Audit of the Acquisition and Payment Cycle - Assignment Example

Audit of Acquisition and Payment Cycle of Introduction This paper explains in detail the substantive tests and procedures that are carried out to establish whether the internal controls in practice are effective or not. In the case of the contrast, the paper highlights the correct measures necessary to correct the flaw. Also, it aims at providing the procedures both substantive tests like analytical review procedures that help to gather enough evidence for making a good audit opinion. Apart from that, tests of controls may be used like observation, enquiry and confirmation, inspection and even arithmetic recalculation and performance. They help to provide sufficient evidence on the effectiveness of any of the existing internal control systems in a business organization. These controls are established to ensure that company resources are safeguarded, and there is accountability. Project Objective The objective was to learn the methodology for designing test of controls and substantive tests of transactions procedures for purchase (acquisition) and payment cycle Accounts of Transaction A (i) Accounts and classes of transactions in acquisition and payment cycles Purchase ledger account, which records transactions for goods purchased. It is recorded for individual creditors accounts after goods purchased have been entered in the purchases journal. General ledger account, which is an account, opened to record all sales and purchases combined in a summary form. Cashbook that records all transactions involving even cash whether from the bank or from cash in hand that was used to make payments for goods purchased. (ii) Business functions and related documents in acquisition and payment cycle To order for goods, the related document here is the local purchase order (L.P.O) which shows all the requisition orders made and even the purchase journal which may record credit purchases. To receive goods, the related document here is the goods received note (GRN) which shows goods have been received by the business entity. To pay for goods purchased, the related documents are invoices that are written to authorize for payment. Cashbook can also be one of the documents in making payments as it reflects the cash out and cash in. b) The nine controls and the transaction -related audit objective 1. Controls on purchasing, receiving, and cash disbursement. The objective is to monitor how goods are purchased, received, recorded and to see who is responsible for authorizing the same through segregation of duties. 2. Controls overpayments. To monitor whether the vouchers are properly issued and properly accounted for when making payments whether through cash or bank cheques or withdrawals. 3. Controls on checks issue. To ensure that all checks issued are properly numbered and accounted for every transaction that has been carried. 4. Controls on receiving goods. Audit objective is to see whether the receiving reports have been properly recorded for the goods ordered and received and ensure all the goods have been dispatched 5. Controls on safety handling of documents. Audit objective is to ensure that they are the right documents and relate to the accounting period and are meant for that purpose. 6. Controls on supporting documents reasonableness. This is meant to know whether supporting documents been interfered with in any manner. 7. Controls on authorization. Meant to check on whose has powers to do or perform a task. 8. Controls over accounts payable. Main audit objective is to monitor how the creditors are paying and their ageing and whether there is any irregularity. 9. Controls on cash at bank. The main transaction audit objective related here is to monitor and verify whether bank statement agrees with the cash book, and there is no mismatch. c) Audit procedure for each controls named above. 1. Controls on purchase and receiving goods. Examine whether the goods have been authorized to be purchased and by who. This can be done by viewing the local purchase order or the requisition form. They can be obtained from the purchasing and supplies department upon request. 2. Controls overpayment. Obtain receipts for vouchers and check whether they have been pre-numbered appropriately and ensure there is consistency in numbering by following a sequence. 3. Controls on checks issue. Close examine whether the checks are properly pre-numbered and in good format and ensure they are not misstated. 4. Controls on receiving goods. Obtain the purchase ledger book and close examine it with the goods received note and the dispatch note copy to ensure they do agree. Check even on the local purchase order to ensure goods ordered for are the exact goods received. 5. Controls on safety handling of documents. Check on documents that are handled by certain personnel and confirm whether is authorized to handle them and confirm whether that person can prepare checks. 6. Controls on support documents. Request for support documents from the procurement department and close examine them to ensure they real support the other verified documents and if they don’t agree ask for approval from those concerned. 7. Controls on authorization. Check on who is supposed to do what within the procurement department and check whether the duties and responsibilities are well outlined. 8. Controls on accounts payable. Check on how the creditors are paid and by which means. This can be obtained by requesting for the minutes of the board. 9. Controls on cash at bank. Close examine the receipts of deposits, bank statements, and even cashbook and ensure that they do agree as per the records of the transactions carried out. Arithmetic calculations may be carried out to test the accuracy. d) Test of control and its substantive test of transactions. (i) To purchasing and receiving the goods the substantive test of completeness must be checked on. This is meant to ensure that every transaction of purchase and payment was recorded, and nothing was omitted. Due to the segregation of duties I think the job was easy for every personnel to operate hence did not fail. (ii) To control on checks issue. Presentation and disclosure should be observed to ensure that all the checks authorized have been presented and no any that is missing. (iii) Concerning vouchers and payments. Occurrence should be observed to ensure that the vouchers have been issued for the transactions that actually occurred and had been properly authorized from the relevant department. (iv) Accounts payable control. Occurrence and completeness should be monitored to ensure that all creditors have been recorded and proper accounts payable control account has been maintained which reflects the same. According to these monthly reconciliations, they make the control reliable and effective and minimizes on errors and omissions. (v) Cash at bank control. In this control completeness and presentation and disclosure substantive tests are appropriate. They ensure that all transactions carried out are reflected is it banking deposits or bank withdrawals. Independent monthly bank reconciliations can ensure transparency and integrity of the accounts operation. (vi) Control of authorization. Rights and obligation and segregation of duties are considered to ensure that every personnel have a role to play in his department. This can be done by viewing employment letters and confirming the task each one was outlined to do. (vii) Control on goods received. Valuation and completeness should be observed to ensure that goods are properly valued and appropriate methods of valuing are applied. Like first in first out (FIFO) or last in first out (LIFO) ensure all goods have been completely recorded. This can be done by close examining the company accounting policies on how to value stock and how to account for it. (viii) Test control on support document- presentation and disclosure and reliability substantive test procedure should be applied. The supporting documents should be checked and ensure whether they can be relied upon. Examine the transactions and where the transactions are not understood the request for supporting documents to approve or interview the concerned parties. e) Acquisition Substantive Tests of Transactions Occurrence - The auditor should close examine the books of accounts and documents and ensure that the transactions actually took place concerning the purchase and receipt of goods. He can request for the books and ensure that the transactions recorded relate to that accounting period under audit. Completeness- The auditor should carefully do vouching on some documents to ensure that the goods, that were ordered, are the same goods that were received. This can be done by obtaining local purchase order and matching it with the goods received note to ensure that they tally. Presentation and Disclosure. Close check the documents provided and see whether they provide sufficient evidence to make a conclusion but if they don’t request for additional or supporting documents to verify whether they can provide sufficient evidence to make one to sign the checks. Valuation.- Carefully check whether the goods are valued at fair market price when even comparing with other business entities dealing with the same product in the same industry. The auditor can also look at the books of accounts and verify what accounting policies they are using in valuing products and see whether they are reasonable. f) Cash Disbursement Substantive Tests of Transactions Accuracy – check whether the monthly bank reconciliations are done correctly. This can be done by performing some arithmetic calculations to verify and see whether the monthly bank statements and cash book do tally after doing reconciliations. Rights and Obligations – check and ensure whether the company has obligations to meet and to what extent do they owe other third parties. To confirm this needs to view the books of accounts as the accounts payable control account and also the company’s current minutes to see whether issue of credit has been discussed and check whether the company has such an obligation. Presentation and Disclosure – Close examine the documents brought for internal verification to confirm whether they are the relevant documents for that purpose and check whether the transactions have been adequately disclosed and are well presented before check preparation. Completeness. Auditor should check the completeness of the transactions recorded in the vouchers by close examining the vouchers and ensuring that there is nothing that has been omitted or added which should not be there. Conclusion If the substantive tests and procedures are carried out correctly with the correct audit objective outlined then, the controls systems established by the company can be truly reflected whether they are effective or ineffective. References Collings, S. (2011). Interpretation and application of international standards on auditing. Chichester, West Sussex, U.K.: Wiley. Hayes, R. (2005). Principles of auditing. Harlow, England: Prentice Hall/Financial Times. Saxena, R., Srinivas, K., Rai, U., & Rai, S. (2010). Auditing. Mumbai [India]: Himalaya Pub. House. Read More