Management and Organizational Studies 3363A/B Chapter 16: MOS 3363 - Chapter 16

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Western University
Management and Organizational Studies
Management and Organizational Studies 3363A/B
Michelle Loveland

Audit the Acquisition and Payment Cycle Acquisition and Payment Cycle Accounts • Accounts Payable • Inventory + Raw materials • Purchases + Purchase returns and discounts • Cash • Property, Plant and Equipment • Expenses – Commission, advertising, insurance, etc. Capital Acquisition and Payment • Share Capital (not capital assets) • Deals with dividends, financing, etc. • Not discussed in this chapter The Acquisition and Payment Cycle • The acquisition and payment cycle involves the decisions and processes necessary for the acquisition of goods and cash disbursements to pay for those acquisitions o The objective is to make sure that accounts are fairly presented • Acquisition and Payment does not include: o Acquisition and payment of employee services (HR & Payroll Cycle) o acquisition and repayment of capital (Capital Acquisition & Repayment) • The cycle typically begins with the invitation of a purchase requisition by an authorized employee who needs the goods or services and ends with payment for the goods received • Cases of fraud usually understate A/P o Common, but less common than Revenue and A/R fraud • Typical types of fraud: o Recorded in the incorrect period o Set up fictitious vendor allowances to reduce A/P o Set up payments to fictitious vendors and steal the funds o Capitalization of Repairs and Maintenance • Typical types of errors: o A/P is recorded for good shipped, before ownership has transferred o Understating A/P by omitting a payable o Payments posted to the wrong vendor account o Incorrect rates to amortize PPE Steps in the Acquisition and Payment Cycle • Purchase goods (Purchase order) • Receive goods and enter them into system o Done by the receiving department o Check the purchase order to make sure everything is accounted for (quantity) o Receive the invoice o Check the price and quantity o Recalculate the invoice o Check with receiving report that quantity is equal to quantity received • Pay the supplier o Check the three documents to make sure everything was authorized and received o (Purchase order, Invoice and Shipping Document) • Changes to suppliers or supplier information (if applicable) o Master Data File A&P Functions • Acquisition: o Processing Purchase Orders o Vendor Master File Changes o Receiving Goods and Services o Recognizing the Liability • Payment: o Recording Cash Disbursements Typical tests include: • Three way match - Test of Acquisition o Purchase Order, Invoice & Shipping Document o Price and quantity should match ▪ Strong internal controls will increase reliability • Authorization of payment – Test of Payment Tests of Controls • Attribute sampling is common in the area of tests of control • Because of the number of accounts affected, the auditor may choose a low tolerance rate • It is also common for the auditor to stratify so that large dollar or unusual amounts are segregated and separately tested The auditor will have assessed the: • Quality of corporate governance • Risks of management override in the payment cycle; and • The level of fraud risk associated with the cycle. Assertions: • Are recorded acquisitions for goods and services received, consistent with the best interests of the client? (Occurrence or Existence) • Have all existing acquisitions been recorded? (Completeness) o Completeness is the most important assertion • Have all acquisitions been accurately recorded? (Accuracy) • Have all acquisitions been correctly classified? (Classification) • Have transactions been recorded in the correct period? (Cut off) System Conversions • Affect all cycles (not just A&P) • Arise when an organization has taken a major change in its systems by implementing a new system or has made major changes to a particular system o Computer system, inventory system, account management system, etc. • There are three areas the auditor needs to consider: o New system of internal controls will be needed to evaluate controls o Auditor will need to audit the data conversion process ▪ Making sure all data is properly trans
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