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Audit of Acquisition Cycle (Chap. 11 A)

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Title: Audit of Acquisition Cycle (Chap. 11 A)


1
Audit of Acquisition Cycle (Chap. 11
A)   Overview of related accounts (Exh. 11.1, p.
493).   Understand the phases of processing
transactions and the related controls (p.
494-). Testing controls (p. 499).   Substantive
tests of accounts payable and expenses (p.
500-).  
2
Exhibit 16.1 Overview of Accounts in Acquisition
Cycle  
3
  • The acquisition and payment process
    consists of five major phases
  • lt                  Authorized requisition
    (request) for goods or services.
  • lt                  Authorized purchase of
    goods or services according to company policies.
  • lt                  Receipt of goods and
    services Accounting for receipt of goods and
  • services (accounting classification and
    valuation)
  • lt                  Approval of items for payment.
  • lt        Cash disbursements.

4
Approaches for Testing Completeness of Accounts
Payable (Use one or more of the following)  
1.        Reconcile monthly statements or
confirmations of major vendors with
recorded accounts payable. 2.      
 Test subsequent cash disbursements.
3.       Perform analytical procedures of expense
accounts - and changes
from prior year and common-size income
statements.
5
Exhibit 11.3 Typical Manufacturing
CompanyAudit ProgramAccounts Payable and
PurchasesDecember 31, 2003 W/P Done Ref By Audi
t Objectives Assess the control risk
over purchase and cash disbursement transactions
and determine the completeness, existence,
valuation, presentation, and obligations of
purchases, operating expenses, and trade
accounts payable. Test of Controls and
Transactions 1. Review computer matching
exception reports to determine number of
exceptions andeffectiveness of follow-up
procedures. ____ ____ 2. Determine
whether there have been any changes to the
computer programs for processingpurchases and
disbursements during the year. ____ ____ 3.
Review results of ITF, noting proper account
distribution, correctness of computermatching,
effectiveness of edit controls, account balance
updates, and generation ofexception
reports. ____ ____   Analytical
Procedures Prepare a common-size income statement
and compare expenses with the prior
period.Identify and investigate significant
differences. ____ ____   Tests of
Details 1.Use generalized audit software to
verify mathematical accuracy of accounts payable,
andagree to general ledger (valuation). ____ ____
2.Identify the major vendors and obtain monthly
statement as of year-end (completeness). ____ ____
3.Send confirmation letters to major vendors not
providing monthly statements (completeness). ____
____ 4.Agree monthly statements and
confirmations from major vendors with accounts
payablelist (existence, completeness, valuation,
and obligation). ____ ____ 5.Perform a cutoff
test of purchases and cash disbursements. ____ ___
_ 6.Review long-term purchase commitments and
determine whether a loss needs to be
accrued(completeness, presentation, and
disclosure). ____ ____ 7.State your conclusion as
to the correctness of the account
balances. ____ ____
6
Audit of Inventory (Chapter 11 B)
Understand the complexities of auditing inventory
(p. 502-) Understand control
procedures for inventory (p. 504-).
  Understand how to review inventory for
obsolescence (p. 508) Substantive testing
of inventory/cost of sales (p. 509-, Exh.
11.6).   Objectives and procedures for observing
a physical inventory (Exh. 11.7, p. 511).
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