purchase Purchase requisition requisition Purchase Purchase order order © The McGraw-Hill Companies 2010 Receiving Receiving report reportand and liability liability recorded recorded Vendor Types of Transactions and Financial Statement Accounts Affected Three types of transactions are processed through the purchasing process: © The McGraw-Hill Companies 2010 Flowchart of the Purchasing Process – EarthWear Clothiers Department Requesting Purchase requisition Purchasing Approved purchase requisition received Input Error corrections PO #2 Filed Numerically © The McGraw-Hill Companies 2010 IT Purchase order file Accounts payable master file Purchase order program Error report Purchase order (4 part) Vendor A/P Receiving Purchasing Flowchart of the Purchasing Process – EarthWear Clothiers Department Receiving Accounts Payable (A/P) PO #1 PO #3 Receiving report Goods received, counted and inspected Receiving report (RR) Vendor invoice Enter vendor, quantity, and PO # Daily receiving log © The McGraw-Hill Companies 2010 Compare invoice to PO and RR Review account distribution Voucher packet Input Error correction To IT From IT Flowchart of the Purchasing Process – EarthWear Clothiers Department IT Purchase order file A/P master file General ledger file Open PO report Input from A/P Accounts payable update Weekly Monthly Daily Report to A/P Error report A/P reporting Daily Monthly reports © The McGraw-Hill Companies 2010 Voucher register Cash disbursements journal A/P listing Cash disbursement report A/P expense distribution report General ledger Flowchart of the Purchasing Process – EarthWear Clothiers Department Accounts Payable (A/P) IT Cash disbursement report A/P master file Review documents and authorize payment Cash disbursement program Cash disbursement report Input © The McGraw-Hill Companies 2010 Cheques Cashier Cheques Review cheques and mail to vendors Cheques To Vendors Types of Documents and Records Purchasing Purchasing documents documents and and records records 1 Purchase Purchase Requisition Requisition –– request request to to purchase purchase goods goods or or services services 2 Purchase Purchase Order Order –– includes includes description, description, quality, quality, and and quantity quantity or or goods goods or or services services being being purchased purchased 3 Receiving Receiving Report Report –– records records the the receipt receipt of of goods goods 4 Vendor Vendor Invoice Invoice –– the the bill bill from from the the vendor vendor 5 Voucher Voucher –– serves serves as as the the basis basis for for recording recording aa vendor’s vendor’s invoice invoice 6 Voucher Voucher Register Register –– used used to to record record vouchers vouchers for for goods goods and and services services 7 Accounts Accounts Payable Payable Subsidiary Subsidiary Ledger Ledger –– includes includes amount amount owed owed to to individual individual vendors vendors 8 Vendor Vendor Statement Statement –– represents represents the the purchase purchase activity activity with with vendor vendor 9 Electronic Electronic Funds Funds Transfer Transfer and and Cheques Cheques –– pays pays for for goods goods or or services services 10 10 Cash Cash Disbursements Disbursements Journal Journal –– contains contains columns columns to to record record credits credits to to cash cash and and debits debits to to accounts accounts payable payable and and cash cash discounts discounts © The McGraw-Hill Companies 2010 The Major Functions © The McGraw-Hill Companies 2010 Relating the Assessed Level of Control Risk to Substantive Procedures IfIf the the results results of of the the tests tests of of controls controls support support the the achieved achieved level level of of control control risk, risk, the the auditor auditor conducts conducts substantive substantive procedures procedures at at the the planned planned level level IfIf the the results results do not not support support the the achieved achieved level level of of control control risk, risk, the the auditor auditor reduces reduces the the detection detection risk, risk, which which will will increase increase substantive substantive procedures procedures © The McGraw-Hill Companies 2010 Auditing Accounts Payable and Accrued Expenses © The McGraw-Hill Companies 2010 Auditing Accounts Payable and Accrued Expenses © The McGraw-Hill Companies 2010 Auditing Accounts Payable and Accrued Expenses Substantive Analytical Procedures © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Accuracy Obtain a listing of accounts payable, foot the listing, and agree it to the general ledger control account Selected vouchers or vendor accounts should be traced to the supporting documents or subsidiary accounts payable records to verify the accuracy of the details © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Completeness The auditor should conduct a test for unrecorded liabilities that include the following procedures: Ask management about control activities used to identify unrecorded liabilities at the end of the period Obtain copies of vendors’ monthly statements and reconcile the amounts to the client’s accounts payable records Confirm vendor accounts, including accounts with small or zero balances Vouch large monetary items from the purchases journal and cash disbursements journal for a limited time after year-end Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Existence The auditor’s major concern is whether the recorded liabilities are valid obligations of the entity The auditor should vouch a sample of items on the listing of accounts payable to other supporting documents © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Cut-off The The auditor auditor attempts attempts to to determine determine ifif all all purchase purchase transactions transactions are are recorded recorded in in the the proper proper period period On On most most audits, audits, the the purchase purchase cut-off cut-off is is coordinated coordinated with with the the client’s client’s physical physical inventory inventory count count Proper Proper cut-off cut-off should should also also be be determined determined for for purchase purchase return return transactions transactions © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Rights and Obligations There is little risk related to this assertion because clients seldom have an incentive to record liabilities that are not obligations of the entity © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Valuation Accounts payable are recorded at either the gross amount of the invoice or net of cash discount amount The valuation of accruals depends upon the type and nature of the accrued expense Most accruals are relatively easy to value © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Classification, Presentation and Disclosure Major Major classification classification issues issues include include 1 Identifying Identifying and and reclassifying reclassifying any any material material debits debits contained contained in in accounts accounts payable payable 2 Segregating Segregating short-term short-term and and long-term long-term payables payables 3 Ensuring Ensuring that that different different types types of of payables payables are are properly properly classified classified © The McGraw-Hill Companies 2010 Tests of Details of Transactions, Account Balances and Disclosures Disclosure Items for the Purchasing Process Payables Payables by by type type (trade, (trade, employees, employees, etc.) etc.) Purchases Purchases from from and and payables payables to to related related parties parties ShortShort- and and long-term long-term payables payables Dependence Dependence on on aa single single vendor vendor or or aa small small number number of of vendors vendors Long-term Long-term purchase purchase contracts, contracts, including including any any unusual unusual purchase purchase commitments commitments Costs Costs by by reportable reportable segment segment of of the the business business © The McGraw-Hill Companies 2010 Accounts Payable Confirmation Accounts Accounts payable payable confirmations confirmations are are used used less less often often than than accounts accounts receivable receivable confirmations confirmations The The auditor auditor is is able able to to examine examine externally externally created created source source documents documents relating relating to to accounts accounts payable payable When When confirmations confirmations are are used used they they are are usually usually positive positive and and referred referred to to as as blank blank confirmations confirmations The The vendor vendor is is asked asked to to supply supply the the balance balance owed owed by by the the client client © The McGraw-Hill Companies 2010 Evaluating the Audit Findings The auditor compares the aggregated identified misstatement to materiality to determine if the identified misstatement would affect the audit The auditor requests the client to correct the identified misstatements and then compares the uncorrected misstatements with materiality to conclude whether the financial statements are fairly stated If uncorrected misstatements in accounts payable, when considered together with other uncorrected misstatements, are less than materiality, the auditor may accept that the financial statements are fairly presented Conversely, if the uncorrected misstatement exceeds the materiality, the auditor should conclude that the financial statements are not fairly presented © The McGraw-Hill Companies 2010 End of Chapter 11 © The McGraw-Hill Companies 2010 ... Assessment Major steps in setting the control risk in the purchasing process Understand Understand and and document document the the purchasing purchasing process process based based on on aa reliance... payable and and cash cash discounts discounts © The McGraw-Hill Companies 2010 The Major Functions © The McGraw-Hill Companies 2010 Key Functions and Duties © The McGraw-Hill Companies 2010 The Key... transactions are processed through the purchasing process: © The McGraw-Hill Companies 2010 Flowchart of the Purchasing Process – EarthWear Clothiers Department Requesting Purchase requisition Purchasing