Audit of the acquisition and payment cycle

The process generally starts with a purchase requisition that an employee of the company generates. Companies in a highly competitive industry that sell low-margin products have a strong incentive to fiddle with their margins through inventory and cost-of-goods-sold valuation.

Here, the employee reconciles the received goods with the vendor invoice and the journal entry to accounts payable is recorded. General Methodology for Auditing Cycles When auditing cycles for different companies, the typical approach is to: The classification assertion is highly important in this scenario because there are many possible debits that can fulfill the journal entry.

These controls dissuade employees from attempting to misappropriate money and help businesses catch honest errors. To prevent this from happening, management and auditors closely monitor Audit of the acquisition and payment cycle controls and key acquisition accounts.

In terms of the completeness assertion, purchase orders and receiving reports are typically pre-numbered and accounted for.

How to Audit the Acquisition & Payment Cycle

The typical journal entry for this class of transactions is a debit to inventory or an expense and a credit to accounts payable. The typical journal entry for this class is simply a debit to accounts payable and a credit to cash.

Ensure Controls Are in Place The stronger internal controls the company has in place, the less likely it is that there are errors or fraud in the purchasing system. The document is then sent to the purchasing department that generates a purchase order.

Smart companies require their purchasing agents to use a list of approved vendors and review vendors on a regular basis. The second class of transactions in the acquisition and payment cycle is the cash disbursements class. Typical Business Functions and Important Documents Although many companies follow different internal processes and use more electronic-based methods, the following flowchart is a typical business process in the acquisition and payment cycle.

Substantive analytical procedures, as we learned before, are typically trend and ratio analysis against industry data, prior year data, and expected results.

Acquisition and Payment Cycle

They may contact large vendors and suppliers and confirm they agree with what the company purports they owe them. The purchase requisition is a document that describes the product needed and the quantity required. This reduces the risk of fraud and kickbacks for purchases.

Auditors will check that there is separation of duties and approval needed in the purchasing and cash disbursement process. Assess Risks A business may have different threats in its acquisition cycle depending on surrounding factors.

The first class is the acquisition class. Auditors will focus more attention on personalized risk factors depending on the inherent strengths and weaknesses of the company. Substantive analytical procedures are usually sufficient and appropriate as audit evidence because the amounts are not significant and very often involve relatively trivial balances such as general and administrative expenses.

Once the ordered goods have been received by the next department, the company issues a receiving report. The purchase order lists the product to purchase, the quantity to order, and the price the company is willing to pay. However, for more judgmental and more complex accounting issues with regards to legal expenses, repairs, and maintenance expense, and lease expense, for example, auditors will want to obtain more assurance and perform tests of details of balances.

We offer the following free resources for more information. Understand the entity and its environment For each cycle, identify internal controls that exist Assess control risk and the risk of material misstatement Evaluate the cost-benefit analysis of testing controls and following a combined audit approach vs a purely substantive audit approach Important Internal Controls For Acquisitions and Disbursements Remember that for classes of transactions, there are five applicable assertions:Transcript of AUDIT OF THE ACQUISITIONS AND PAYMENT CYCLE.

Accounts and classes of transactions in the acquisition and payment cycle METHODOLOGY FOR TESTING TEST OF CONTROLS AND SUBSTANTIVE TEST OF TRANSACTION Identify the accounts and the classes of transactions in the acquisition and payment cycle.

The acquisition and payment cycle (also referred to as the PPP cycle for purchases, payables, and payments) is mainly comprised of two classes of classes of transactions.

The first class is the acquisition class. The typical journal entry for this class of transactions is a debit to inventory or an expense.

It's easy for things to go wrong in a company's acquisition and payment cycle. Companies can overstate the value of the inventory they purchase, which makes assets look bigger than they actually are. Management can omit or undervalue their accounts payable, which exaggerates financial strength.

To prevent this from. Audit of Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Account.

Chapter 19 Objective 1: Identify the accounts and the classes of transactions in the acquisition and payment cycle Objective 2: Describe the business functions and the related documents and records in the acquisition and payment cycle1/5(1).

View Essay - acquisition and payment cycle (1) from ACC at University of Phoenix. In the audit of the acquisition and payment cycle, the main goal is to make sure that the goods and services75%(4).

Audit Chapter Acquisition and Payment Cycle study guide by angche includes 23 questions covering vocabulary, terms and more. Quizlet flashcards, activities and games help you improve your grades.

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