GROUP 2: Audit of Expenditure Cycle: Tests of Controls and Substantive Tests Tests of Transactions Tr ansactions ! by Cabrera
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"ature of t#e expenditure Cycle It involves the activities associated with the acquisition and payment of goods and services. The major classes of transactions for a trading concern are acquisition, cash disbursement and payroll while in a manufacturing firm production cycle cycle transaction and inventory inventory warehousing transaction are included in the expenditure cycle in addition to that of in a trading concern. Expenditure cycle affects financial statement accounts. It impacts all current assets, except marketable securities and accounts recievable, all plant and intangible assets and many current liabilities. ccounts affected by the expenditure c ycle! a. b. c. d. e. f. g.
"urchases Trade ccounts and and note payable "urcha "urchase se return return and allowa allowance ncess #ash #ash in bank $#re $#redit ditss for cash cash disburs disburseme ements nts%% "urc "urcha hase se disc discou ount ntss Inventories &anufa &anufactu cturin ring g amd opera operatin ting g expens expenses es requiring payments
'ocuments used in the expenditure cycle! a. b. c. d. e. f. g. h.
"urc "urcha hase se requ requis isit itio ion n "urchase order (ece (eceiiving ing repo report rt )endor ndor**s invo invoic icee 'ebit memo )oucher #heck )endor* ndor*ss stat statem emen entt
ccounting records involved in the expenditure cycle! a. "urc "urcha hasse jou journal rnal b. #ash disbursement +ournal +ournal c. ccoun ccounts ts payabl payablee subsi subsidia diary ry ledg ledger er
Audit of Ac$uisition %& Evaluation Evaluation of !nternal !nternal Control Control over ac$uisitio ac$uisition n egregation of duties--purchases and • disbursements pproval of purchase orders • umerical control of purchase purchase orders and • receiving reports &atching of details of vendors* invoices to • purchase orders and receiving receiving documents
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pproval of vendors* invoices "re-numbered checks (econciliation of details of individual disbursements to controlling accounts (econciliation of vendors* statements statements to accounts (econciliation of bank accounts /se of budgets and analysis of variances /se of chart of accounts and review of account coding
0or the purchase flowchart, see fi'ure % on the third page. 2& Test of of Contro Controls: ls: Ac$ui Ac$uisit sition ion The following presents the controls that an entity should have to ensure the propriety of each assertion and the test an auditor may perform to determine the effectiveness of the controls of the acquisitions transactions. a& Existence& (ecorded acquisitions are for itmes that were acquired. cquisitions that occurred b& Co(p Co(ple lete tene ness ss&& cquisitions are recorded. c& Ri'# Ri'#ts ts and and obl obli' i'at atio ions ns&& (ecorded acquisitions are the entity*s perchases and liabilities. d& )aluatio luation n or Alloc Allocati ation& on& cquisitions are recorded for the proper amount e& Pres Presen enta tati tion on and disc disclo losu sure re&& cquisition are recorded to result in the presentation and disclosure in accordance with "1"0( *& Audit Audit pro'ra( pro'ra( for test of contro controls: ls: Ac$uisit Ac$uisitions ions Transactions +& Substantiv Substantivee Tes Testt of Tra Transact nsactions: ions: Ac$uisit Ac$uisition ion ,icsussion of Audit Procedures
a.
Examine Examine the underlyin underlying g documen documents ts for authentic authenticity ity and reasonableness. can voucher register for large or unusual items. Inspect acquired property, property, plant and equipment. Trace inventory purchased to perpetual records. can voucher voucher register for duplicate payments. b. Trace a sequence sequence of receiving reports to entries entries in the vouvher register. Test cut off. ccount for a sequence of entries in the voucher register. c. Trace Trace form form iinvo iinvoices ices to perpet perpetual ual inventory inventory records. records. Examine vendor*s invoices to determine that goods were purchased. d. (ecompute (ecompute invoices invoices and compare compare invoi invoice ce price price to purchase order. order.
e.
#heck accuracy accuracy of accoun accounts ts an an invoi invoices ces by reference reference to chart of accounts.
Audit of Cas# ,isburse(ents
0or cash disbursement processing, see figure 2 on the next page.
,iscussion of audit procedures
3. Examin Examining ing docu documen ments ts unde underly rlying ing cash cash disbursements. 2. (econcilin (econciling g cash cash disbursem disbursements ents per books books to to cash disbursements per bank 4. "repar "reparing ing or or testin testing g reconc reconcili iliati ation on
3. Internal Internal #ontrol #ontrol for for #ash #ash 'isbu 'isburseme rsements nts transactio transactions ns /sing a questionnaire, an entity can evaluate the internal control over the cash disbursement transaction. The 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 se're'ation of duties, independent reconciliation and revie- of vendor state(ents, and monthly ban. reconciliations& 2. Test of control: Cas# ,isburse(ents Transactions a& Existence& (ecorded acquisitions are for itmes that were acquired. b& Co(p Co(ple lete tene ness ss&& cquisitions cquisitions that occurred are recorded. c& Ri'# Ri'#ts ts and and obl obli' i'at atio ions ns&& (ecorded acquisitions are the entity*s entity*s perchases and liabilities. d& )aluatio luation n or Alloc Allocati ation& on& cquisitions are recorded for the proper amount e& Pres Presen enta tati tion on and disc disclo losu sure re&& cquisition are recorded to result in the presentation and disclosure in accordance with "1"0( "1"0( *& Audit Pro'r Pro'ra( a( for test of contro controls ls
Typical Typical audit procedures employed by the auditor in testing disbursement for the period under consideration include the following! a.
"rove "rove the the arithm arithmeti etical cal accu accuracy racy of the the cash cash disbursements record and trace postings to the general ledger b. #ompare paid bank checks with with the cash disbursemnts c. cco ccoun untt for for all all chec checks ks.. d. (econcile (econcile recorded recorded disbursem disbursements ents with the bank statement. e. Exami Examine ne suppo supporti rting ng docume documents nts.. f. (eview (eview cash cash disb disburs urseme ement nt recor records ds for for unusua unusuall items.
+& Substa Substanti ntive ve tests tests of of transac transactio tions: ns: Cas# Cas# ,isburse(ents
