Bus 426 - Lecture 6.docx

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Business Administration
BUS 426
Michael Favere- Marchesi

Lecture 6 Acquisitions and Payment Cycle There are 5 business functions  Purchases  Purchase Orders  Receiving  Receiving Report  Recording  Liability for Purchased Goods (Invoice)  Change in Vendor Master File  Processing and Recording Payments Assertions – Acquisitions (Test of Controls)  Occurrence: Recorded acquisitions are for goods received o Invoices  Receiving Report  Purchase Order  Completeness: Existing acquisitions have been recorded o Purchase Order  Receiving Report  Invoices o Primary Objective, because it can overstate A/P  Accuracy: Recorded acquisition transactions are accurate  Classification: Acquisition transactions are properly classified  Timing: Acquisition transactions are recorded on correct dates  Posting and Summarization: Acquisition transactions are properly included in the vendor master file (Posted to right vendor account), and properly summarized in the general ledger (Correct total appears in general ledger) Usually Use Attribute Sampling for Test of Controls  Common for this cycle  Relatively low tolerable exception rate because of the number (too large) of accounts affected  Common to stratify for this population Assertions – Cash Disbursements (Test of Controls)  Occurrence: Recorded cash disbursements are for goods received o Cheque  Receiving Report o Primary Objective, because it can understate A/P (liability)  Completeness: Existing cash disbursements are recorded  Accuracy: Recorded cash disbursement are accurate o Cheque  Invoice  Classification: Cash disbursements are properly classified  Timing: Cash disbursements are recorded on the correct dates  Posting and Summarization: Cash disbursement transactions are properly included in vendor master file and properly summarized in the general ledger Substantive Tests of A/P  A/P is Cash Disbursements, but acquisition and payment throughout the year  Both Cash Disbursement and transactions often involved highly material account  See Table 18-6, p. 610 Search for Unrecorded Liabilities  We would look at all the payments in a period right at cut-off, then trace it to the general ledger, is it on A/P list? o YES: Recorded liability o NO: Unrecorded liability Analytical Procedures  Compare acquisition-related expense account balance with prior year  Review list of account payables for unusual vendors, non- vendors, interest bearing payables  Compare individual account balance with prior year Capital Assets  Capital assets master file, where assets are tracked o Master file will provide information for calculating and recording amortization  Large transactions, material amounts, kept in records for several years  Emphasize is on current year additions and retirement of assets o To do this, examine supporting documents  Most Important: Search for unrecorded disposals Capital Assets Analytical Procedures  Compare current expenses with prior year expenses Amortization Expense  Policy is consistent from year to year?  Calculation accurate?  Tie-in to verification of Accumulated Amortization Audit Prepaids  Especially when reviewing the adequacy of insurance coverage (prepaid insurance)  Test prepaids with analytical procedures  Verify credits with insurance expenses  Debits with cash payments Accruals  Lots of fees that are right by cut-off date and so items must be audited  Payroll related  Professional fees  Warranty costs  Property taxes Audit of Operations  Determine if income and expenses are fairly presented  Evaluate matching and commitment application of accounting principles  The audit of operations is closely linked with other cycles  Therefore, analytical procedures is important o Compare all expenses with prior year o Compare individual assets and liability balances
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