3 types of transactions related to expenses
1. purchase transactions
2. cash disbursement transactions
3. purchase return transactions
4 steps in purchasing process
1. purchase requisition generated
2. purchasing department prepares purchase order
3. good received, liability recorded
4. payment to vendor
4 major segregation of duties in purchasing process/expense recognition
1. purchasing function from requisitioning and receiving function
2. invoice processing function from AP function
3. cash disbursement function from AP function
4. General ledger function from AP function
inherent risks related to purchasing
1. industry-related risk (material price, material supply)
2. misstatement detected by prior audits
again, 2 types of substantive testing
1. substantive analytical procedures
2. test of details
testing OCCURRENCE for AP transaction
population: sample of vouchers
test against: authorized purchase orders; receiving reports
testing COMPLETENESS for AP transaction
population: sample of vouchers
trace back to: purchases journal
testing AUTHORIZATION for AP transaction
population: purchase requisitions
check for authorization
testing ACCURACY for AP transaction
population: vendor's invoices billed to entity
recompute for math errors
testing CUTOFF for AP transaction
population: vouchers
compare voucher dates with purchases journals dates
testing CLASSIFICATION for AP transaction
test of sample transaction classifications
testing EXISTENCE for AP balance
1. vouch selected amounts from AP listing to voucher packets/supporting documents
2. reconcile vendor statements with vendor accounts
3. confirmation of AP with vendors
testing RIGHTS AND OBLIGATIONS for AP balance
link vouchers to purchase requisition, purchase order, receiving report and vendor invoices
testing COMPLETENESS for AP balance
1. agree AP listing total to general ledger
2. find unrecorded liabilities (inquiry of management; examine post-balance sheet transactions)
3. reconcile vendor statements with vendor accounts
4. vendor confirmation
testing VALUATION/ALLOCATION for AP balance
1. agree AP listing total to general ledger
2. trace AP listing items to vouchers/sub records
3. review vendor AP confirmations
4. reconcile vendor statements with vendor accounts
AP substantive analytical procedures and potential misstatements detected (total of 4)
1. payables turnover and days payable outstanding ---> liabilities and expenses
2. current year total balance to prior years ---> liabilities and expenses
3. amounts owed to individual vendors compared to prior years ---> liabilities and expenses
4. purch
substantive testing COMPLETENESS
1. test of controls to identify unrecorded liabilities and accruals
2. vouch purchase journal and cash disbursements at year-end
3. examine purchase orders, receiving reports, vendor invoices for mismatches
substantive testing EXISTENCE
vouch sample on AP listing to supporting documents
3 major classification issues for AP and accruals
1. material debits in AP
2. short-term vs long-term
3. different types of payables separated
AP confirmation: is it common? Is it positive or negative?
not as common as AR confirmation; usually positive confirmation