Chapter 11Chapter 11

Audit of Acquisition Cycle Audit of Acquisition Cycle and Inventoryand Inventory

Audit of the Acquisition Cycle

Five Phases in Acquisition and Payment Process

Authorized requisition

Authorized purchase

Receipt of goods and services

Approval for payment

Cash disbursement

Authorized Purchase

Separate purchasing function

•promotes efficiency and effectiveness

•eliminates potential favoritism

•reduces the opportunity for fraud

•centralizes control in one function

Testing Controls over Accounts Payable & Related Expenses

•Attribute sampling for some criteria

•Evidence of proper authorization

•Expense reimbursements

•Other non-business expenses

Substantive Tests of Accounts Payable

•Testing for completeness

•Accounts payable confirmations

•Testing subsequent disbursements

•Analytical review of related expense accounts

•Year-end cutoff tests

•Review of contracts for purchase commitments.

Audits of Expense Accounts

•Detailed test of expense accounts

•Analytical procedures of expense accounts

Audit of Inventory and Cost of Goods Sold

•Inventory is a complex accounting and auditing area because of:

Obsolete inventory

Various accounting valuation methods

High volume

Diversity of items

Inventory•Audits of inventories are complex because:

•Many frauds involve inflating inventory

•Inventory easily transportable

•Multiple locations

•Difficulty identifying obsolete inventory

•Defective inventory

•Valuation

•Returned goods

•Diversity of products

•Complex valuation methods

Internal Controls for Inventory

•Well-conceived inventory control system should ensure

all purchases authorized

accounting system ensures timely, accurate, complete recording

receipt of inventory properly accounted for

cost accounting system up to date

perpetual inventory system

inventory reviewed for obsolescence

Internal Control for Inventory

•Well-conceived inventory control system Well-conceived inventory control system should ensureshould ensure

•management reviews and manages inventory

•new product introduction is controlled

•long term contracts are closely monitored

Substantive Testing of Inventory and Cost of Goods

Sold•Assertions and audit procedures for inventory:Assertions and audit procedures for inventory:

•Existence:complete year-end physical inventory

•Completeness:cutoff tests

•Rights:review of long term contracts etc.

•Valuation:combination of direct tests & analytics

•Disclosure:review GAAP guidelines and client unusual circumstances