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Chapter 11 PowerPoint Presentation

Chapter 11

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Chapter 11

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  1. Chapter 11 Audit of Acquisition Cycle and Inventory

  2. 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

  3. Authorized Purchase • Separate purchasing function • promotes efficiency and effectiveness • eliminates potential favoritism • reduces the opportunity for fraud • centralizes control in one function

  4. Testing Controls over Accounts Payable & Related Expenses • Attribute sampling for some criteria • Evidence of proper authorization • Expense reimbursements • Other non-business expenses

  5. 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.

  6. Audits of Expense Accounts • Detailed test of expense accounts • Analytical procedures of expense accounts

  7. Diversity of items High volume Various accounting valuation methods Obsolete inventory Audit of Inventory and Cost of Goods Sold • Inventory is a complex accounting and auditing area because of:

  8. 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

  9. 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

  10. Internal Control for Inventory • Well-conceived inventory control system should ensure • management reviews and manages inventory • new product introduction is controlled • long term contracts are closely monitored

  11. Substantive Testing of Inventory and Cost of Goods Sold • 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