The Accounts and the Classes of Transactions in the Acquisition and Payment Cycles - Assignment Example

Auditing Project (a) (i). Identify the Accounts and the es of Transactions in the Acquisition and Payment Cycles. Acquisition and Payment cyclesare identified as two credential aspects of financial accounting. These two aspects encompass three specific classes of transactions and account types, which are enlisted hereunder. Classes of Transactions Acquisitions of goods and services Cash disbursements Purchase returns as well as allowances and purchase discounts Accounts Types Accounts Payable Account payable encompasses all possible expenses that the business process will have to incur/pay with regard to business transactions. Transactions associated with the attainment of necessary goods and services are categorised as a part of this account. In this context, expenses related to ‘maintenance of machineries’, ‘payment of taxes’, ‘freight charges’ and ‘necessary business utilities’ are accounted under the ‘manufacturing expense control account’ that forms a substantial part of ‘goods and services’ transactions. Specific expenses related to selling and delivery of ordered quantity of goods and services manufactured by the business process. Certain other expenses associated with administration functions also are accounted under the ‘administrative expense control account’ of the ‘goods and services’ transactions. In this context, expenses associated with subsidiary account types, payment of legal and audit related fees would be categorised under ‘administrative expense control account’ (Prentice Hall Business Publishing, 2008). Raw Material Purchases Accounts This account specifically comprises of two specific aspects that include ‘purchase returns and allowances’ and ‘purchase discounts’. Both of these aspects can be accounted as beneficiary attributes for the business process depending on the fact that these accounts aids in maintaining the cash within the business process (Prentice Hall Business Publishing, 2008). Cash in Bank The account specifically comprises of the expenses associated with plant and machinery establishments. Certain constraints of this account also encompass the possible expenses associated with ‘acquisition of goods and services’. In addition, the ‘prepaid expenses incurred’ by a business organization are also considered within this account (Prentice Hall Business Publishing, 2008). ii). Describe the business functions and the related documents and records in the acquisition and payment cycle and related cash disbursement. The classes of accounts and transactions identified in the acquisition as well as payment cycles are important for business functions. In alignment with such transactions and accounts, the list of four specific business functions along with necessary documentation details have been illustrated hereunder. Processing purchase orders Processing of purchased order gradually implies to handling every aspect-associated placement of requisition and corresponding purchase of goods and services. From an accounting perspective, this function encompasses two specific aspects that include structuring of ‘purchase requisition’ and placement of ‘purchase order’ (Prentice Hall Business Publishing, 2008). Receiving Goods And Services This function gradually emphasizes on structuring of appropriate report that entails every specific detail of the goods received after then orders are placed for effective business performance (Prentice Hall Business Publishing, 2008). Recognizing the liability This business functions entails about the various business and finance related elements that may prove to be a liability for the business organization. As a matter of fact, the possible liability such as ‘Vendor’s statement’, ‘Voucher’ and ‘Vendor’s invoice’ among others are accounted under this business function (Prentice Hall Business Publishing, 2008). Evaluation And Recording Of Details Related To Cash Disbursements Cash disbursement gradually refers to paying necessary funds by the organization for settling all debts and payables. Thus, the necessary documentation associated with this business function gradually includes evaluation of cheques and other transaction files related to cash disbursements within the business process. (b). List the Nine Controls and After Each Control, Identify The Transaction-Related Audit Objective(s) That Is Partially Or Fully Satisfies. The list of nine audit controls along with their substantial details has been provided in the undermined sections. Segregation of purchasing, receiving and cash disbursement functions This control specifically includes segregation of all the purchase related details such as placement of ‘purchase requisition’ and ‘purchase order’. This control also inculcates appropriate evaluation of transactional data related to goods purchase and delivery that requires subsequent cash disbursement. The prime objective is to maintain higher levels of transparency within the accounting aspects of the business process (Arens et al., 2013). Use of pre-numbered voucher packages, properly accounted for The transaction related audit function associated with this control is to evaluate a small or large sample of existing ‘voucher packages’ and ‘purchase requisitions’ with the intention of checking the payment clearance status (Arens et al., 2013). Use of pre-numbered cheques, properly accounted for The transaction related audit objective associated with this control includes appropriate evaluation of the previously existing cash disbursement statements and payable cheque details with the intention of completing the pending transactions (Arens et al., 2013). Use of pre-numbered receiving reports, properly accounted for This control specifically aims towards evaluating sample data related to the previously recorded payment receivables with the prime intention of getting them cleared. Internal verification of document package before cheque preparation Within this control, the auditors focus towards evaluating the ‘list of account payable’ and summating the payables in the ledger. Associated focus of the auditors is also laid on collection and evaluation of the vendor statements with the intention of clearing off the payable debts. The mode of payment clearance is to be made through cheques. Review of supporting documents and signing of cheques by an independent and authorized person The objective associated with this control can be categorised into five types and are enlisted hereunder Completeness This factor includes verification of the multiple voucher samples with the intention of evaluating incomplete transactions that are recorded previously. Cut-Off This factor includes comparison of the voucher dates and the actual dates of transactions in order to identify any misinterpretations within the recorded data. Record Validation This factor includes validation of the data mentioned within the invoice records. Appropriate understanding The factor encompasses the level of understanding projected by the auditors to all possible distortions for the maintenance of appropriate accounting data. Associated elements also include ‘classification of the purchase samples’. Cancellation of documents prior to signing of the cheque The prime focus of every auditor emphasized signing off all the vouchers for which the payments have been made in order to ensure that none of the unsigned vouchers is returned for repayments. Monthly reconciliation of the accounts payable master file with the general ledger This control aims towards evaluating the monthly transactional data with the prime intention of analysing its completeness and authenticity. In general, the intention of this principle focuses on accomplishing the auditing procedure in a precise manner. Independent reconciliation of the monthly bank statements Under this control, the auditors focus on evaluating all the previously recorded cash disbursement data. Specific level of focus has been provided on the evaluation of the previously attained cash disbursement proof with the intention of attaining higher level of precision within audit procedures Source: (Rittenberg et al., 2011) (c) For each control, list one audit procedure to test the control. Use the most reliable test of control evidence that you can think of. Write the audit procedure in good form The suggested audit procedure associated with each control has been illustrated below in a precise manner. Segregation of purchasing, receiving and cash disbursement functions Regarding this principle, it is suggested that the auditors should evaluate the level of completeness within previously recorded details of goods and services transactions. The auditors should also focus on evaluating the final acquisition reports in order to identify any transaction error that could have occurred as result of incorrect entry. Use of pre-numbered voucher packages, properly accounted for For this control, the suggested auditing procedure should include precise evaluation of the multiple samples of voucher packages and vendors’ invoice data with the prime intention of finding any signs of incompleteness or distortion within the record keeping. Use of pre-numbered cheques, properly accounted for Within this control, the suggested auditing procedure should include appropriate evaluation of properly recorded cash disbursement statements. Specific level of focus should also be provided on the sequence of previously paid cheques with the intention of attaining a proper understanding of the business transaction procedures. Use of pre-numbered receiving reports, properly accounted for The suggestive auditing technique for this control gradually includes appropriate evaluation of the existing transaction reports with the intention of identifying all forms of discrepancies associated with appropriate record keeping. Internal verification of document package before cheque preparation For this control, it is suggested that the auditing procedure should focus on verification of whether all the pending payments within the vendor accounts are made in an appropriate manner. Specific levels of focus should be provided on evaluation of due payments that could cause further complications within the auditing structure. Review of supporting documents and signing of cheques by an independent, authorized person Under this control, suggestions within auditing procedures can only be provided regarding evaluating the levels of completeness within all the documents that encompasses previous records of goods and services related transactional data that are carried out by the business process. Cancellation of documents prior to signing of the check Suggestive facts in alignment with this control specifically includes precise evaluation and confirmation of the cheques and payment details that are already filed in by the business process with the intention of mitigating the hassle associated with repayment complaints. Monthly reconciliation of the accounts payable master file with the general ledger Necessary suggestions regarding precise evaluation of the monthly transactional data may support the mitigation of the level of complications that auditors may face while matching the annual accounting records associate with the business procedure. Independent reconciliation of the monthly bank statements Under this control, appropriate suggestion is the evaluation of periodically recorded cash disbursement data through which corresponding flaws within the record keeping techniques and data can be attained. Source: (Rittenberg et al., 2011) (d) For each test of control, list one substantive test of transactions audit procedure to test whether the control failed to be effective. Use the most reliable substantive tests of transactions evidence that you can think of. The suggested substantive tests associated with each control have been illustrated below in a precise manner. Key Control Substantive Test of Transaction 1. Segregation of purchasing, receiving and cash disbursement functions Outline the various entries that are presented in the acquisition journals related to invoices of vendors’ and purchase orders 2. Use of pre-numbered voucher packages, properly accounted for Trace all the records from the invoices and acquisition journal of vendors 3. Use of pre-numbered checks, properly accounted for Settling or reconciliation of cash disbursements (recorded) with the cash disbursements (bank statement) 4. Use of pre-numbered receiving reports, properly accounted for Trace all the records from receiving reports and acquisition journal 5. Internal verification of document package before check preparation Scrutinize various supporting documents for propriety along with recomputed information regarding this supporting documents 6. Review of supporting documents and signing of checks by an independent, authorized person Trace cheque that has been cancelled in order to relate journal entries of acquisition and examine the name of payee as well as amount 7. Cancellation of documents prior to signing of the check Trace acquisition journal to examine the possible duplicate entries 8. Monthly reconciliation of the accounts payable master file with the general ledger Trace entries in the general ledger as well as accounts payable and master files of inventory 9. Independent reconciliation of the monthly bank statements Settling or reconciliation of cash disbursements (recorded) with the cash disbursements (bank statement) Source: (Arens et al., 2013; Gramling et al., 2012) (e) Create a separate audit schedule labeled “Acquisition Substantive Tests of Transactions” Decide and write one substantive test of transaction audit procedure for each transaction-related audit objective for acquisition. Acquisitions Substantive Tests of Transactions Transaction-Related to Audit Substantive Audit Procedures Occurrence Recorded acquisitions of various goods and services that are actually been received Recorded cash disbursements of various goods and services that are actually been received Completeness Trace acquisition journal receiving reports Trace acquisition journal vendors’ invoices Accuracy Compare various entries in acquisition journal in order to relate to with invoices and receiving reports Compare vendors’ invoices price with the price limits set by management Existence Compare vendors’ invoices price with the price limits set by management Review general ledger, master file of various accounts payable master file and acquisition journal Classification Study vendors’ invoices in order to have an appropriate classification Compare classification along with different charts of accounts in reference to invoices of vendors Timing Compare the dates and timing that are recorded in the receiving reports as well as in the vendors’ invoices with acquisition journals Summarization & Positioning Trace entries in master file (accounts payable) and in the acquisitions journals Source: (Quizlet LLC., 2015) (f). "Cash Disbursement Substantive Tests of Transactions", decide and write one substantive test of transactions audit procedure for each transaction related audit objective for cash disbursements. Cash Disbursements Substantive Tests of Transactions Transaction-Related to Audit Substantive Audit Procedures Occurrence Recorded entries of various transactions of cash disbursement of goods and services Completeness Trace various entries in the acquisition journal with the consequent payment records in cash distribution Accuracy Compare cancelled cheques with the entries in cash distribution and acquisition journals Properly recomputed the cash discounts Classification Compare classification along with different charts of accounts relating to invoices of vendors and journals of acquisition Timing Compare the dates and timing that are recorded in the cancelled cheques with cash disbursements entries Compare the dates and timing that are recorded in the cancelled cheques with bank entries Summarization & Positioning Trace entries in master file (accounts payable) and in the cash distribution entries Source: (Crumbley & Zabihollah, 2004) References Arens, A. A., Best, P., Shailer, G., & Fiedler, B. (2013). Auditing, assurance services and ethics in Australia. New Jersey: Pearson Higher Education. Crumbley, D. L., & Zabihollah, R. (2004). U.S. master auditing guide. USA: CCH. Gramling, A. A., Johnstone, K. M., & Rittenberg, L. E. (2012). Auditing. USA: Cengage Learning. Prentice Hall Business Publishing. (2008). Audit of the acquisition and payment cycle: tests of controls, substantive tests of transactions, and accounts payable. Retrieved from http://www.mccc.edu/~horowitk/documents/arens12e_19.pdf Quizlet LLC. (2015). Purchase cycle. Retrieved from http://quizlet.com/10459964/audit-411-ch-18-flash-cards/ Rittenberg, L., Johnstone, K., & Gramling, A. (2011). Auditing: A business risk approach. USA: Cengage Learning. Read More