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Chapter 10

acquisition and expenditure cycle including audit of accounts payabl

e and inventory existence

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1.Typical activities

• (1)purchasing goods and services.

• (2)paying the bills.

• Authorization

• custody

• recording

• periodic reconciliation

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Request forpurchases

Authorization

Receive goodsand services

Receivevendor invoice

Enter accounts payable

Recording

Cashdisbursement

Start here

ChequesTo vendor

Cheque copy

Requisition

Purchase order

Receiving report

Invoice

Voucherenvelope

Cashdisbursementtransaction

file

Accountspayablemaster

file

Assetand expense

accounts

Perpetualinventory

record

Purchaserequisition

Purchaseorder

Receivingreport

To vendor

Put goods in inventoryput fixed assets in productive servicePut services to use

Voucherinvoice

Accounts/Records:Raw materialsWork in processFinished goodsProperty, plant, equipmentInsuranceSuppliesVarious expensesCash disbursementsAccounts payable

custody

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Accounts/Records:Raw materialsWork in processFinished goodsProperty, plant, equipmentInsuranceSuppliesVarious expensesCash disbursementsAccounts payable

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Segregation of responsibility

• authorization

• Custody recording

• reconciliation

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(1)Authorization

• A.PURCHASES ARE REQUESTED.

• B.purchasing department seeks the best prices and quality,issues a purchase order.

• obtaining competitive bids.

• C.cash disbursements are authorized

• (order,invoices,internal receiving reports)

• D.cheques are sighed(over a certain amount, 2; vouchers be marked “paid”--- 付讫）

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(2)custody

• A.inspect the good received (a receiving report).

• B.put in the hands(other responsible person)

• C.cash “custody” rest largely,authorized to sign cheques.

• D.access to blank documents.

• Forge a false purchase order to fictitious vendor, receiving report, invoice,

• company cheque, supplier

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(3)recording

• A.TIME: PERCHASE ORDER,INVOICE,

RECEIVING REPORT ARE IN HAND.

• B. DR: inventory, fixed asset,expense account

• CR:ACCOUNTS PAYABLE

• C. DR: ACCOUNTS PAYABLE

• CR:CASH

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(4)periodic reconciliation

• EXISTING ASSETS TO RECORDED AMOUNT• ( 账实核对）

• A.inventory on hand, perpetual inventory records• B.book cash balance, bank cash balance• C.fixed assets, detail records• D.detail of accounts payable, the control account.• E.internal audit confirmation of accounts payable

to compare vender`s report to recorded liabilities .

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2.audit evidence in management reports

• (1)open purchase orders

• market prices have fallen below

• (2)unmatched receiving reports

• material unrecorded liability

• (3)unmatched vendor invoice

• compare to (2)

• material unrecorded liability

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(4)accounts payable trial balance

• List by vendor control ac invoice

All paid and unpaid accounts payable

should be supported by voucher

voucher:a cover sheet, folder,envelope that contain all the supporting document.

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(5)purchases journal

• Sample selection of transactions for detail test of controls audit of supporting document

• for validity,authorization,accuracy, classification,accounting,and proper period

recording.

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(6)inventory reports(trial balance)

(7)fixed asset reports

• (A) to scan for unusual conditions(-, over)

• (B) as a population for sample selection

• observation

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(8)cash disbursements report

• Sample selection for detail test of controls audit of supporting document in the voucher

• for validity,authorization,accuracy, classification,accounting,and proper period

recording.

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3.control risk assessment

• Account balance

• (1)general control considerations

• (2)detail test of controls audit procedures

• (3) detail test of controls for inventory records

• (4) summary:control risk assessment

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(1)general control considerations

• A.Segregation of responsibility

• B.Detail control checking procedures

INTERNAL CONTROL QUESTIONNAIRE

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(1)general control considerations

• Segregation of responsibility

• authorization

• Custody recording

• reconciliation

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Segregation of responsibility

• A.authorization(requisitioning, purchase ordering).

• Custody, recording, reconciliation

• B. Custody of inventory and cash

• .authorize purchase, recording,

reconciliation

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Segregation of responsibility

• C.recording(accounting)

• .authorization, Custody, reconciliation

• E. Reconciliation

• .authorization, Custody, recording

• combination of 2 of more

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(1)general control considerations

• Detail control checking procedures• A.Purchase requisitions and orders,sighed• B.inventory warehouses,fixed asset locations,

security• C.accountants, supporting documentation,date• D.vendor invoice, compare to purchase order

and receiving report (price,quantity).

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(1)general control considerations

• C.INTERNAL CONTROL QUESTIONNAIRE

• appendix 10A

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(2)detail test of controls audit procedures

• Objective Exhibit 10-2

• detail test of control procedure:

• A. 样本总体 (population)

• B. 取证方法（ action)

• action: vouching, tracing, observing, scanning, recalculating

• Exhibit 10-3 重要

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(3) detail test of controls for inventory records• Direction of the test

• completeness, validity

• E 10-4

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(4) summary:control risk assessment

• CONTROL RISK IS LOW

• observation test-count,

• a date prior to the year-end

• the sample size can be fairly small

• CONTROL RISK IS high

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4.audit cases: substantive audit procedures

• Casette 10.1 printing (copying)money

Argus production,inc.

Real printing business

Quickprint company

M.welby

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Casette 10.1 printing (copying)money

• Problem

improper expenditures

For copy services

charged to motion picture production costs.

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method

• M.Welby• authority and responsibility for obtaining copies.

• 1.arrange for outside script copying services.

• 2.receive the copies

• 3.approve the bills for payment.

• Purchasing, receiving, accounting

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method

• Fraud

• A.fictitious company, Quickprint Company.

• B.a post office box number

• C.letterhead stationery

• D.nicely printed invoices.

• No printing equipment.

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Argus production,inc.

Real printing business

Quickprint conpany

1.转包

2.bill

3.invoice

(extra copy)

Bill(fictitious)

4.PaidTook the rest

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Paper trail

A. Argus`s production cost files, all the Q bills

B.created files for proposed films, no production.

C.NO COPYING SERVICE BILLS

FROM OTRERS

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Amount

5 years, $475,000

• copy cost were capitalized,

Amortized over 2-3 years

• net income was overstated

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Audit approach

• Objective

existence, valuation

• control

segregation

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Test of controls

• Weakness:combination of duty lack of managerial review.

• No controls to test other than to see whether Welby had approve

d the copying cost bills.• Procedures: Direction of the test

project files,vouch,source documentExpenditures,trace, project cost records

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Audit of balance

• A. Show evidence of projects that had never gone into production.

• Chance (a pattern of Q)

• B.locate the Q

• C.interview with M.Welby.

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Casette 10.2 real cash paid to phony doctors

• Problem

• fictitious medical benefit claims were paid

Self-Insured up to $5000 per employee

• the expense account that included legitimate and false charges

was “employee medical benefits”

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Method

• Martha Lee• manager of the claims payment department

• she never missed a day of work in 10 years.

• best employees

• best efficiency rating

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Method

• Control• (1) the patient was a Beta employee.• (2) medical treatments were covered in the plan.• (3) the charges were within approved guidelines

and not covered by the provincial plan.• (4)the cumulative claims did not exceed $50,000.• (5)the calculation for payment was correct.

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Method

• Weakness• After verification processing, claims were sent to

the payment department to pay the doctor directly.• No payments ever went directly to employees.

• Nobody ever verified claims information with the employee.

• No one verified the credentials of the doctors.

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Method

• Fraud

• false claims on real employees.

• Forging the signature of various claims processors.

• Adding her own review approval.

• Naming bogus doctors.

• Various post office box address and to her husband`s business address.

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Paper trail

• Falsified claims forms.

• Fictitious employee names,processor signatures, doctor`s bill, phony doctors and addresses.

• Cancelled cheques (endorsements).

• Accounts opened in various banks.

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Amount

• 7, $3,500,000

• until the last, no one noticed anything unusual

about the total amount of claim paid.

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Audit approach

• Objective

• medical benefits “existed”

• valid claims paid to valid doctors.

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Control

• No controls that connected the claims data with outside sources.

• Such as employee acknowledgment or doctor investigation.

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Test of control

• “thinking like a crook”

• the holes in the controls:

• nobody seeks to verify data with external sources.

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Audit of balance

• Balance: medical benefits.

• Objective: valid existence of payment.

• Procedure:

• (1)A list of doctors and dentists paid.

• (2)determine whether their addresses are valid business addresses.

• (3)compare claims processors` signatures on various forms.

• (4) compare doctors` addresses.

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Discovery summary

• 8 “doctors” were not licensed.

• 5: post office box, M.L

• 3: mailing address, her husband

business.

• Further investigation

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5.special note: the completeness

• Completeness and obligations assertions.

• Search for unrecorded liabilities.

• A useful list of procedures• p420

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6.special note:physical inventory observation

• A.the best opportunity

• 客户盘点，审计监盘• (seldom actually count the entire inventory) 。

• B. Instruction(11).

• C. Dual-direction testing

• (existence,completeness).

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D.physical inventory not on year-end date

• reconcile

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E.cycle inventory counting

• Company Never take a complete count on a single date.

• Understand the cycle or sampling plan and evaluate its appropriateness.

• Present for some counting operations

• only under unusual circumstances and as an “extended procedure”:observe all counts

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F.auditors not present at client`s inventory count• On the first audit

• review the client`s plan for the already completed count as before.

• Some test counts and trace to current records..

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G.inventories located off the client`s premises

• If mounts are material

• if control is not strong

• on-site test count

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H.inventory existence existence and completeness

• After the observation is complete

• sufficient appropriate evidence of the following:

A.goods in the perpetual records but not owned were excluded from the inventory compilation.

B.Goods on hand were counted and included in the inventory compilation.

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H.inventory existence existence and completeness

C.Goods consigned-out or stored in outside warehouse were included in the inventory compilation

D.Goods in transit were added to the inventory count and included in the inventory compilation

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H.inventory existence existence and completeness

E.Goods on hand already sold (but not yet delivered) were not counted and were excluded from the inventory compilation

F. Goods CONSIGNED-IN (goods on hand but not owned ) were excluded from the inventory compilation

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Auditing assignments(ch10)

• 1.casette 10.3, 10.4, 10.5, 10.6/team

• 2. 下列各题，每人均做，书面完成 。• 10.31--10.45

• 3. 10.6, 10.14,10.18