AUDIT PURCHASE

AND
PAYMENT CYCLE

ACCOUNT & CLASSES OF

TRANSACTION IN THE
ACQUISITION AND
PAYMENT CYCLE

Is to evaluate whether the account effected by the acquisitions of good and

services and cash disbursement for the acquisition are fairly presented in
accordance with generally accepted accounting principle Graf 19-1

Cash in bank

Acc payable
Cash
disbursements

Raw material purchases

Acquisitions of goods
and services
Property, plant, equipment

Purchase returns and allowances

Purchase
return and
allowances
Purchase discounts

Manufacturing exp control acc

Subsidiary accounts

Pre expenses

Purchase discounts

Selling exp control acc

Subsidiary accounts

Admin exp control acc

Subsidiary accounts

Repair & maintenance

Commissions

Supplies

Taxes

Travel expense

Officers travel

Supplies

Delivery expense

Legal fees

Freight in

Repairs

Auditing fees

Utilities

Advertising

Taxes

3 classes of transaction that included in the

cycle:1)ACQUISITIONS OF GOOD AND SEVICES
2)CASH DISBURSMENT
3)PURCHASE RETURN AND ALLOWANCES
AND PURCHASE DISCOUNTS

BUSINESS FUNCTION
IN THE CYCLE AND
RELATED DOCUMENT
AND RECORD

PURCHASE
REQUISITION

ACCOUNT
PAYABLE TRIAL
BALANCE

VENDORS
STATEMENT

VENDOR
INVOCE

PURCHASE
ODER

ACCOUNT
PAYABLE
MASTER FILE

CHECK

ACQUISITION
JOURNAL OR
LISTING

ACQUISITION
TRANSACTION
FILE

CASH DISBURMENT
TRANSACTION FILE

DEBIT MEMO

VOUCHER

CASH
DISBURSEMENT
JOURNAL OR
LISTING

ACQUISITIONS

ACCOUNTS

BUSINESS FUNCTION

DOCUMENT AND RECORDS

INVENTORY

PROCESSING PURCHASE

PURCHASE REQUISITION

PROPERTY,PLANT AND

ODER

PURCHASE ODER

EQUIPMENT
PREPAID EXPENSES

RECEIVING REPORT

LEASEHOLD IMPROVEMENT

RECEIVING GOODS AND

ACCOUNT PAYABLE

SERVICES

MANUFACTURING EXPENSES

ACQUISITIONS TRANSACTION
FILE

SELLING EXPENSES

RECOGNISING THE

ACQUISITION JOURNAL\LISTING

ADMINISTRACTIVE EXPENSES

LIABILITY

VENDOR INVOICE
DEBIT MEMO
VOUCHER
ACCOUNT PAYABLE MASTER FILE
ACCOUNT PAYABLE TRIAL BALANCE

CASH DISBURSEMENT

CASH IN BANK (FROM CASH

PROCESSING AND

VENDOR STATEMENT
CHECK

DISBURSEMENT)

RECORDING CASH

CASH DISBURSEMENTS

ACCOUNTS PAYABLE

DISBURSEMENT

TRANSACTION FILE

PURCHASE DISCOUNT

CASH DISBURSEMENT

PURCHASE REQUISITION
Request for good and services by and authorized employee.
It may take the form of a request for such acquisition as materials by a foreman or the storeroom
supervisor, outside repair by office or factory personnel, or insurance by the vice president in charge
of property and equipment.
PURCHASE ORDER
Document identifying the description, quantity and related information for good and services the
company intends to purchase.
This this document is often used to indicated authorization to acquired good and services.

VENDOR INVOICE
Is a document received from the vendor and show the amount owed for an acquisition
It indicated the description and quantity of good and services received, price (including freight),
cash discount term, date of the billing and total amount.

DEBIT MEMO
A document received from the vendor and indicated a reduction in the amount owed to a
vendor because of returned goods or an allowance granted.
VOUCHER
Is commonly used by organizations to establish a formal means of recording and controlling
acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered.
Include a cover sheet or folder for containing documents and a package of relevant
document such as the purchase order, copy of the packing slip, receiving report, and vendor
invoice.
After payment a copy of the check is added to the voucher package.

ACQUISITIONS TRANSACTION FILE

this is a computer-generated file that includes all acquisition transaction processed by
the accounting system for a period, such as a day, week or month.
It contained all information entered into the system and includes information for each
transaction, such as a vendor name, date amount, account classification and description
and quantity of good and services purchase.
The file can also include purchase return and allowance or there can be separate file
for those transactions.
ACQUISITIONS JOURNAL OR LISTING
The listing of report is generated from the acquisitions transaction file typically
includes the vendor name, date, amount and account classification or classification for
each transaction, such as repair and maintenance, Inventory or utilities.
It also identifies whatever the acquisition was for cash or account payable
The journal or listing can cover any time period, typically a month.

ACCOUNT PAYABLE MASTER FILE

Records acquisitions, cash disbursement, and acquisition return and allowance transaction for
each vendor.
The master file is updated from the acquisition, return and allowances and cash disbursement
equals the total balance of account payable in the general ledger.
Printout of the account payable master file show by the vendor , beginning balance in account
payable, each acquisition, acquisition return and allowance, cash disbursement and the ending
balance.
ACCOUNT PAYABLE TRIAL BALANCE
Listing includes the amount owed to each vendor or for each invoice or voucher at the point in
time
It is prepared directly from the account payable master file.

VENDOR STATEMENT
Document prepared monthly by the vendor and indicates the beginning balance,
acquisitions, return and allowance, payment to the vendor and ending balance.
These balance and activities are the vendor representations of the transaction for the
period, not the client.
CHECK
Document used to pay the acquisition when payment is due.
After the check is signed by the authorized person, it is assets. Therefore signed
checks should be mailed by the signer or a person under the signer control.

CASH DISBURSEMENT TRANSACTIOJ FILE

Computer generated file that includes all cash disbursement transaction processed
by the accounting system period, such as a day week, or month
Includes the same type of information discussed for the acquisition transaction file.
CASH DISBURSEMENT JOURNAL\LISTING
Report generated from the cash disbursement transaction file that includes all
transaction for any time period
Same transaction including all relevant information are included in the account
payable master file and general ledger.

PROCESSING
PURCHASE
ORDER

PROCESSING AND
RECORDING
CASH
DISBURSEMENT

RECEIVING
GOODS AND
SERVICES

RECOGNIZING
THE
LIABILITY

BUSINESS FUNCTION
PROCESSING PURCHASE ORDERS
The request for good or services by the client personnel is the starting point for
the cycle.
Exact form of the request ant the required approval depend on the nature of good
and services and company policy.
RECEIVING GOODS AND SERVICES
Receipt by the company of good and services from the vendor is the critical point
in the cycle because it is the point at which most company first recognize the
acquisition and related liability on there record
When good are received , adequate control requires examination for description,
quantity, timely arrival and condition
A receiving report is a paper or electronic document prepared at the time tangible
goods are received

RECOGNISING THE LIABILITY

Proper recognition of the liability for the receipt of good and services requires prompt
and accurate recording.
Initial recording has significant effect on the recorded financial statement and the
actual cash disbursement.
PRCESSING AND RECORDING CASH DISBURSEMENTAre in the
-CHECK
-CASH DISBURSEMENT TRANSACTIOJ FILE
-CASH DISBURSEMENT JOURNAL\LISTING

TRANSACTION THAT RELATED AUDIT OBJECTIVE IN CASH DISBURSEMENT

TRANSACTION

INTERNAL CONTROL

Recorded cash disbursement are for good

and services actually
received(EXISTENCE)

Existing cash disbursement transaction are

recorded(COMPLETENESS)

Recorded cash disbursement transaction

are accurate (ACCURANCY)

SUBTANTIVE TESTS OF
TRANSACTION

there is adequate segregation of duties

between account payable ad custody of
signed check
Supporting documentation is examined
before singing of check by an
authorized person
Approval of payment

Check are prenumbered and accounted

for
Bank reconciliation is prepared monthly

Reconcile recorded cash disburment with

the cash disbursement on the bank
statement

Calculation and amount are internally

verified
Bank reconciliation is prepared monthly
by independent person

Compare cancelled checks with the related

Recomputed cash discount
Prepare proof cash disbursement

Review the cash disbursement journal,

ledger and account payable
Trace the cancelled check to the
related acquisition journal entry
Examine cancelled check for authorized
signature, proper endorsement
Examine supporting document

Internal control

Understand Internal Control

The

auditor gains an understanding of

internal control for the acquisition and
payment cycle by studying the clients
flowcharts, preparing internal control
questionnaires, and performing walkthrough tests for acquisitions and cash
disbursements.

Key Internal Control

1.Authorisation of Purchases :
- Proper authorisation is essential because it ensure that the
goods and services acquired are for authorised company
purposes and it avoids the acquisition of unnecessary items.
2.Separation of Asset Custody from other Functions :
- Most companies have receiving department initiate a
receiving report as evidence of the receipt and examination of
goods.
- One copy sent to the raw materials storeroom and another to
the accounts payable department for their information needs.

3.Timely Recording and Independent Review of Transactions :

- Some companies , the recording of the liability for acquisitions is
made on the basis of the receipt of goods and services.
- Other companies , it is deferred until the vendors invoice is
received.
4.Authorisation of Payments :
- Most important controls over cash disbursements include the signing
of checks by an individual with proper authority , separation of
responsibilities for signing the checks and performing the accounts
payable function , and careful examination of the supporting
documents by the check signer at the time the check is signed.

CONTROL PROCEDURES OVER PURCHASES AND

PAYMENTS

Evaluate Cost-Benefit of Testing

Controls
The

auditor identifies the key internal

controls and weaknesses.

The

auditor decides whether substantive

tests will be reduced sufficiently to
justify the cost of performing tests of
controls.

Controls and Substantive Tests of

Transactions for Acquisitions
Recorded

acquisitions are for goods and services

received, consistent with the best interests of the
client (existence).

Existing

acquisitions are recorded (completeness).

Acquisitions
Acquisitions

are accurately recorded (accuracy).

are correctly classified

(classification).

Controls and Substantive Tests of

Transactions for Cash Disbursements
The

assumption underlying these controls

and audit procedures is separate cash
disbursements and acquisitions journals.

The

acquisitions and cash disbursements

tests are typically performed concurrently.

METHODOLOGY FOR
DESIGNING TESTS OF
DETAILS OF BALANCES FOR
ACCOUNTS PAYABLE

PHASE 1

Identify client business

risks affecting accounts
payable
Set tolerable
misstatement and assess
inherent risk for accounts
payable

Assess control risk for

accounts payable

PHASE 2

Design and perform tests

of controls and substantive
tests of transactions for
the acquisition and payment
cycle

PHASE 3

Design and perform

analytical procedures for
the acquisition and payment
cycle

Design tests of details of

accounts payable balance to
satisfy balance-related
audit objectives
Audit procedures
Sample size
Items to select
Timing

Analytical Procedure

Possible Misstatement

Compare acquisition-related expense account

balances with prior years.

Misstatement of accounts payable and expenses

Review list of accounts payable for unusual, nonvendor and interest-bearing payables.

Classification misstatement for non trade

liabilities.

Compare individual accounts payable with previous Unrecorded or non existent accounts or
years.
misstatement.
Calculates ratios such as purchases divided by
accounts payable and accounts payable divided by
current liabilities.

Unrecorded or non existent accounts or

misstatement.

The auditor should recognize the difference in emphasis between the audit of liabilities
and the audit of sales. When assets are being verified, attention is focused on making
certain that the balance in the account is not overstated. There are two types of test:
1. Out-of-Period Liability Test

The emphasis on understatements in liability accounts.

Important to accounts payable.

The extent of test to uncover unrecorded accounts payable, often called the search
for unrecorded accounts payable, depends heavily on assessed control risk and the
materiality of the potential balance in the accounts.

The same audit procedures used to uncover unrecorded payables are

the accuracy.

The audit procedures that follow are typical test.

applicable to

Out-of-Period Liability Test

1. Examine underlying documentation for subsequent cash disbursement.
Purpose Uncover cash disbursements made in the subsequent accounting period that represent
liabilities at the balance sheet date.
2. Examine underlying documentation for bills not paid several weeks after the year end.
Carried out in the same manner as the preceding one and serves the same purpose.
Differences is that it is done for unpaid obligations near the end of the audit field work rather
than obligations that have already been paid.
3. Trace receiving reports issued before year-end to related vendors invoices.
All merchandise received before the year-end of the accounting period, indicated by the issuance
of receiving report, should be included as accounts payables.
4. Trace vendors statements that show a balance due to accounts payable trial balance.
If the client maintains a file of vendors statement indicating a balance due at the balance sheet
date can be traced to the listing to make sure that it is included as an account payable.
5. Send confirmations to vendors with which client does business. Sending confirmation to active
vendors for which a balance has not been included in the accounts payable list is a useful means of
searching for omitted amounts.

Cutoff Test

Cutoff test for accounts payable are intended to determine whether

transactions
recorded a few days before and after the balance sheet date are
included in the
correct period.

The relationship of cutoff to physical observation of inventory and the determination of

the amount of inventory in transit. There are include:

1. Relationship of cutoff to physical observation of inventory.

In determining that the accounts payable cutoff is correct, it is essential

cutoff test be coordinated with the physical observation of inventory.

that the

2. Inventory in transit.

A distinction in accounts payable must be made between acquisitions of

are on an FOB destination basis and those that are made FOB
origin.

inventory that

Determining whether inventory has been acquired on an FOB destination or

done by examining vendors invoices.

origin basis is

DISTINGUISH THE
RELIABILITY OF VENDORS
INVOICES, VENDORS
STATEMENT AND
CONFIRMATIONS OF
ACCOUNTS PAYABLE AS AUDIT
EVIDENCE

It is essential that the auditor understand the relative reliability of the three primary
types of evidence ordinarily used: vendors invoices, statements and confirmations.

a) Distinction between vendors invoices and vendors statements.

In examining vendors invoices and related supporting documents, such as receiving

reports and purchase orders, the auditor gets highly reliable evidence about individual
transactions.

The vendors statement is superior for verifying accounts payable because it includes the
ending balance. It is not as desirable as invoices for verifying individual transactions
because a statement includes only the total amount of the transaction.

The vendors invoice is superior for verifying transaction because the auditor is verifying
individual transaction and the invoice show the details of the acquisitions.

b) Distinction between vendors statements and confirmations.

The most important is the source of the information.

A vendors statements has been prepared by an independent third party but is in

the hands of the client at the time the auditor examines it.

A confirmation of accounts payable, which normally is a request for an itemized

statement sent directly to the public accountants office, provides the same
information but can regarded as more reliable.

In addition, it include a request for information about notes and acceptances

payable as well as consigned inventory owned by the vendor but stored on the
clients premises.

When vendors statement are examined or confirmations are received, there

must be a reconciliation of the statement or confirmation with the accounts
payable list.

Sample sizes for accounts payable tests vary considerably,

depending on such factors:

1)

Materiality of accounts payable

2)

Number of accounts outstanding

3)

Assessed control risk

4)

Results of the prior year

Statistical sampling is less commonly used for the audit of accounts

payables than for accounts receivable.

Cash in
Bank

Acquisition
Expenses

Accounts
Payable
Expenses

Payments
Audited by
TOC, STOT, and AP

Audited by
TOC, STOT, and AP

Ending
balance

Audited by
AP and TDP

Ending
balance
Audited by
AP

TOC + STOT + AP + TDP

= Sufficient competent evidence per GAAS