Chapter 18 Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Revie a.

!uestions Asset accounts:

18"1

Office supplies Delivery equipment Machinery and equipment Land Cash in bank Prepaid e penses

b.

Liability accounts:

Accounts payable Accrued property ta es Accrued insurance Other accrued liabilities

c.

! pense accounts:

Purchases" purchase returns # allo$ances" purchases discounts %CO&' accounts( )ent e pense Le*al e pense +ines and penalties Advertisin* e pense )epairs and maintenance Depreciation e pense ,tilities e pense Property ta e pense Administrative e penses -ncome ta e pense

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18"#
TRA$SACT%&$"R'(AT') A*)%T &+,'CT%-' .. )ecorded cash disbursements are for *oods and services actually received %occurrence(. P&SS%+(' %$T'R$A( C&$TR&(S
1here is adequate

C&..&$ T'STS &/ C&$TR&(S

Discuss $ith personnel

se*re*ation of duties bet$een accounts payable and custody of si*ned checks. 'upportin* documentation is e amined before si*nin* of checks by an authori2ed person. Approval of payment on supportin* documents at the time checks are si*ned.
Checks are prenumbered

and observe activities.

Discuss $ith personnel

and observe activities.

! amine indication of

approval.
Account for a

3. ! istin* cash disbursement transactions are recorded %completeness(.

and accounted for. 1he bank reconciliation is prepared monthly by an employee independent of recordin* cash disbursements or custody of assets.
Calculations and amounts

sequence of checks.
! amine bank

reconciliations and observe their preparation.

! amine indication of

4. )ecorded cash disbursement transactions are accurate %accuracy(.

are internally verified. 1he bank reconciliation is prepared monthly by an independent person.
Accounts payable master

internal verification.
! amine bank recon0

ciliations and observe their preparation.

! amine indication of

5. Cash disbursement transactions are properly included in the accounts payable master file and are properly summari2ed %postin* and summari2ation(. 6. Cash disbursement transactions are properly classified %classification(.

file contents are internally verified. Accounts payable master file or trial balance totals are compared $ith *eneral led*er balances.
An adequate chart of

internal verification.
! amine initials on

*eneral led*er accounts indicatin* comparison.

! amine procedures

accounts is used.
Account classifications are

internally verified. 7. Cash disbursement transactions are recorded on the correct dates %timin*(.
Procedures require recordin*

manual and chart of accounts. ! amine indication of internal verification.

! amine procedures

of transactions as soon as possible after the check has been si*ned. Dates are internally verified.

manual and observe $hether unrecorded checks e ist. ! amine indication of internal verification.

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18"0
TRA$SACT%&$"R'(AT') A*)%T &+,'CT%-' .. )ecorded acquisitions are for *oods and services received" consistent $ith the best interests of the client %occurrence(. P&SS%+(' %$T'R$A( C&$TR&(S
Purchase requisition"

C&..&$ T'STS &/ C&$TR&(S

! amine documents

purchase order" receivin* report" and vendor8s invoice are attached to the voucher. Acquisitions are approved at the proper level. Computer accepts entry of purchases only from authori2ed vendors in the vendor master file. Documents are cancelled to prevent their reuse. 9endors8 invoices" receivin* reports" purchase orders" and purchase requisitions are internally verified.

in voucher packa*e for e istence.

! amine indication

of approval.
Attempt to input

transactions $ith valid and invalid vendors.

! amine indication

of cancellation.
! amine indication of

internal verification.

3. ! istin* acquisition transactions are recorded %completeness(.

Purchase orders are

Account for a

prenumbered and accounted for. )eceivin* reports are prenumbered and accounted for. 9ouchers are prenumbered and accounted for.
Calculations and amounts

sequence of purchase orders. Account for a sequence of receivin* reports. Account for a sequence of vouchers.
! amine indication of

4. )ecorded acquisition transactions are accurate %accuracy(.

are internally verified.

:atch totals are compared

internal verification.
! amine file of batch

$ith computer summary reports.

Acquisitions are approved

for prices and discounts 5. Acquisition transactions are properly included in the accounts payable and inventory master files" and are properly summari2ed %postin* and summari2ation(.
Accounts payable master

totals for initials of data control clerk; compare totals to summary reports. ! amine indication of approval.
! amine indication of

file contents are internally verified. Accounts payable master file or trial balance totals are compared $ith *eneral led*er balances.

internal verification.
! amine initials on

*eneral led*er accounts indicatin* comparison.

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18"0 1continued2
TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' 6. Acquisition transactions are properly classified %classification(. 7. Acquisition transactions are recorded on the correct dates %timin*(.

P&SS%+(' %$T'R$A( C&$TR&(S

Adequate chart of accounts

C&..&$ T'STS &/ C&$TR&(S

! amine procedures

is used.
Account classifications are

internally verified.
Procedures require

manual and chart of accounts. ! amine indication of internal verification.

! amine procedures

recordin* transactions as soon as possible after the *oods and services have been received. Dates are internally verified.

manual and observe $hether unrecorded vendors< invoices e ist. ! amine indication of internal verification.

18"3 Auditin* standards require that the tests of controls and substantive tests of transactions cover the entire accountin* period in order to determine that the system $as operatin* in a consistent manner throu*hout the period. -n selectin* the number of items for testin*" the auditor must determine the sample si2e" statistically or nonstatistically" such that it is likely to be representative of the actual conditions of the population of all transactions. -n testin* items that are periodic procedures rather than individual transactions %such as monthly bank reconciliations(" the auditor must determine the appropriate timin* to determine that those procedures are operatin* properly. 18"4 1he importance of cash discounts to the client is that the client can produce a substantial savin*s if it makes use of the cash discounts available. 1he auditor should e amine vouchers and invoices to determine $hether discounts are bein* taken in accordance $ith the terms available. 18"5 1he difference in the purpose of the steps is that Procedure . ascertains $hether all e istin* acquisitions are recorded properly %completeness and accuracy(" $hereas Procedure 3 is desi*ned to determine $hether recorded acquisitions are proper %occurrence and accuracy(. Althou*h the t$o procedures test opposite ob=ectives %completeness and occurrence(" they are similar in that each is desi*ned to determine that the vendor8s name" type of material and quantity purchased" and total amount of the acquisition a*ree $ith the receivin* report" vendor8s invoice" and acquisitions =ournal entries. 18"6 -t is difficult to control blank or voided checks %as $ell as checks issued before they are mailed( $ithout havin* a printed prenumbered system of blank checks. >ithout prenumberin*" unauthori2ed and unrecorded checks may be more easily issued $ithout detection until after they have cleared the bank. 1he auditor can compensate for poor control over checks by reconcilin* recorded cash ./05

disbursements $ith cash disbursements on the bank statement for a test period.

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18"8 A voucher is a document used by an or*ani2ation to establish a formal means of recordin* and controllin* acquisitions. A voucher re*ister is a =ournal for recordin* the vouchers for the acquisition of *oods and services. 1he use of a voucher system improves control over the recordin* of purchases by facilitatin* the recordin* in numerical order at the earliest possible date" the point at $hich the invoice is received. 18"7 1he point at $hich *oods and services are received is ordinarily $hen title to the *oods and services passes and a liability that should be included in the financial statements is established. 18"18 1he acquisition and payment cycle is related to the inventory accounts in that normally all purchases of ra$ materials in the case of a manufacturin* operation or merchandise in the case of a distribution company are recorded throu*h this cycle. -f the tests of internal controls of the acquisition and payment cycle indicate that proper controls e ist to ensure that the proper cost is used in valuin* the inventory and that ne$ purchases of inventory are recorded at the proper time" in the proper amount" and in the proper account" tests concerned $ith the accuracy and cutoff of the inventory accounts may be reduced from that level required if the controls $ere not adequate. 18"11 1he acquisition and payment cycle includes the recordin* of liabilities that are set up in the accounts payable account. -f the auditor finds that the internal controls in the acquisition and payment cycle are sufficient to ensure that accounts payable are recorded in the proper amount and at the proper time" reconcilin* the vendors< statements and testin* the cutoff as year0end procedures of the accounts payable balance may be *reatly reduced. 18"1# 1he procedure $ill most likely uncover the misstatement in item b. 1he search for unrecorded invoices is desi*ned to detect an understatement of accounts payable. 18"10 ,nless evidence is discovered $hich indicates that a different approach should be follo$ed" auditors traditionally follo$ a conservative approach in selectin* vendors for accounts payable confirmations and customers for accounts receivable confirmations. 1he auditor assumes that the client is more likely to understate accounts payable" and therefore concentrates on the vendors $ith $hom the client deals actively" especially if that vendor8s balance appears to be lo$er than normal on the client8s accounts payable listin* at the confirmation date. -n verifyin* accounts receivable" the auditor assumes that the client is more likely to overstate account balances; and for that reason concentrates more on the lar*er dollar balances and is not as concerned $ith ?2ero balances.? 18"13 A vendor8s invoice is sent $ith or at the same time as the order and states the amount of *oods shipped" the price" and other details. 1his is the vendor8s bill for the *oods shipped. A vendor<s statement contains the individual open items and the endin* balance due in the account. A vendor8s statement is not as ./06

./06

18"13 1continued2 meanin*ful as an invoice to verify individual transactions because a statement includes only the total amount of the transactions and not the details makin* up the shipment" such as unit price and frei*ht. 1he vendor8s statement can be used to verify the correct balance in accounts payable for an individual vendor. 1he statement contains the endin* balance and the individual transactions required to reconcile the accounts payable listin*s and determine the propriety of the balances sho$n for individual vendors. 18"14 1here are several reasons $hy it is not as common to confirm accounts payable at an interim date as accounts receivable:

Less reliance is placed on accounts payable systems than accounts receivable systems for most audits. +or accounts payable" it is common to rely heavily on the search for unrecorded accounts payable to test the balance. >hen control risk is assessed at the ma imum" it is inappropriate to confirm at an interim date. -n auditin* accounts payable" it is common for the auditor to confirm only those accounts for $hich vendors8 statements are not available %received by the client( at year0end. @ence" the auditor $ill not kno$ $hich accounts $ill be confirmed until the end of the year. Accounts payable confirmation is usually a less important and less time consumin* task than confirmation of receivables; therefore" it is less important to confirm the accounts payable early for purposes of reducin* year0end audit time.

18"15 -t is important that the cutoff of accounts payable be coordinated $ith that of the physical inventory to determine that they are established at the same point in time. -f these cutoffs are not consistent" *oods may be counted in the physical inventory for $hich no liability in accounts payable has been recorded" or vice versa. 'uch a situation $ould result in an understatement of accounts payable and cost of *oods sold or an overstatement of these t$o accounts" respectively. Durin* the physical inventory" the auditor should *ather cutoff information %such as the last several receivin* reports and shippin* documents( to assist in the determination that an accurate cutoff $as established. 18"16 +.O.:. destination means that the title to the *oods passes $hen they are received by the purchaser. +.O.:. ori*in si*nifies that the title passes to the buyer $hen the *oods are shipped by the seller. 1he auditor should be a$are that the client mi*ht receive inventory subsequent to year0end that le*ally $as the property of the client at year0end. >hen receivin* reports near year0end are bein* e amined and tested in connection $ith inventory cutoff tests" the auditor should search for *oods that $ere shipped prior to year0end +.O.:. ori*in and received after the closin* date. ! amination of bills of ladin* $ill substantiate the date of shipment.

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.ultiple Choice !uestions /rom CPA '9aminations a. a. %3( %4( b. b. %3( %4( c. c. %3( %.(

18"18 18"17

)iscussion !uestions and Problems

18"#8
a: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-'1S2 b: T'ST &/ C&$TR&( c: P&T'$T%A( .%S" STAT'.'$T1S2 d: S*+STA$T%-' PR&C')*R'

!*'ST%&$

)ecorded acquisitions and payments are for *oods and services received" consistent $ith the best interests of the client %occurrence(.

Observe and inquire about personnel performin* purchasin*" shippin*" payables and disbursin* functions.

&oods received and not recorded or recorded and not received. Disbursements made for *oods not received.

9endor statement reconciliation. )evie$ of physical inventory shorta*es.

Acquisitions are recorded on the correct dates %timin*(. ! istin* acquisitions are recorded %completeness(.

Observe and inquire about the procedure performed by mail clerk. Compare date mail is received to date accountin* received invoices. Account for numerical sequence of receivin* reports and determine that all $ere recorded.

Late recordin* 9endor or non0recordin* statement reconciliation. of liabilities to 'earch for suppliers. unrecorded liabilities.

! istin* acquisitions are recorded %completeness(.

)eceivin* reports are misplaced and acquisitions not recorded.

9endor statement reconciliation.

./0A

Acquisitions are recorded at the proper amounts %accuracy(.

! amine cancelled invoices for indication of checkin* for clerical accuracy.

Acquisitions from vendors are recorded at improper amounts.

1est e tensions" footin*s" discounts" and frei*ht terms on vendors8 invoices.

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18"#8 1continued2
a: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-'1S2 b: T'ST &/ C&$TR&( c: P&T'$T%A( .%S" STAT'.'$T1S2 d: S*+STA$T%-' PR&C')*R'

!*'ST%&$

Acquisition transactions are properly classified %classification(.

! amine indication of approval.

Acquisitions are recorded in the $ron* account.

! amine supportin* invoice for reasonableness of accountin* distribution. ! amine checks clearin* the bank prior to year0end to determine that they $ere recorded in the cash disburse0 ments =ournal prior to year0 end. ! amine vendor statements" notin* any unrecorded payments appearin* on the statement. 1race checks to supportin* invoice and determine reasonableness of e penditure. )econcile vendors< statements.

Payments are recorded on the correct dates %timin*(. ! istin* payments are recorded %completeness(.

Observe $hether the system automatically posts checks $hen they are prepared.

Checks are disbursed and not recorded.

Acquisitions are for *oods and services received" consistent $ith the best interests of the client %occurrence(. )ecorded cash disbursements are for *oods and services actually received %occurrence(.

! amine invoices for $hich checks have been disbursed to determine that they have been cancelled. Observe and inquire about the handlin* of checks from the time they are mailed to suppliers.

-nvoices are recorded and paid more than once.

Checks are disbursed and no merchandise is received. Checks are received by other than the supplier for $hom they are intended.

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18"#1
a: T;P' &/ T'ST :oth %test of authori2ation is a test of control( b: P*RP&S' &/ PR&C')*R'
1o determine that the amount recorded in the

!*'ST%&$ .

acquisitions =ournal is correct %accuracy(.

1o determine that recorded purchases are for

*oods and services actually received %occurrence(. 3 1est of control

1o determine that the vendors< invoices are

approved for payment" and that receivin* reports and purchase orders are all attached %occurrence(. 4 'ubstantive test of transactions
1o determine that postin*s to the cash

disbursements =ournal are properly summari2ed and posted to the *eneral led*er and are posted to the accounts payable master file %postin* and summari2ation(.
1o determine that all check numbers are

1est of control

included to the cash disbursements =ournal" no check number is included more than once and voided checks are accounted for %completeness and occurrence(. 6 'ubstantive test of transactions
1o determine that the proper amount of cash

disbursements are recorded durin* the test month. Checks are not recorded more than once and checks are not omitted %accuracy" occurrence and completeness(.
1o determine that all receivin* reports $ere

:oth %accountin* for sequence is a test of control(

eventually entered into the system as liabilities %completeness(. 1o determine that acquisitions $ere recorded at the proper amounts" considerin* the *oods received %accuracy(.
1o determine that the amount recorded is

'ubstantive test of transactions

accurate" that the classification is proper" and that the acquisition is for *oods and services received" consistent $ith the best interests of the company %accuracy" classification and occurrence(.
1o determine that checks are recorded on the

'ubstantive test of transactions

correct dates %timin*(.

./0B

18"##

a.

@ere are advanta*es for purchasin* ra$ material =e$elry items online throu*h supplier >eb sites:

Increased Product Selection . Donnen Desi*n purchasin* personnel may be able to locate ne$ products only offered throu*h the -nternet that they may not be able to obtain throu*h normal purchasin* channels. Faster Delivery of Purchases . :ecause Donnen Desi*n purchasin* a*ents may be able to purchase ra$ material =e$elry items $ith company credit cards" shipment of the products to Donnen $arehouses can occur at the point of sale. 1hus" ra$ materials may be received by Donnen more quickly. More Product Information. Most =e$elry suppliers post pictures of the products for sale on the -nternet. 1hus" Donnen purchasin* personnel may have *reater opportunities to pre0 screen items before purchase than they do throu*h traditional orderin* sources.

b.

@ere are potential risks associated $ith online purchases of ra$ material =e$elry items:

Unauthorized Purchases Using Donnen Credit Cards . &iven that all online sales must be made usin* a company credit card" purchasin* a*ents may have an opportunity to make unauthori2ed purchases that are char*ed to Donnen credit cards but shipped to purchasin* a*ent addresses. Privacy Protection for Donnen Credit Cards . :ecause the reputation of the online vendors is unkno$n" there is some risk that Donnen credit card information $ill not be adequately protected by vendors from unauthori2ed use. Inconsistent Product Quality . :ecause Donnen purchasin* a*ents $ill be buyin* products from a $ide variety of ne$ vendors" they have less information about product quality across vendors. As a result" the quality of the products purchased may vary e tensively. Reliability of Su lier. :ecause Donnen purchasin* a*ents $ill be buyin* products from a $ide variety of ne$ vendors" the reliability of those suppliers may vary e tensively. 1here is no certainty that orders placed $ith each vendor $ill be processed completely and accurately.

c.

1he primary advanta*e of allo$in* Donnen Desi*n purchasin* a*ents to acquire products usin* company credit cards is that the products $ill be shipped and delivered on a more timely basis than if they pay by company check.

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18"## 1continued2 d. 1he primary advanta*es of restrictin* purchases to only those that can be paid by company check are that it %.( decreases the risk that Donnen personnel use company credit cards to make unauthori2ed purchases and %3( decreases the risk that online vendors fail to adequately protect Donnen credit card information. 'u**ested internal controls: %.( 1o prevent purchasin* a*ents from makin* unauthori2ed purchases of non0=e$elry items usin* Donnen credit cards" the company could:

e.

)equest throu*h the credit card a*ency that only selected types of products are authori2ed for purchase %for e ample" the credit card $ould not be allo$ed for any services" such as travel" food" hotel" etc(. 'end all credit card billin* statements directly to accountin* for reconciliation to receivin* reports of inventory products. 'eparate credit cards may be issued to purchasin* personnel $ith pre0specified spendin* limits.

%3( 1o prevent purchasin* a*ents from orderin* =e$elry items for shipment to an a*ent<s home address" the company could:

'end all credit card billin* statements directly to accountin* for reconciliation to receivin* reports. Only allo$ purchases from selected online vendors $hose policies indicate that products may only be shipped to the credit card billin* address %$hich $ould be a Donnen Desi*n address(.

%4( 1o prevent a buildup of unused credits $ith online vendors for returned *oods" the company could:

Only allo$ purchases from selected online vendors $hose policies indicate that products may be returned for credit to the credit card account. Pre0screen product quality from all vendors before authori2in* the use of that vendor for online purchasin*. !stablish purchasin* limits for each online vendor so that the amount of purchases at a sin*le vendor are not e cessive.

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18"#0
a: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T )ecorded cash disbursements are for *oods and services actually received %occurrence(. b: PR'-'$T%-' C&$TR&( Once checks are si*ned by the treasurer" they are returned to someone independent of pur0 chasin* and accounts payable for mailin*. All supportin* docu0 ments are cancelled to prevent reuse. 3 )ecorded cash disbursement transactions are correctly stated %accuracy(. Checks are prepared usin* a computer process" $hich assures simultaneous preparation of check and =ournal. )econcile bank account on a timely basis at the end of each month. 1ransactions are recorded automatically usin* a computer process $ith the same information as the check preparation. c: S*+STA$T%-' PR&C')*R' )evie$ physical inventory shorta*es for unusual or inconsistent occurrences. Compare payee on the check to the company name on the vendor8s invoice. Compare check amounts to entries in the cash disbursements =ournal. 1est bank reconciliation. 1race last checks $ritten to cash disbursements =ournal. ! amine date checks cancelled at bank to determine if checks $ere held by the client. ! amine underlyin* documents for reasonableness and authenticity.

.%SSTAT'" .'$T .

Cash disbursement transactions are recorded on the correct dates %timin*(.

)ecorded acquisitions are for *oods and services received" consistent $ith the best interests of the client %occurrence(.

)equire that an authori2ed purchase order andDor approval of each invoice by the orderin* department head be required before payments are made for *oods received.

./0.3

18"#0 1continued2
a: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T Acquisition transactions are properly classified %classification(. b: PR'-'$T%-' C&$TR&( Account distributions are revie$ed by a responsible individual prior to entry into the system. c: S*+STA$T%-' PR&C')*R' ! amination of supportin* invoices for entries into the repairs and maintenance account to verify the proper account distribution. At the date on $hich the cutoff test is to be performed" the auditor obtains the number of the last receivin* report%s( that should have been recorded and accounts for the numerical sequence of all previous receivin* report%s( that should have been recorded.

.%SSTAT'" .'$T 6

Acquisition transactions are recorded on the correct dates %timin*(.

)eceivin* reports to be delivered to accountin* at the end of the day on $hich the ra$ materials are received. Accountin* department accounts for numerical sequence of receivin* reports after obtainin* the last number used from receivin* personnel.

18"#3

a.

1he type of audit evidence used for each procedure is as follo$s:

A*)%T PR&C')*R' . 3 4 5 6 7 A /

T;P' &/ A*)%T '-%)'$C' ! ternal documentation %e chan*e rate(; reperformance -nquiries of client ! ternal documentation Confirmation -nternal and e ternal documentation Analytical procedure -nternal documentation )eperformance

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18"#3 1continued2 b. +A(A$C'"R'(AT') A*)%T &+,'CT%-' Com leteness Classification E E E E E E E E E E E E E E E E %bligations Detail tie!in "#istence

A*)%T PR&C')*R'

$ccuracy E

. 3 4 5 6 7 A /

Fote: )i*hts and )eali2able value are not applicable to accounts payable.

c.

Auditin* standards require that all audit ob=ectives be met by *atherin* sufficient appropriate evidence. Auditor =ud*ment is required to determine the appropriate evidence to satisfy each ob=ective. +or e ample" $here an ob=ective is contributed to by an audit procedure that uses less reliable evidence" the audit ob=ective $ill not be completely met. -n such a case" additional evidence $ill be *athered usin* other audit procedures. -n this case" the evidence used in procedure 3 is from inquiries of the client" $hich is *enerally a $eak form of evidence. 1hus" the classification ob=ective could require more reliable evidence from other audit procedures to be fully met. Procedure A uses internal documentation as its primary evidence. 1he reliability of this procedure $ould depend on the effectiveness of the client8s internal controls in producin* the internal documents.

./0.5

Cutoff

18"#4
a: T;P' &/ '<C'PT%&$ Monetary misstatement b: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T Acquisition transactions are properly classified %classification(. c: A*)%T %.P&RTA$C' -ndicates that no one is effectively revie$in* the accountin* distribution. Auditor must consider the effect of the e ceptions on determinin* the amount of reliance that he or she may place on the system. d: e: '//'CT &$ A*)%T -f considered si*nificant" the e ceptions could prevent reliance on the system of internal controls and require the auditor to perform additional tests of the classification of items $ithin the financial statements. -f determination is made that controller does not revie$ supportin* documents" the audit tests should be increased to determine the si*nificance of the deficiency. f: PR'-'$T%-' C&$TR&(S @ave someone revie$ the account distribution of invoices that enter the system.

'<C'PT%&$ .

/&((&="*P Determine the si*nificance of the misclassifica0 tions and plan any required additional steps that are deemed appropriate.

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3 Control deviation )ecorded acquisitions and related cash disbursements are for *oods and services received" consistent $ith the best interests of the client %occurrence(.

-ndicates that the controller is not follo$in* the procedure of initialin* invoices. 1his may indicate that he or she is not effectively revie$in* invoices and other supportin* documents prior to payment.

Determine $hether or not the controller is effectively revie$in* invoices and other supportin* documents.

A competent independent person should revie$ supportin* documents for approval of controller and test items to determine effectiveness of controller8s revie$.

18"#4 1continued2
a: T;P' &/ '<C'PT%&$ Monetary misstatement b: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T Acquisition transactions are recorded on the correct dates %timin*(. c: A*)%T %.P&RTA$C' At the date of the physical inventory" this situation $ill be critical in that any items counted in physical inventory and not recorded in the acquisitions =ournal $ill cause an understated cost of sales and accounts payable. -t could be a fraudulent payment or it could result in an overstatement of perpetual inventory records. -f the payment is fraudulent" there are serious audit ramifications. -f it is unintentional" the situation is $asteful of company assets and must be brou*ht to the client8s attention. d: e: '//'CT &$ A*)%T )equire e pansion of purchase cutoff $ork at physical inventory date and year0end. f: PR'-'$T%-' C&$TR&(S )equire that copies of all receivin* reports be routed directly to accountin* and that accountin* account for numerical sequence of receivin* reports on a re*ular basis.

'<C'PT%&$ 4

/&((&="*P Determine $hether or not this situation persists throu*hout the year and $hether it is rectified at physical inventory date and year0end.

./0.7

Monetary misstatement

)ecorded cash disbursements are for *oods and services actually received %occurrence(.

+irst determine $hether it is fraudulent. -f not" investi*ate the frequency of occurrence of duplicate payments to determine their si*nificance.

1he duplicate payments result in recordin* of none istent inventory. -f the company performs an interim physical inventory" the auditor could e perience a problem relyin* on the system of internal control bet$een the physical inventory date and year0end.

-nvoices must be matched $ith an ori*inal receivin* report and purchase order prior to approval for payment. All duplicate invoices are marked ?duplicate? upon receipt.

18"#4 1continued2
a: T;P' &/ '<C'PT%&$ Monetary misstatement b: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T )ecorded cash disbursement transactions are correctly stated %accuracy(. c: A*)%T %.P&RTA$C' )esults in G.CC liability" $hich may or may not be recorded on the books. d: e: '//'CT &$ A*)%T Probably none" since occurrence rate is lo$. -f amount is si*nificant" then e pansion of reconciliation of vendor statements may be appropriate. Auditor should e amine the bank cutoff statement for the possibility that the voided check and other checks may have been issued and cashed but not recorded. f: PR'-'$T%-' C&$TR&(S An independent person should compare checks to invoice amount prior to si*nin* checks.

'<C'PT%&$ 6

/&((&="*P -nvesti*ate the e ception rate to determine the possible effect of unrecorded liabilities on the financial statements.

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7 Control deviation ! istin* cash disbursement transactions are recorded %completeness(. 1he check may not actually have been voided. -t could represent the disbursement of cash if a check $as prepared. Determine company policy for voided checks and evaluate the potential for unrecorded checks.

)equire that all voided checks be properly voided and saved.

18"#4 1continued2
a: T;P' &/ '<C'PT%&$ Control deviation and Monetary misstatement b: TRA$SACT%&$" R'(AT') A*)%T &+,'CT%-' $&T .'T )ecorded acquisitions are for *oods and services received" consistent $ith the best interests of the client %occurrence(. )ecorded acquisition transactions are correctly stated %accuracy(. c: A*)%T %.P&RTA$C' Absence of receivin* reports prevents the auditor from determinin* $hether or not the *oods $ere received and processed on a timely basis. 1he e tension error indicates that the clerical accuracy of invoice tests are ineffective. d: e: '//'CT &$ A*)%T -f either of the problems is considered si*nificant to the auditor" he or she should e pand the scope of his or her tests of controls or substantive tests of transactions to determine the effect on the financial statements. f: PR'-'$T%-' C&$TR&(S )equire that copies of receivin* reports must be present before invoices are approved for payment. @ave an independent person test e tensions to determine that the clerical tests are effective.

'<C'PT%&$ A

/&((&="*P Obtain bill of ladin* copy from vendor to determine $hether or not the merchandise $as received. Determine if the absence of receiver indicates that they are not compared to the invoice. Deter0 mine the e ception rate by e pandin* the tests if the misstatement noted is considered si*nificant.

./0./

$&T': +or all monetary misstatements that are potential frauds" the auditor should evaluate $hether a fraud occurred. !ven one fraud is sufficient for the auditor to consider the potential impact on the audit" primarily because materiality is normally smaller for fraud than for errors.

18"#5
a: '-A(*AT%&$ -f the vast ma=ority of transactions e ceed this amount" the limit is appropriate. Other$ise" a sample of smaller amounts should also be included. b: APP(%CAT%&$ )%//%C*(T%'S +or attributes samplin*" the sample must be randomly selected from the total population. 1his limitation $ould prevent the use of attributes samplin* or at least force the auditor to *enerali2e only to those transactions e ceedin* G.CCC rather than to the overall system. 1o use such a stratification" the population $ould have to be divided into ra$ materials and others" and the sample si2e computed and results evaluated for each population separately. 1he sample $ould not be random and the auditor could not statistically *enerali2e to the population.

%$STR*CT%&$ .

-f ra$ materials is the most si*nificant account included in the accounts tested" this stratification of the =ud*mental sample is appropriate. 'uch elimination of vendors from repeat selections fulfills no purpose in the test and eliminates the possibility of selectin* more sample items from vendors $ith $hom the client does considerable business. >hen invoices are not located they should not simply be replaced. 1he fact that they $ere not located must be taken into account in the evaluation of the results of the test. 1his is an appropriate $ay to perform the test as lon* as the sample si2e used is sufficient to cover all tests performed. Fo sample that meets the above requirements can be random. 1he random selection of this sample $ill not provide results that may be evaluated statistically.

1he evaluation of results makes little sense if transactions $ith missin* documents are omitted from the sample.

1here $ould be no difficulty in application.

'ee response 4 above.

./0.B

18"#6

a.

1he fact that the client made a =ournal entry to record vendors8 invoices $hich $ere received late should simplify the CPA8s test for unrecorded liabilities and reduce the possibility of a need for a further ad=ustment" but the CPA8s test is nevertheless required. Clients normally are e pected to make necessary ad=ustments to their books so that the CPA may audit financial statements that the client believes are complete and correct. -f the client has not recorded late invoices" the CPA is compelled in his or her testin* to substantiate $hat $ill ultimately be recorded as an ad=ustin* entry. -n this audit" the CPA should test entries in the 3C.C voucher re*ister to ascertain that all items that $ere applicable to 3CCB have been included in the =ournal entry recorded by the client. Fo. )esponse to inquiry alone *enerally does not constitute sufficient appropriate evidence. 1he CPA should obtain a letter in $hich responsible e ecutives of the client8s or*ani2ation represent that to the best of their kno$led*e all liabilities have been reco*ni2ed. @o$ever" this is done as a normal audit procedure to remind the client of his or her responsibilities and the statements that have been made. -t does not relieve the CPA of the responsibility for makin* his or her o$n tests. >henever a CPA is =ustified in relyin* on $ork done by an internal auditor he or she can reduce %but not eliminate( his or her o$n audit $ork. -n this case" the CPA should have determined early in his or her audit that O2ine8s internal auditor is qualified by bein* both technically competent and reasonably independent. Once satisfied as to these points" the CPA should discuss the nature and scope of the internal audit pro*ram $ith the internal auditor and revie$ his or her internal audit schedules in order that the CPA may properly coordinate his or her o$n pro*ram $ith that of the internal auditor. -f the O2ine internal auditor is qualified and has made tests for unrecorded liabilities" the CPA may limit his or her $ork to a less e tensive test in this audit area if the results of the internal auditor<s tests $ere satisfactory. >ork done by an auditor for a federal a*ency $ill normally have no effect on the scope of the CPA8s audit" since the concern of *overnment auditors is usually limited to matters $hich are unrelated to the financial statements. Fevertheless" the CPA should discuss the *overnment auditor8s $ork pro*ram $ith him or her" as there are isolated situations $here specific procedures follo$ed to a satisfactory conclusion by a *overnment auditor $ill furnish the CPA $ith added assurance and therefore permit him or her to reduce certain $ork in an area. @o$ever" *overnment auditors are usually interested primarily in substantiatin* as valid and allo$able those costs $hich a company has allocated a*ainst specific *overnment contracts or sales to the *overnment" and consequently there is

b.

c.

d.

./03C

18"#6 1continued2 little likelihood that the auditor for a federal a*ency at O2ine $ould check for unrecorded liabilities. %Another reason for discussin* the federal auditor<s results $ith him or her is that his or her findin*s may affect the financial statements in other $ays.( e. -n addition to the 3C.C acquisitions =ournal" the CPA should consider the follo$in* sources for possible unrecorded liabilities: .. -f a separate cash disbursements =ournal e ists" e amine underlyin* documentation for disbursements recorded durin* the first part of 3C.C. Determine if any of the disbursements relate to acquisitions that should have been recorded in 3CCB. 9endors8 invoices that have not been entered in the acquisitions =ournal. 'tatus of ta returns for prior years still open. Discussions $ith employees. )epresentations from mana*ement. Comparison of account balances $ith precedin* year. ! amination of individual accounts durin* the audit. ! istin* contracts and a*reements. Minutes. Attorneys8 bills and letters of representation. 'tatus of rene*otiable business. Correspondence $ith principal suppliers. Audit testin* of cutoff date for reciprocal accounts" e.*." inventory and fi ed assets.

3. 4. 5. 6. 7. A. /. B. .C. ... .3. .4. 18"#8 a:

+er>eron %nternal Controls .. Prenumbered purchase orders are used and accounted for.

b: Transaction Related Audit &b?ective1s2 Occurrence" Completeness

c: Test of Controls )evie$ :er*eron<s accountin* for the sequence of purchase orders to determine if all are properly accounted for. ! amine a sample of purchase orders and verify that all are properly approved by the vice president of finance.

3. All purchase orders must be approved by the vice president of finance.

Occurrence

./03.

18"#8 1continued2 a: +er>eron %nternal Controls 4. Prenumbered receivin* reports are prepared upon receipt of *oods. b: Transaction Related Audit &b?ective1s2 Completeness c: Test of Controls )evie$ :er*eron<s accountin* for the sequence of receivin* reports to determine if all are properly accounted for. Observe $hether access to the inventory in the $arehouse is properly restricted. -nquire as to ho$ the shippin* mana*er restricts access to inventory. 6. Perpetual inventory records are updated upon receipt of *oods as evidenced by the receivin* report. 7. Chief accountant matches vendor invoices to purchase order and receivin* reports %-f related to *oods purchased(" checkin* for accuracy and appropriateness. Chief accountant documents revie$ by initialin* documents. A. Access to accountin* records is restricted by pass$ord to the chief accountant. Completeness" Accuracy" 1imin* ! amine a sample of receivin* reports and verify that the perpetual inventory records $ere updated on a timely basis. ! amine a sample of matched documents and verify that all are properly initialed by the chief accountant and that amounts are accurate and appropriate.

5. &oods are stored in a $arehouse that is under the control of the shippin* mana*er.

Completeness

Occurrence" Completeness" Accuracy

Occurrence

Attempt to access the accountin* records $ith an invalid pass$ord.

./033

18"#8 1continued2 a: +er>eron %nternal Controls /. Accountin* records are updated timely based on matchin* of documentation. b: Transaction Related Audit &b?ective1s2 1imin* c: Test of Controls ! amine a sample of matched documents and verify that entries $ere made in the accountin* records in the correct time period. ! amine a sample of cash disbursement transactions and verify that all are properly approved by the president. ! amine a sample of monthly bank reconciliations to verify they $ere performed and properly completed. ! amine a sample of monthly reconciliations to determine they are initialed and prepared properly.

B. President revie$s all documentation before approvin* cash disbursements and controls si*ned checks until mailin*. .C. Controller performs a monthly bank reconciliation.

Occurrence

Occurrence" Completeness" Accuracy" 1imin* Postin* and summari2ation

... Controller reconciles on a monthly basis the accounts payable listin* to the accounts payable *eneral led*er account. Controller initials reconciliation upon completion. .3. -ndependent inventory counts are obtained quarterly and reconciled to the perpetual inventory records.

Occurrence" Completeness" Accuracy

Observe client inventory count teams durin* one of the quarterly inventory counts to determine $hether they are follo$in* the client<s inventory countin* procedures.

./034

18"#7

a.

1he most important balance0related audit ob=ectives for accounts payable are: .. 3. 4. Accounts payable in the accounts payable list a*ree $ith related master file and the total is correctly added and a*rees $ith the *eneral led*er %detail tie0in(. ! istin* accounts payable are in the accounts payable list %completeness(. 1ransactions in the acquisition and payment cycle are recorded in the proper period %cutoff(.

Other balance0related ob=ectives $hich must also be met" but *enerally receive less emphasis are: 5. 6. 7. b. Accounts payable in the accounts payable list e ist. Accounts payable in the accounts payable list are correctly stated. Accounts payable in the accounts payable list are properly classified.

Mincin is not required to use accounts payable confirmation procedures. 1he auditor is required to obtain confirmation of accounts receivable" since the primary audit test is for possible material overstatements and *enerally the client has available only internal documents such as sales invoices. +or accounts payable the auditor can e amine e ternal evidence such as vendor invoices and vendor statements" $hich substantiate the accounts payable balance. Althou*h not required" the accounts payable confirmation is often used. 1he auditor mi*ht consider such use $hen: .. 3. 4. 5. 6. 7. -nternal controls are deficient. 1he company is in a ?ti*ht? cash position and bill payin* is slo$. Physical inventories e ceed *eneral led*er inventory balances by si*nificant amounts. Certain vendors do not send statements. 9endor accounts are pled*ed by assets. 9endor accounts include unusual transactions.

c.

A selection technique usin* the lar*e dollar balances of accounts is *enerally used $hen the primary ob=ective is to test for overstate0 ments %often for accounts receivable confirmation(. Accounts $ith 2ero balances or relatively small balances $ould not be sub=ected to selection under such an approach. >hen auditin* accounts payable" the auditor is primarily concerned $ith the possibility of unrecorded payables or understatement of recorded payables.

./035

18"#7 1continued2 'election of accounts $ith relatively small or no balances for confirmation is the more efficient direction of testin* since under0 statements are more likely to be detected $hen e aminin* such accounts. >hen selectin* accounts payable for confirmation the follo$in* procedures could be follo$ed: .. 3. Analy2e the accounts payable population and stratify it into accounts $ith lar*e balances" accounts $ith small balances" accounts $ith 2ero balances" etc. ,se a sample technique that selects items based on criteria other than the dollar amounts of the items %select based on terminal di*its" select every nth item based on predetermined interval" etc.( Desi*n a samplin* plan that $ill place more emphasis on selectin* accounts $ith 2ero balances or relatively small balances" especially $hen the client has had substantial transactions $ith such vendors durin* the year. 'elect prior0year vendors $ho are no lon*er used. 'elect ne$ vendors used in the subsequent period. 'elect vendors that do not provide periodic statements. 'elect accounts reflectin* unusual transactions durin* the year. 'elect accounts secured by pled*in* assets.

4.

5. 6. 7. A. /. 18"08 a.

-t is an appropriate procedure to have the client perform the recon0 ciliations of vendors8 statements as lon* as the auditor maintains control over the statements $hich have been received directly from the vendor and the auditor performs adequate tests to determine that the reconcilin* items sho$n on the reconciliations are proper. On 'tatement ." the auditor must determine that the payment $as recorded on the company8s books prior to Hune 4C. 1he auditor may also $ant to e amine the cutoff bank statement to determine if the check to this vendor cleared the bank $ithin a reasonable amount of time. On 'tatement 3" the auditor must determine that the payment $as recorded on the company8s records prior to Hune 4C and investi*ate the reason that the vendor had not received the payment at the time his or her statement $as prepared. 1he auditor must determine $hether or not the *oods represented on the invoices that Milner had not received $ere in the company8s inventory at Hune 4C. 1his may be accomplished by requestin* that the vendor send proof of shipment for the *oods invoiced.

b.

./036

18"08 1continued2 +or 'tatement 4" the auditor should request that the vendor provide additional details of the account balance. Other$ise" the auditor $ill not be able to use the vendor8s statement and $ill have to include the G6"A46.7B as a potential misstatement. +or 'tatement 5" the auditor must determine $hether or not the item for $hich the credit memo $as issued by the vendor on Huly .6 $as appropriately recorded on the company8s records at Hune 4C" includin* consideration of inventory. 1he 'tatement 6 reconciliation is incorrect. 1he payment by Milner on Huly 4 should not have been deducted from the accounts payable balance per the master file. 1he auditor should investi*ate the unlocated difference" since it could be comprised of t$o much lar*er offsettin* amounts that the auditor may $ish to test. c. 1he auditor must consider $hether the covera*e achieved by the ./ confirmations that $ere received directly from the vendors is sufficient outside verification of the accounts payable balance at Hune 4C. -f the auditor is satisfied $ith this covera*e" he or she may $ish to support the four nonresponses by e aminin* vendor invoices in support of the amount recorded in the master file. -f the client has received vendor statements from any of these four suppliers" the auditor may $ish to reconcile these statements. -t is essential to coordinate the cutoff tests $ith the physical observation of inventory. -f the cutoff is inconsistent $ith the physical inventory there can be si*nificant misstatements in the income statement and the balance sheet. +or e ample" assume an inventory acquisition for G5C"CCC is received late in the afternoon of December 4." after the physical inventory is completed. -f the acquisition is included in accounts payable and purchases but e cluded from inventory" the result is an understatement of net earnin*s of G5C"CCC. On the other hand" if the acquisition is e cluded from both inventory and accounts payable" there is a misstatement in the balance sheet" but the income statement is correct.

18"01

a.

./037

18"01 1continued2 b.
A),*ST%$@ '$TR; R'C'%-%$@ R'P&RT $&: )'SCR%PT%&$ &/ .%SSTAT'.'$T1S2 )'+%T ACC&*$T A.&*$T CR')%T ACC&*$T A.&*$T

374. 3743

Fone )eceived prior to year0end and not recorded -ncluded in accounts payable and not inventory )eceived prior to year0end and not recorded -ncluded in accounts payable and not inventory Fone 1itle passed prior to year0end and not recorded Fone 1ypically" misstatements that have an effect on earnin*s are most important because of the importance of earnin*s to users of financial statements. )eceivin* report numbers 3744 and 3746 affect earnin*s. -n addition" these misstatements are more important because they represent the recordin* of part of the entry. -f they are not ad=usted" the inventory balance the follo$in* year $ill be understated by G.C"7C/.BB %4"A7..33 I 7"/5A.AA(. +or the other three items %receivin* report numbers 3743" 3745 and 374A(" the misstatement is less important because they $ould be recorded the follo$in* year and the account balances $ould then be proper. -nventory 6"/A/.47 Accounts payable 6"/A/.47 -nventory 7"43C.65 Accounts payable 7"43C.65

3744

-nventory

4"A7..33 Purchases 4"A7..33

3745

-nventory

A"/43../

Accounts payable

A"/43../

3746

-nventory

7"/5A.AA Purchases 7"/5A.AA

3747 374A

374/ c.

./03A

J Case A =ard Publishin> Company 18"0# Part % Com uter Solution. Computer prepared data sheets usin* ! cel are contained on the Companion >eb site %+ilename P./43. ls(. Application of audit samplin* is not appropriate for Procedures .0/ due to the nature of the procedures. -n this case" audit samplin* is also not appropriate for Procedure .C because the samplin* unit is a line item in the cash disbursements =ournal. 1he samplin* data sheet that follo$s represents an attributes samplin* approach. 1he only differences bet$een this approach and a nonstatistical samplin* approach are the estimate of A)AC) and the determination of sample si2es. 'ee the footnotes to the samplin* data sheet for further e planations. A samplin* data sheet usin* attributes samplin* follo$s:
P(A$$') A*)%T )'SCR%PT%&$ &/ ATTR%+*T' B.a. B.b.%.( B.b.%3( B.b.%4( B.b.%5( B.b.%6( B.b.%7( B.b.%A( B.b.%/( B.b.%B( B.b.%.C( B.b.%..( K KK !ntry in CD =ournal a*rees $ith details on cancelled check. All supportin* documents attached to vendor<s invoice. Documents a*ree $ith disbursements. !ntry in CD =ournal a*rees $ith details on vendor8s invoice. Discount $as taken as appropriate. 9endor8s invoice initialed. Account codin* reasonable. Purchases approved by >ard. P.O. or P.). properly approved. Prices" footin*s and e tensions are correct. Details on supportin* documents a*ree. Documents properly completed and cancelled upon payment. %$%T%A( SA.P(' S%B'CC 4/ AA 4/ 4/ 4/ AA 4/ AA AA 4/ 4/ AA

'P'R CL .L CL CL CL .L CL .L .L CL CL .L

T'R 7L 6L 7L 7L 7L 6L 7L 6L 6L 7L 7L 6L

ARACRK .CL .CL .CL .CL .CL .CL .CL .CL .CL .CL .CL .CL

+or a nonstatistical samplin* data sheet" A)AC) columns should indicate MmediumN for all attributes. +or a nonstatistical samplin* data sheet" students< determination of sample si2e $ill vary. >hile no one ans$er is correct" the sample si2e chosen for each attribute should reflect the !P!)" 1!) and A)AC) for that attribute.

./03/

18"0# 1continued2 Part %% a. $ttributes sam ling a roach : 1he results portion of the samplin* data sheet are as follo$s:
ATTR%+*T' $&: B.a. B.b. %.( %3( %4( %5( %6( %7( %A( %/( %B( %.C( %..(
K KK

SA.P(' S%B' 6C 6C 6C 6C 6C 6C 6C 6C 6C 6C 6C 6C

'<C'PT%&$S C .K C C C 7K 4KK C C C C C

'<C'PT%&$ RAT' C 3L C C C .3L 7L C C C C C

C*'R 5.7L A.7L 5.7L 5.7L 5.7L over .A./L .3.BL 5.7L 5.7L 5.7L 5.7L 5.7L

Control deviations Monetary misstatements

&onstatistical a roach : :ecause C,!) under nonstatistical samplin* is estimated usin* auditor =ud*ment" students< ans$ers to this question $ill vary. 1hey $ill most likely be similar to the C,!)s calculated usin* attributes samplin*. :ecause the '!) is 2ero for attributes B.a." B.b.%3(0%5(" and B.b.%A(0%..(" it is unlikely that students $ill estimate C,!) *reater than the 1!) of 6L %tests of controls( or 7L %substantive tests of transactions(. +or attribute B.b.%6( students should conclude that the results are not acceptable because the '!) of .3L clearly e ceeds the 1!) of 6L. +or attribute B.b.%7(" even thou*h the '!) equals the 1!) of 7L" the results are not acceptable because samplin* error must be considered in determinin* C,!). +or attribute B.b.%.(" students< estimates of C,!) $ill be more variable since the '!) is only 3L. 'ome students $ill find the results acceptable" and some $ill not" dependin* on their estimates of samplin* error.

./03B

18"0# 1continued2 b. ! ception . is not an e ception" and has no effect on tests of details of accounts payable. ! ception 3 is a control deviation. !ven thou*h it is not a monetary misstatement" controls require the presence of all supportin* documents before a purchase and the related disbursement are processed. -f an invalid purchase is recorded" the liability and the related debited account may be overstated. -f an invalid disbursement is recorded" accounts payable may be inappropriately reduced. 1hus" misstatements in the occurrence of those transactions could actually result in both overstatements and understatements of accounts payable. 1ests for occurrence include tracin* items on the accounts payable listin* to supportin* documents and confirmation of accounts payable and reconciliation to vendor8s statements. ! ception 4 is a control deviation $here one0half of those items also contain monetary misstatements. Misclassification is a serious misstatement. @o$ever" it relates to the debit entry" not the credit to accounts payable. 1ests supportin* char*es to assets and e pense accounts $ill need to be increased" but tests of accounts payable $ill probably not be affected. On the follo$in* pa*e is an audit pro*ram for accounts payable. 1he balance0related audit ob=ectives tested by each procedure are indicated. :ecause the appropriate audit risk for accounts payable is hi*h and inherent risk is lo$" and because analytical revie$ procedures $ere e cellent" detailed tests should be held to a minimum. 1he e ception to this is for procedure 4; this has not been reduced because of the e ception in procedure B.b.%.(.

c.

./04C

18"0# 1continued2
+A(A$C'"R'(AT') A*)%T &+,'CT%-'S Com leteness Classification Detail tie!in %bligations

"#istence

$ccuracy

.. Obtain list of accounts payable. +oot the list and a*ree to *eneral led*er. 3. 1race all items on the list over G.C"CCC to vendor8s invoice and supportin* documents. 4. Obtain vendor8s statements for 3C vendors $ith *reatest volume of purchases" plus .C others" by confirmation. )econcile statements to accounts payable list. 5. ! amine all subsequent period disbursements and payments in process of amounts over G6"CCC to determine if they $ere recorded in the proper period. 6. )evie$ the list of accounts payable for proper classification of accounts due to related parties" debit balances" or items $ith unusual terms.
Fote:

E E E

)i*hts and )eali2able value are not applicable to accounts payable. Fo audit $ork $as considered necessary for obli*ations.

%nternet Problem Solution: %dentifyin> Accounts Payable /raud

18"1 !mployee fraud is frequently perpetrated throu*h the processin* of inappropriate accounts payable and cash disbursement transactions. 1$o -nternet resources provide an overvie$ of common fraud techniques involvin* accounts payable. )ead these resources to ans$er the questions belo$:

./04.

Cutoff E E

%nternet Problem 18"1 1continued2 Resources: 'en (ays to Identify $ccounts Payable Fraud Part ): http:DD$$$.auditnet.or*DarticlesD.C$aystoidentifyAPfraudOPt..pdf Part *: http:DD$$$.auditnet.or*DarticlesD.C$aystoidentifyAPfraudOPt3.pdf .. >hat contributes to the risk that entities fail to detect duplicate payments to vendorsP Ans er: Most often the cause of a duplicate payment is due to error versus fraud. >hile many of the accountin* soft$ares have controls to identify duplicate payments" sli*ht differences in duplicate invoices can prevent the soft$are controls from detectin* a duplicate payment. +or e ample" duplicate invoices from the same vendor $ith sli*htly different invoice numbers of Q4565 and Q45650A may not be reco*ni2ed by the soft$are controls. 1he most common cause of duplicate invoice numbers is havin* duplicate vendor numbers for the same vendor. :ecause duplicate invoices from the same vendor are applied to different vendor accounts" the duplicates aren<t easily detected because it appears that the t$o invoices are from different vendors. 3. >hat techniques mi*ht help detect duplicate paymentsP Ans er: Dupe searches look for duplicate elements $ithin t$o or more invoices. -f several elements match" then there may be a *reater likelihood that duplicate invoices mi*ht be present. Another technique is the use of Mfu22y0matchin*"N $hich is similar to dupe searches e cept that the comparison is focused on MsimilaritiesN in elements rather than e act matches. 4. @o$ mi*ht :enford<s la$ help detect fraudulent accounts payable transactionsP Ans er: :enford<s La$ can be used to predict the frequency of certain numbers in a pattern of di*its. +or e ample" :enford<s la$ predicts that" out of a *roup of numbers" the first di*it $ill be a M.N about 4CL of the time" $hereas it $ill be an M/N about 6..L of the time. 'o" if an individual $ho records fictitious accounts payable transactions includes an e cessive amount of fictitious transactions be*innin* $ith the number M.N in the first di*its column" the use of :enford<s La$ may detect that activity $hen it reveals une pected pattern of transactions be*innin* $ith the number M.N.

./043

%nternet Problem 18"1 1continued2 5. >hat techniques mi*ht identify fraudulent transactions that are =ust belo$ amounts for required approvalsP Ans er: A common fraud technique is to process transactions at amounts that are =ust belo$ limits that require mana*ement approval. +or e ample" spendin* limits may require hi*her level mana*ement approval for transactions *reater than or equal to G6"CCC. 'o" an individual may record a fictitious transaction that has an amount of G5"B6C. 1o detect that kind of fraudulent activity" transactions that are =ust belo$ the approval limits could be fla**ed for revie$. +or e ample" all transactions that are 6L or less than the approval limit could be fla**ed for revie$. -n our e ample" all transactions bet$een G5"A6C and G6"CCC $ould be revie$ed. 1hus" the G5"B6C transaction $ould be selected for revie$. 6. >hat techniques mi*ht help detect fictitious vendors in the vendor master file that mi*ht result in unauthori2ed payments bein* sent to employeesP Ans er: One control to detect payments made falsely to employees due to the inclusion of employees in the vendor master file is to perform a cross0check of the vendor and employee master files. :y mer*in* the vendor and employee master files" an or*ani2ation can match certain variables %or do a fu22y match( in the files such as: Address 1a -D numbers Phone numbers :ank routin* numbers

Matches of these variables bet$een the t$o files should be investi*ated to determine if employees are falsely included in the vendor master file.
%$ote: -nternet problems address current issues usin* -nternet sources. :ecause -nternet sites are sub=ect to chan*e" -nternet problems and solutions may chan*e. Current information on -nternet problems is available at $$$.pearsonhi*hered.comDarens.(

./044