Auditing for
Expenditure Cycle
1. Sheren Doherty / 181523990
2. Amelia Chintya Dewi / 181524308
3. Bernadeta Ratri Dewi / 181524419
Payment
Functions
● Paying the liability
● Recording the Payment
Paying the Liability
Specific audit objectives related to controls over the preparation and signing cheques and
electronic transfers:
● Authorized personnel in finance department have no responsibility for initiating
purchase transaction (OE2)
● Authorized cheque signers determine each cheque or bank transfer along with
proper approved supplier’s invoice details (OE2,AV1)
● Cancel supplier’s invoices and supporting documents to prevent resubmission for
duplicate payment (OE2)
● Cheque signer control the mailing of cheques to reduce risk of theft (OE2)
● No blank cheques should be issued (0E2)
● Prenumbered cheques should be used (CE2)
● Limit access to blank cheques and electronic signatures (C2)
Recording the
Payments
Controls over the recording of payments:
● Independent check by accounting supervisor of the agreement and posted the
amount journalized to account payable ledger (OE2,C2,AV1)
● Independently prepared bank reconciliations (OE2,C2,AV1)
Payroll Cycle
• hiring employees
• authorising payroll changes
n ct io n s • preparing attendance and timekeeping data
Fu • preparing the payroll
P a y ro ll • recording the payroll
in • paying the payroll and protecting unclaimed
wages
Internal Control of Account Payable
Control Risk
Environment Assessment
Information
and Monitoring
Communication
Control Activities -
Cash Disbursment
Transaction
Common Documents Functions and
and Reports Control Activities
Common Documents and Reports
Check
Check
Summary
File Cash Cash Dispensing
Disbursment Journal or Cash
Transactions Register
The c
a
funct sh disburs
Functions and io em
by wh n is the pr ent
i o
gives ch the com cess
c
Control Activities c on
servic eipt of goo to
p
the re onsiderati any
es d s an
d
Potential
Misstatements
• Checks may not be recorded.
• Checks may not be recorded promptly.
• Checks can be issued for unauthorized purchases.
• Vouchers can be paid twice.
• Checks may be issued for the wrong amount.
• Checks can be changed once signed.
• Errors may have occurred in recording checks.
• Cash payments may be made for unauthorized purchases, or they
may be made for the incorrect amount.
Substantive Tests of Accounts Payable
Balances
● Existence and Occurrence
● Completeness
● Rights and Obligations
● Valuation or Allocation
● Presentation and Disclosures
Substantive Test of
3.
the Expenditure Tests of Details
Cycle of Transactions
1. 4.
Initial Tests of Details
Procedures of Balances
2.
5.
Analytical
Presentation and
Procedures
Disclosure
Initial Procedure
1. Obtain an understanding of the business and industry and determine:
a) The significance of purchases and accounts payable to the entity.
b) Key economic drivers that influence the entity's purchases and resultant
account payables.
c) Standard trade terms in the industry, including seasonal dating, etc.
d) The extent of concentration of activity with suppliers and related purchase
commitments.
Initial Procedure
2. Perform initial procedures on the accounts payable balance and records that will be
subjected to further testing.
a) Trace beginning balance for accounts payable to prior year's working papers.
b) Review activity in general ledger account for accounts payable and investigate
entries that appear unusual in amount or source.
Analytical Procedure
a) Develop an expectation for accounts payable using knowledge entity's business activity, normal
trade terms, and its history of accounts payable turnover.
b) Calculate ratios:
i. Accounts payable turnover (purchases + accounts payable).
ii. Accounts payable to total current liabilities.
c) Analyze ratio results relative to expectations based on prior years, industry data, budgeted
amounts, or other data.
d) Compare expense balance to prior year or budgeted amounts for indications of possible
understatement related to unrecorded payables.
Tests of Details of Transactions
4. Vouch a sample of recorded expenditure cycle transactions to supporting
documentation.
a) Vouch accounts payable credits to supporting vouchers, vendor
invoices, receiving reports, and purchase orders and other supporting
information
b)Vouch accounts payable debits to cash disbursements or purchase
memoranda.
Tests of Details of Transactions
5. Perform purchases cutoff test.
a) Select a sample of recorded purchase transactions from several days
before and after year-end and examine supporting vouchers, vendor invoices,
and receiving reports to determine that purchases were recorded in the proper
period, or
b) Observe the number of the last receiving report issued on the last
business day of the audit period and trace sample of lower and higher
numbered receiving reports to related purchase documents and determine
that transactions were recorded in the proper period.
Tests of Details of Transactions
6. Perform cash disbursements cutoff test.
a) Observe the number of the last check issued and mailed on the last day of the audit
period and trace to the accounting records to verify accuracy of cutoff, or
b) Trace dates of "paid" checks returned with year-end cutoff bank statements to dates
recorded.
7. Purchase return cutoff test.
a) Determine purchase returns shipped back to vendors for a period of several days before
and after year-end and determine that transactions are recorded in the proper period.
b) Vouch the last purchase returns recorded in the books of original entry to vendor's
authorization and shipping reports.
Tests of Details of Transactions
8. Perform search for unrecorded liabilities.
a) Examine subsequent payments between balance sheet date and end of fieldwork, and
when related documentation indicates payment was for obligation in existence at balance sheet
date, trace to accounts payable listing
b) Examine documentation for payables recorded at year-end that are still unpaid at end of
fieldwork.
c) Investigate unmatched purchase orders, receiving reports, and vendor invoices at year-
end.
d) Inquire of accounting and purchasing personnel about unrecorded payables,
e) Review capital budgets, work orders, and construction contracts for evidence of
unrecorded payables
Tests of Details of Balances
9. Confirm accounts payable.
a) Identify major vendors by reviewing voucher register or accounts payable subsidiary
ledger or master file and send confirmation requests to vendors with large balances, unusual
activity, small or zero balances, and debit balances.
b) Investigate and reconcile differences.
10. Reconcile unconfirmed payable to monthly statements received by client from vendors.
Presentation and Disclosure
11. Compare statement presentation with GAAP.
a) Determine that payables are properly identified and classified as to type and expected
period of payment.
b) Determine whether there are debit balances that are significant in the aggregate and that
should be reclassified.
c) Determine the appropriateness of disclosures pertaining to related party or collateralized
payables.
d) Inquire of management about the existence of undisclosed commitments or contingent
liabilities.
e) Evaluate the completeness of presentation and disclosures for payables in drafts of financial
statements to determine conformity to GAAP by reference to disclosure checklist.
f) Read disclosures and independently evaluate their classification and understandability.
Case Study
1. The purchasing department has three staff, one supervisor
15.22 Internal and two assistants who prepare orders from requisitions
issued by the stores department.
Control Evaluation 2.
3.
Orders are placed on prenumbered purchase order forms.
A completed copy of the purchase order is sent to the
stores department and when goods are received the
- Cash payments storeperson sends a copy of the delivery note to the
purchasing department, stamped ‘Received’.
4. A copy of the purchase order and the delivery note are
The internal auditor of the Jerry Bowen group of sent to the finance department to be matched with the
invoice.
companies is carrying out a review of the
5. Once invoices are checked they are sent to the operations
internal controls applied by some of the group's manager for approval.
subsidiaries in relation to purchases. Work has 6. Signed invoices for payment are returned to the finance
just been completed in relation to Mangus department, which prepares a bank EFT file and uploads
the file onto the online banking system.
Opum Pty Ltd, one of the manufacturing 7. A copy of the EFT is emailed to the operations manager
businesses and the auditor has provided a who then logs on to the online banking system to authorise
summary of her findings: the payments
For each of the payment system procedures listed above,
critically evaluate each step in the process identifying
strengths and weaknesses in the system and make
suggestions for improvements.
15.22
Internal Control Evaluation - Cash payments
1. The purchasing department has three staff, one supervisor and two assistants who prepare orders
from requisitions issued by the stores department.
The strength found in this step is the purchase orders should only be raised on receipt of a valid requisition
however the control could be improved if the requisition is signed by a suitable supervisor or seniors from
the staff. The prenumbered requisition form should allow a review to prevent omissions.
2. Orders are placed on prenumbered purchase order forms
The strength is the prenumbered purchase order and it should be approved by the purchasing supervisor
including different approval levels being implemented in order to require the supervisor approval for certain
orders with high value.
There is no indication that approved suppliers are used for the purchasing process, if different branches of
the group use different suppliers the group may not be getting the best buying terms
15.22
Internal Control Evaluation - Cash payments
3. A completed copy of the purchase order is sent to the stores department and when goods are received the store person
sends a copy of the delivery note to the purchasing department, stamped ‘received’
The strength is that they check the received goods although it could be improved if the person in charge completed and pre
numbered the received goods documents then sent the documents to the purchasing department. The document also should indicate
that the goods are correct and not defected.
4. A copy of the purchase order and the delivery note are sent to the finance department to be matched with the invoice
The payment’s approval only when matched against approved order is the strength in this process. To improve this control, they
could create a goods received note.
5. Once invoices are checked they are sent to the operations manager for approval
The operations manager is unlikely to have the knowledge to check every invoice so maybe signing without understanding what is
being signed. It would be better for each department to have appropriate approval delegations and these delegations are followed.
Orders above a certain value might require approval by the operations manager to ensure costs are being controlled, otherwise
approval levels at each stage should be set and followed.
15.22
Internal Control Evaluation - Cash payments
6. Signed invoices for payment are returned to the finance department, which prepares a bank EFT file and upload the
file onto the online banking system
It is appropriate that finance should only make payments for approved invoices. However, there is no indication of a report
being produced of all items outstanding on the purchase ledger to allow a follow up of any amounts in the ledgers for which
invoices don’t exist.
7. A copy of the EFT is emailed to the operations manager who then logs on the online banking system to authorise the
payments.
This is a weakness because the operations manager is responsible for approving invoices and authorizing payments.
There is no indication that the operations manager signed approved documents when logging on to the banking systems.
Controls could be improved by authorizing payments centrally and having two required authorizers, in any event these
authorizers should have sight of supporting documentation when approving payments.
15.23 Accounts Payable - Substantive Testing
You are the audit senior for the audit of Grosse Ltd and have been given the audit file to review. The reporting date
is 30 June 2015 and the materiality for the client has been set at $200 000. You obtained the information listed
below from your review of the audit file.
1. The balance noted for accounts payable in the general ledger at 30 June 2015 is $158 000, which compares
with a balance as at 30 June 2014 of $342 000.
2. The audit assistant noted in the file: ‘Because the accounts payable balance is immaterial in the current year,
only limited work is necessary.’
3. The only work performed by the audit assistant was to select the three largest payables from the client's
detailed purchases ledger (which had been compared with the general ledger) and compare the balances
with photocopies of supplier statements.
Required:
1) Outline any queries you would raise with the audit assistant.
2) Describe the additional audit procedures you believe should be performed to ensure that the accounts
payable balance is fairly stated.
15.23 Accounts Payable - Substantive Testing
a) Queries I would raise with the audit assistant:
1. The accounts payable balance may be immaterial compared to overall materiality,
but it is probably not immaterial compared to materiality allocated to accounts
payable.
2. Potential errors in relation to accounts payable maybe material. This because the
main risk associated with accounts payable is understatement.
3. The sample selected is not appropriate. It would be preferable for the auditor to use
statistical techniques to select the sample size. Selection of the three largest
balances is also inappropriate because the main risk associated with payable is
understatement not overstatement
4. The balances of the creditors selected for testing should be reconciled to the
original supplier’s statement.
15.23 Accounts Payable - Substantive Testing
b) Additional audit procedures that should be performed to ensure that accounts payable
balance is fairly stated
● The auditor should obtain adequate explanations for such a substantial drop in payables
from 2014 to 2015
● A random sample (using statistical sampling techniques) should be selected from the
whole population of payables to reconcile to original suppliers’ statements. The auditor
should ensure that accounts payable that accounts payable that have decreased
significantly from 2014 are included in the sample.
● More audit work should be done to cut-off of purchases and payables.
● The errors in accounts payable may not be immaterial. The auditor should perform work
searching for unrecorded liabilities through review of subsequent period’s purchase and
payment transactions.
Thank You
