Kế toán, kiểm toán - Chapter eleven: Auditing the purchasing process

Auditing the Purchasing ProcessChapter ElevenExpense 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 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 ProcessA 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 requisitionPurchase orderReceivingreport and liability recordedVendorTypes of Transactions and Financial Statement Accounts AffectedThree types of transactions are processed through the purchasing process:Flowchart of the Purchasing Process – EarthWear ClothiersDepartmentRequestingPurchasingITPurchaserequisitionApprovedpurchaserequisitionreceivedInputErrorcorrectionsPurchaseorder programPurchaseorder fileAccountspayablemaster fileErrorreportPurchaseorder(4 part)PurchasingVendorA/PReceivingPO #2FiledNumer-icallyFlowchart of the Purchasing Process – EarthWear ClothiersDaily receiving logDepartmentReceivingAccounts Payable (A/P)PO #1Goodsreceived,counted andinspectedReceivingreport (RR)Enter vendor,quantity, andPO #PO #3ReceivingreportVendorinvoiceCompare invoiceto PO and RRReviewaccountdistributionVoucherpacketInputErrorcorrectionTo ITFrom ITFlowchart of the Purchasing Process – EarthWear ClothiersDepartmentITAccountspayableupdatePurchaseorder fileA/P masterfileGeneralledger fileErrorreportInputfrom A/PReportto A/PA/P reportingWeeklyMonthlyA/P listingCashdisbursementreportDailyDailyMonthlyreportsGeneralledgerOpen PO reportA/P expensedistribution reportVoucher registerCash disbursementsjournalFlowchart of the Purchasing Process – EarthWear ClothiersTo VendorsDepartmentAccounts Payable (A/P)ITCashierCashdisbursementreportReview documentsand authorize paymentCashdisbursementreportInputA/P masterfileCashdisbursementprogramChequesChequesReview chequesand mail tovendorsChequesTypes of Documents and RecordsPurchasing documents and records . . .Purchase Requisition – request to purchase goods or services.Purchase Order – includes description, quality, and quantity or goods or services being purchased.Receiving Report – records the receipt of goods.Vendor Invoice – the bill from the vendor.Voucher – serves as the basis for recording a vendor’s invoice.Voucher Register – used to record vouchers for goods and services.Accounts Payable Subsidiary Ledger – includes amount owed to individual vendors.Vendor Statement – represents the purchase activity with vendor.Electronic Funds Transfer and Cheques – pays for goods or services. Cash Disbursements Journal – contains columns to record credits to cash and debits to accounts payable and cash discounts.The Major FunctionsKey Functions and DutiesThe Key Segregation of DutiesInherent Risk AssessmentIndustry-Related Factors1.Is the supply of rawmaterials adequate?2.How volatile areraw materialprices?Inherent Risk AssessmentMisstatements Detected in Prior AuditsGenerally, the purchasing process is not difficult to audit and does not present contentious accounting issues. However, the auditor’s experience in past audits must be considered when assessing inherent risk.Control Risk AssessmentMajor steps in setting the control risk in the purchasing process.Understand and document the purchasing process based on a reliance strategy.Plan and perform tests of controls of purchase transactions.Set and document the control risk for the purchasing process.Control Risk AssessmentInformation Systems and CommunicationFor each major class of transactions in the purchasing process, the auditor must obtain the following information:How purchase, cash disbursements and purchase return transactions are initiated.The accounting records, supporting documents and accounts involved in processing purchases, cash disbursements and purchase returns.The flow of each type of transaction from initiation to inclusion in the financial statements, including computer processing.The process used to estimate accrued liabilities.Control Risk AssessmentAfter testing controls, the auditor sets the level of control risk. When tests of controls support the planned level of control risk, no modifications are necessary to detection risk. The auditor may proceed with the substantive procedures as planned.When tests do not support the planned control risk, the auditor lowers the level of detection risk leading to more substantive procedures.Control Activities and Tests of Controls – Purchase TransactionsAssertions about Classes of Transactions and Events for the Period under AuditControl Activities and Tests of Controls – Purchase TransactionsControl Activities and Tests of Controls – Cash Disbursement TransactionsOccurrence of Cash Disbursement TransactionsThe auditor is concerned with a misstatement caused by a cash disbursement being recorded in the client’s record when no payment was made. The primary control activities to prevent such misstatements include proper segregation of duties, independent reconciliation and review of vendor statements, and monthly bank reconciliations.Control Activities and Tests of Controls – Cash Disbursement TransactionsCompleteness of Cash Disbursement TransactionsThe major audit concern is that a cash disbursement is made but not recorded in the records. The auditor should examine and test the client’s procedures for reviewing vendor payments lists and reconcile the daily cash disbursements with posting to the accounts payable subsidiary records.Control Activities and Tests of Controls – Cash Disbursement TransactionsAuthorization of Cash Disbursement TransactionsProper segregation of duties reduces the likelihood that unauthorized cash disbursements are made. The individual who approves a purchase should not have direct access to the cash disbursement.Control Activities and Tests of Controls – Cash Disbursement TransactionsAccuracy of Cash Disbursement TransactionsOne of the major audit concerns is that the payment amount is recorded incorrectly. To detect such an error, client personnel should reconcile the total of electronic cash disbursements transfer and the cheques issued each day with the daily cash disbursements report.Control Activities and Tests of Controls – Cash Disbursement TransactionsCut-off of Cash Disbursement TransactionsThe auditor’s tests of controls include reviewing the reconciliation of payments transfers with postings to the cash disbursements journal and accounts payable subsidiary records. The auditor also tests cash disbursements before and after year-end to ensure that transactions are recorded in the proper period.Control Activities and Tests of Controls – Cash Disbursement TransactionsClassification of Cash Disbursement TransactionsThe auditor is concerned that a cash disbursement may be charged to the wrong general ledger account. The use of a chart of accounts, as well as independent approval and review of the account code on the voucher should provide adequate control.Control Activities and Tests of Controls – Purchase Return TransactionsGenerally, the number and magnitude of purchase return transactions are not material. The auditor normally does not test controls relating to purchase returns. Substantive testing is used to test the reasonableness of the amount.Relating the Assessed Level of Control Risk to Substantive ProceduresIf the results of the tests of controls support the achieved level of control risk, the auditor conducts substantive procedures at the planned level. If the results do not support the achieved level of control risk, the auditor reduces the detection risk, which will increase substantive procedures.Auditing Accounts Payable and Accrued ExpensesAuditing Accounts Payable and Accrued ExpensesAuditing Accounts Payable and Accrued ExpensesSubstantive Analytical ProceduresTests of Details of Transactions, Account Balances and DisclosuresAccuracyObtain 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.Tests of Details of Transactions, Account Balances and DisclosuresCompletenessThe 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.Tests of Details of Transactions, Account Balances and DisclosuresExistenceThe 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.Tests of Details of Transactions, Account Balances and DisclosuresCut-offThe auditor attempts to determine if all purchase transactions are recorded in the proper period. On most audits, the purchase cut-off is coordinated with the client’s physical inventory count. Proper cut-off should also be determined for purchase return transactions.Tests of Details of Transactions, Account Balances and DisclosuresRights and ObligationsThere is little risk related to this assertion because clients seldom have an incentive to record liabilities that are not obligations of the entity.Tests of Details of Transactions, Account Balances and DisclosuresValuationAccounts 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.Tests of Details of Transactions, Account Balances and DisclosuresClassification, Presentation and DisclosureMajor classification issues include . . .Identifying and reclassifying any material debits contained in accounts payable.Segregating short-term and long-term payables.Ensuring that different types of payables are properly classified.Tests of Details of Transactions, Account Balances and DisclosuresDisclosure Items for the Purchasing ProcessPayables by type (trade, employees, etc.).Short- and long-term payables.Long-term purchase contracts, including any unusual purchase commitments.Purchases from and payables to related parties.Dependence on a single vendor or a small number of vendors.Costs by reportable segment of the business.Accounts Payable ConfirmationAccounts payable confirmations are used less often than accounts receivable confirmations. The auditor is able to examine externally created source documents relating to accounts payable. When confirmations are used they are usually positive and referred to as blank confirmations. The vendor is asked to supply the balance owed by the client.Evaluating the Audit FindingsThe 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.End of Chapter 11