5 - Audit of Purchasing Disbursement Cycle

AUDIT OF THE EXPENDITURE CYCLE 1.

PURCHASING / ACQUISITION

2.

PAYMENT / DISBURSEMENT

3.

PRODUCTION & WAREHOUSING

4.

PAYROLL

TOPIC OUTLINE  

DEFINITION, CATEGORIES & NATURE  ACCOUNTS

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DOCUMENTS

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INTERNAL CONTROL REQUIREMENTS

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TEST OF CONTROLS

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SUBSTANTIVE TESTS

TOPIC OUTLINE  

DEFINITION, CATEGORIES & NATURE  ACCOUNTS

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DOCUMENTS

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INTERNAL CONTROL REQUIREMENTS

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TEST OF CONTROLS

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SUBSTANTIVE TESTS

PURCHASING CYCLE

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DISBURSEMENT –money paid out or spent -means payment of/for  purchases expenses

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PURCHASING – the act or process of seeking and obtaining something (Acquisition)

PURCHASING DEPARTMENT Purchasing department refers to a people or group of people in an organization attempting to acquire goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.

Procurement - includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to

OVERVIEW OF THE PURCHASING CYCLE

1. An employee recognizes a need for a purchase; completes a requisition and sends it to purchasing. Ace Company PURCHASE REQUISITION The production dept. needs 200 kgs. of dry #4 solvent. authorized

PURCHASING DEPARTMENT

2. Purchasing shops for the appropriate quality at the best price, then prepares a purchase order .

PURCHASING DEPARTMENT

Ace Company PURCHASE ORDER To: Big Chemical Co. Please ship 200 kgs. of dry #4 solvent by 6/2/12 Price P38.40/kg.

BIG

Chemical Co.

3. When goods arrive from the vendor, the receiving dept. inspects, counts, and prepares a receiving report. Ace Company RECEIVING REPORT

BIG

RECEIVING DEPARTMENT

Chemical Co.

BIG

Received 200 kgs. of dry #4 solvent on 6/1/12. Condition: OK

4. Goods are moved from receiving to a warehouse; (if perpetual inventory, it is updated). RECEIVING DEPARTMENT

WAREHOUSE

 perpetual inventory description Php 6/1/12-dry #4 solvent-200 kgs.7680

5. When needed, goods are moved from the warehouse to production; perpetual inventory and cost accounting records are updated. WAREHOUSE

 perpetual inventory description Php 6/1/12-dry #4 solvent-200 kgs.7680 6/8/12-trans.200 kgs.to prod. -7680

PRODUCTION DEPARTMENT

cost acctg. system description _ Php _  June 8, 2012 Raw  mat’l added  - dry #4 solvent (200 kgs.) 7680

6. When finished, goods are moved from production to the warehouse; perpetual inventory and cost accounting records are updated. WAREHOUSE

 perpetual inventory description Php 6/9/12-fin.goods 50 litres x7g 9680

PRODUCTION DEPARTMENT

cost acctg. system description _ Php _  6/9/12-trans. 50 litres of finished x7g to warehouse 9680

7. When sold, goods are shipped and perpetual inventory records are updated. A C E

Ace Co.

 perpetual inventory description Php 6/9/12-fin.goods 50 litres-x7g 9680 8/5/12- sold 30 litres-x7g -5808

TYPES OF TRANSACTIONS 

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Purchase of goods and services for cash or credit. Payment of the liabilities arising from such purchases. Return of goods to suppliers for cash or credit.

FINANCIAL STATEMENT ACCOUNTS AFFECTED 

Purchase transaction:  Accounts payable  Inventories  Purchases or cost of goods sold asset and expense  Various accounts requiring cash payment 

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Purchase return transaction: Purchase returns & allowances  Purchase discounts   Accounts payable 

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Cash disbursement transaction: Cash

DOCUMENTS AND RECORDS 

Purchase requisition.

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Purchase order.

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Receiving report.

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Vendor invoice.

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Vendor statements.

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Voucher.

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Cheque.

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Voucher register/purchase journal.  Accounts payable subsidiary ledger.

Cash disbursements  journal/cheque register.

DOCUMENTS AND RECORDS PURCHASE REQUISITION 

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FROM: inventory stockroom or operating department PURPOSE: indicates to the purchasing dept. that goods should be ordered CONTENT: item description, qty. needed, the requester 

AUDIT SIGNIFICANCE 

EVIDENCE THAT THE PURCHASING DEPARTMENT WAS AUTHORIZED TO INITIATE A PURCHASE

DOCUMENTS AND RECORDS PURCHASE ORDER 

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FROM: Purchasing dept. to supplier  PURPOSE: indicates authorization to procure goods & services CONTENT: item description, qty. needed, related information for goods & services

AUDIT SIGNIFICANCE 

PO contains the signature of the employee who authorized a purchase from a vendor 

DOCUMENTS AND RECORDS RECEIVING REPORT  

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FROM: Receiving report PURPOSE: prepared at the time tangible goods are received CONTENT: item description, qty. received, the date received & other relevant data

AUDIT SIGNIFICANCE 

This report is prepared within the entity & provides evidence that goods were received

DOCUMENTS AND RECORDS VENDOR’S INVOICE  

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FROM: Supplier  PURPOSE: indicates the details of the items received CONTENT: item description, qty. received, price, freight, cash discount, terms & date of billing

AUDIT SIGNIFICANCE 

This document is created externally & provides evidence about a purchase of goods or services

DOCUMENTS AND RECORDS DEBIT MEMO  

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FROM: Supplier  PURPOSE: indicates a reduction in the amount owed to a vendor because of returned goods or an allowance CONTENT: item description, amount & quantity of goods returned

AUDIT SIGNIFICANCE 

This document is created externally & provides evidence of reduction of accounts payable

DOCUMENTS AND RECORDS VOUCHER 

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FROM: Accounting dept./Payables Clerk to Treasury Dept. PURPOSE: establish a formal means of recording & controlling acquisitions CONTENT: brief details of payment to be paid; vendor’s invoice, RR & PO are attached to it

AUDIT SIGNIFICANCE 

A voucher provides documentation for the recording of a transaction.

DOCUMENTS AND RECORDS CHECK  

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FROM: Treasurer

AUDIT SIGNIFICANCE

 PURPOSE: a means of payment that authorized a bank to transfer funds to the payee

CONTENT: payee, date to be paid, amount in words & figures, signatures

A check that has been presented for payment is referred to as PAID or CANCELED CHECK. A paid check provides evidence about payments that an entity has made

DOCUMENTS AND RECORDS VENDOR’S STATEMENT  

FROM: Vendor  PURPOSE: indicates the beg. Balance, acquisitions, returns & allowances, payments to vendor & ending balance

AUDIT SIGNIFICANCE 

This can be used to determine that all transactions recorded on the statements have been recorded in the books

MAJOR FUNCTIONS Requisitioning  Purchasing  Receiving  Invoice processing  Disbursements   Accounts payable  General ledger  

KEY SEGREGATION OF DUTIES 

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The purchasing function should be segregated from the requisitioning and receiving functions. The invoice-processing function should be segregated from the accounts payable function. The disbursement function should be segregated from the accounts payable function. The accounts payable function should be segregated from the general ledger

STATEGIC SYSTEMS APPROACH INHERENT RISK ASSESSMENT 

 Auditor should gain a comprehensive understanding of the purchasing process

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Industry-related factors

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Misstatements detected in prior audits

CONTROL RISK ASSESSMENT Understanding and documenting the purchasing internal control system based on the planned level of control risk

Planning and performing tests of controls on purchasing cycle transactions

Assessing and documenting the control risk for the purchasing cycle

TEST OF CONTROLS EXISTENCE OR OCCURRENCE

• Recorded acquisitions are for items that were acquired

COMPLETENESS

•  Acquisitions that occurred are recorded

RIGHTS & OBLIGATIONS

• Recorded acquisitions are the entity’s purchases & liabilities

TEST OF CONTROLS VALUATION OR  ALLOCATION

• Acquisitions are recorded for the proper amounts

PRESENTATION  AND DISCLOSURE

• Acquisitions are recorded to result in presentation & disclosure in accordance with PAS/PFRS

TEST OF CONTROLS: Existence or Occurrence ACQUISITION CONTROLS 

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 Approval by authorized personnel, which is evidenced by signature on the PO Prepared voucher supported by properly executed PRF, PO, RR & Vendor’s Invoice The check signer should examine the supporting documentation & cancel the documents (mark “paid” or

TEST OF CONTROLS 

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Examine the approval signature Observes the procedure & examine file of documents Examine cancellation of documents. if not

TEST OF CONTROLS: Completeness ACQUISITION CONTROLS 

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Prenumbered RR should be used & accounted for 

Vouchers are prenumbered and accounted as they are entered in the voucher

TEST OF CONTROLS 

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Observe the procedure & account for numerical sequence of the RR Observe the procedure & account for numerical

TEST OF CONTROLS: Rights & Obligations ACQUISITION CONTROLS 

RR should be prepared by persons having access only to a blind copy of PO details

TEST OF CONTROLS

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Observe that the procedure is being performed

TEST OF CONTROLS: Valuation or Allocation ACQUISITION CONTROLS 

Invoice amounts are verified by a clerk by reference to the PO and RR. Mathematical accuracy is also rechecked.

TEST OF CONTROLS

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Examine the voucher for signature indicating performance

TEST OF CONTROLS: Presentation & Disclosure ACQUISITION CONTROLS 

Require employees to use a chart of account that adequately describes accounts. Account coding is assigned by 1 person & checked by another 

TEST OF CONTROLS

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Examine the chart of accounts & the signature of employee performing the checking or verification

CONTROL PROCEDURES AND TESTS OF CONTROLS PURCHASE RETURNS TRANSACTIONS 

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The number and magnitude of purchase returns transactions is generally not material for most entities. Because of the possibility of manipulation the auditor should at a minimum inquire about how the client controls purchase return transactions. When goods are returned to a vendor, the client usually prepares a debit memo that reduces the amount of the vendor's accounts payable.

SUBSTANTIVE TESTS OF TRANSACTIONS: ACQUISITIONS ASSERTIONS & AUDIT OBJECTIVES 

EXISTENCE OR OCCURRENCE T o d e t er m i n e t h a t r ec o r d e d p u r c h a s e s a r e for items that were acquired 

AUDIT PROCEDURES 

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Examine underlying documents for authenticity & reasonableness. Scan voucher register for large or unusual items. Inspect items Trace inventory purchased to perpetual records

SUBSTANTIVE TESTS OF TRANSACTIONS: ACQUISITIONS ASSERTIONS & AUDIT OBJECTIVES 

COMPLETENESS To determine that  purchases that occurred are recorded 

AUDIT PROCEDURES 

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Trace a sequence of RR to entries in the voucher register. Cut-off tests

SUBSTANTIVE TESTS OF TRANSACTIONS: ACQUISITIONS ASSERTIONS & AUDIT OBJECTIVES 

RIGHTS & OBLIGATIONS

AUDIT PROCEDURES 

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To determine that  purchases are the entity’s acquisitions & liabilities

Trace from invoices to perpetual inventory records. Examine vendor’s invoices & supporting documents to ascertain that: 

Goods were not received on consignment 

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Ordered goods were received Goods were not delivered to another location

SUBSTANTIVE TESTS OF TRANSACTIONS: ACQUISITIONS ASSERTIONS & AUDIT OBJECTIVES 

VALUATION OR  ALLOCATION To determine that  purchases are recorded for the proper amounts

AUDIT PROCEDURES 

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Recompute invoices & compare invoice price to PO. Testing of prices paid by tracing in published catalogs at the time of purchase

SUBSTANTIVE TESTS OF TRANSACTIONS: ACQUISITIONS ASSERTIONS & AUDIT OBJECTIVES 

PRESENTATION & DISCLOSURE To determine that  purchases are recorded to result in presentation & disclosure in accordance with PAS/PFRS

AUDIT PROCEDURES 

Check accuracy of accounts on invoices by reference to chart of accounts

EVALUATING THE AUDIT FINDINGS - PURCHASING Compare total projected misstatement to tolerable misstatement.   Analyze misstatements for causes of errors.  Conclude 

AUDITING ACCOUNTS PAYABLE AND ACCRUED EXPENSES Substantive tests of transactions   Analytical procedures  Tests of account balances 

SUBSTANTIVE TESTS OF TRANSACTIONS 

The intended objective of such tests is to detect monetary misstatements.

ANALYTICAL PROCEDURES 

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Compare payables turnover and days outstanding in accounts payable to previous years’ and industry data. Compare the current-year balances in accounts payable and accruals with prior years' balances. Compare amounts owed to individual vendors in the current year's accounts payable listing to amounts owed in prior years. Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior

ACCOUNTS PAYABLE CONFIRMATIONS  Accounts payable payable confirmations confirmations are generally used less frequently by auditors than accounts receivable confirmations because the auditor generally has access to vendor invoices and monthly vendor statements.  The auditor focuses on large dollar accounts, regular vendors with small or zero balances, and a sample of other 

ACCOUNTS PAYABLE CONFIRMATIONS (cont.) 

When confirming accounts payable, auditors generally use a form of positive confirmation referred to as a blank or zero balance confirmation.

PRODUCTION CYCLE

This cycle involves a series of functions that transform raw materials into finished products

PRODUCTION CYCLE 

Production planning and control

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Inventory management and controls

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Manufacturing activities

Revenue

INVESTING

PRODUCTION

EXPENDITURE

FINANCING

Production plans are prepared based on sales forecasts The actual production of goods is initiated by issuing production orders to the departments where processing will take place Materials requisition forms are prepared to authorize the storekeeper to release the materials to production personnel. If materials are to be purchased, purchased requisitions are prepared and the transaction is processed through the

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DOCUMENTS PRODUCTION ORDER 

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FROM: INVENTORY (FINISHED GOODS) TO PRODUCTION PERSONNEL PURPOSE: instruct to produce a quantity of a particular product

AUDIT SIGNIFICANCE 

Records approval for production personnel to produce goods

DOCUMENTS BILL OF MATERIAL 

PURPOSE: a list of raw material components required to produce a product

AUDIT SIGNIFICANCE 

Indicates components to be used in producing a product

DOCUMENTS MATERIALS REQUISITION 

PURPOSE: use to request and approve the issuance of materials from inventory

AUDIT SIGNIFICANCE 

Records approval to issue materials in the production

DOCUMENTS MATERIALS REQUISITION

AUDIT SIGNIFICANCE

SUMMARY 

PURPOSE: summarizes the materials requisitioned by job or by process, for a period such as a day, a week, or a month

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Records materials used in any given period and is the basis for assigning costs to an account

DOCUMENTS COST ACCUMULATION REPORT 

PURPOSE: a form that accompanies goods as they are transferred through production. 

 As additional costs are incurred, the costs are recorded in the report

AUDIT SIGNIFICANCE

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Records cost of raw materials placed in production

DOCUMENTS AUDIT SIGNIFICANCE LABOR TICKET 

PURPOSE: records of a time worked on a job

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Record the specific activity of a laborer and is the basis for assigning costs to an account

DOCUMENTS LABOR TICKET SUMMARY 

PURPOSE: summarizes the daily labor tickets by  job or by process

AUDIT SIGNIFICANCE

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Record labor used in production on any given day

DOCUMENTS COMPLETED PRODUCTION REPORT 

PURPOSE: summarizes costs for cost control purposes and for determining the amount of costs to assign to goods remaining in the production process

AUDIT SIGNIFICANCE

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Provides a basis for inventory valuation

Values is added to inventory acquired and finished goods are sold As value is added to raw materials, quantity and cost must be monitored. Quantity is monitored primarily through the use of perpetual inventory records or stock cards. Perpetual records should be continually updated as goods are moved in and out of the storeroom, providing a running records of quantities on hand •

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Several systems are used for assigning and tracking inventory  Job Order Cost System Process Cost System Activity-Based Cost System  Just In Time Hybrid or Mixed Cost System

Ending inventory and cost of goods sold are computed  A physical count is conducted periodically and the perpetual records are reconciled to the figure per count. If a periodic system is used, ending inventory is set up after assigning costs to the units in ending inventory

INVENTORY WAREHOUSING 

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 Activities 

Receipt of goods by the storeroom

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Issuance of goods

Misstatements / Irregularities 1.

Fictitious receipts / issues may be recorded

2.

Goods may be received or issued but not recorded

3.

Errors may be recorded in the quantity of goods transferred

4.

Inventory may be misvalued

5.

Goods on consignment may be treated as inventory