Acquisition and Payment Cycle Issues - Essay Example

Completing the tests in the acquisition and payment cycle: Verification of selected accounts Acquisition and payments cycle has many functions under it as well as activities. The cycle of transactions are; first, the acquisition of either or both goods and services followed by the disbursement of cash and lastly the returns on purchases as well as allowances and discounts related to the purchases made (Arens et al. 2005). The cycle is taken to be complete when the actual payment is made whereby the terms of the purchase have been adhered to and the same recorded appropriately in the corresponding accounting records. It is after this that entries in respect to discount and returns are entered. The cycle usually has a number of accounts to it that have are involved in order to term the cycle as complete. The accounts are; accounts payable, cash in the bank, raw materials purchases, purchase returns and allowances, prepaid expenses, property, plant and equipment and purchase discounts. All these accounts are interconnected in that a transaction entry in one affects a number of them (Arens et al. 2005). An example is where a purchase of raw materials is made on cash basis. Here the entries are that the cash in bank account shall be credited with the amount disbursed for the purchase and the raw materials account debited with the same amount. In case there are returns to suppliers then the opposite transaction entries shall be made with the corresponding amount. Under the accounts payable i.e. of acquisition of goods and services, there are three major accounts that are used. The first is the Manufacturing Expense Control Account which aims at establishing the cost of manufacturing goods in respect to their impact either direct or indirect to production (Arens et al. 2005). The direct costs are the ones that are directly traceable in the manufacturing process and they include, direct expenses, direct labour and direct materials. In other words direct costs combined are termed as Prime Cost. It is under this account that other subsidiary accounts are opened. Examples are freight in account, repairs and maintenance account and taxes account. The other major account under accounts payable is the Administrative Expense Control Account which usually falls under general expenses for the impact on production cannot be directly traced in the finished product (Arens et al. 2005). Most of the accounts under this category are related to office expenses and accounting ones. Its subsidiary accounts are legal fees account, audit fees, supplies etc. The third is the Selling Expense Control Account. The expenses in this are incurred generally for the purposes of selling products e.g. advertising, commission to salespersons, travel expenses etc. Under acquisition and payments cycle, the classes that are mainly looked into are those of acquisition itself and cash disbursement. Under the acquisition stage the transactions that are mainly carried out involve the inventory, prepaid expenses, manufacturing expenses and accounts payable as elaborated above. When taking inventory as an example, after acquisition, the account is debited with the particulars and the cash in bank credited with the same amount. The documents that are involved in processing purchase orders are the purchase requisition and the purchase orders and the report in respect to receipt of goods and services. In the receiving report the details of the received goods are indicated alongside their particulars as regards quality and quantity. As regards recognition of liability, the documents and reports involved are the acquisitions transaction file and journal or listing (Arens et al. 2005). The others are the vendor’s invoice; indicating the amount payable, voucher; acts as evidence of disbursement, debit memo; indicates the amount the purchaser owes the seller or supplier, vendor’s statement; indicates all the information pertaining to the item being sold, A/P trial balance; it has all the debit and credit entries pertaining to all the transactions and the A/P master file where records of customers, products and employees are indicated. The special documents and reports are the check; a document that is used to order for money or payment from a bank, cash disbursements transaction file; records the amount disbursed and respect to what, and the cash disbursements journal or listing; records all the transactions which involved payment by cash indicating the date of the transaction, explanation, accounts debit etc (Arens et al. 2005). The balance sheet and transaction objects are there to ensure that the transactions were carried out in the recommended manner and that proper recording was used. First objective of looking into the transactions is to ensure that the payments are valid in that they were done after proper authorisation. Also to ensure that the payments are accurately recorded and that the records are complete in terms of the accounting period in question, amounts inserted are correct and all the necessary explanations are availed. The tests conducted here are Out-of-period liability tests and Cut-off tests (Arens et al. 2005). Under the out-of-period liability tests it is important to look into the documents that underlie cash disbursements, bills that have not been paid way after the year-end, comparison is done between the vendor’s invoices and the receiving reports to see if they are matching. The vendor’s statements should be traced that show that there is a balance due to the account payable and sending of confirmations to vendors is important so as to get the details pertaining to their transactions with the business. Under the Cut-off tests, the physical observation is carried out to verify the correlation between the cut-off and the inventory. The other area looked into is the inventory in transit and the documentation to that effect. The tests carried out are Tests of Controls (TOC), Substantive Tests of Transactions (STOT), Analytical Procedures (AP) and Tests of Details of Balances (TDB) (Arens et al. 2005). Tests of controls are carried out to test the reliability of the financial statements and if they are found not to be then substantive tests are carried out since they offer more comprehensive analysis (Arens et al. 2005). Analytical procedures are primarily for bringing forth the potential relationship between data that is financial in nature and that which is non-financial. The evidence gathered in acquisition and payments cycle is through sampling whereby audit procedures are applied to a few items that represent the whole. Both statistical approach and non-statistical can be used. For the accounts receivable statistical sampling is more commonly used than for the accounts payable. However, the sampling size is dependent on many factors e.g. size of the firm, nature of transactions, time allocated for the exercise etc. An example of audit evidence to be gathered is in relation to verifying that vendor’s confirmations are in line with the statements. Another area for evidence search can be in relation to accounts payable (Arens et al. 2005). Here the list of balances are checked to see whether they are actually in the accounts payable ledger, the additions are tested to determine whether there is agreement with the relevant control account and then reconciliation is done in regards to the balances in the statements sent by the suppliers at the end of the financial year. When all the areas highlighted above are followed or looked into then the acquisition and payments cycle will have been well audited in order to ensure reliability of the records therein. Works Cited Arens, A., Elder, R. and Beasley, M. Auditing and Assurance Services. Prentice Hall Business Publishing, 2005. Read More