Chapter 8: Acquisition and Expenditure Cycle

The acquisition and expenditure cycle consists of processes involved in purchasing and paying for goods and services.
Key activities: requesting purchases, receiving goods, recording transactions, and paying vendors.

Describe the acquisition and expenditure cycle with source documents such as purchase requisitions, purchase orders, receiving reports, and invoices.
Identify significant accounts like Accounts Payable and Expenses with relevant assertions for auditing.
Discuss the risks of material misstatements, particularly in the accounts payable and expenses.
Identify internal control activities to mitigate risks of misstatements in the acquisition and expenditure processes.
Provide examples of tests of controls and substantive procedures relevant to this cycle.
Apply knowledge in audit procedures regarding acquisitions and expenditures.
Understand the payroll cycle and its associated risks and controls.

Purchase goods and services:
- Request for purchase initiated by departments via purchase requisitions.
- Purchasing department prepares and approves purchase orders.
- May involve bidding processes for high-value purchases.
Receiving goods or services:
- Confirmation of goods receipt through a receiving report.
Recording transactions:
- Documenting invoices from vendors and entering them into Accounts Payable.
Cash disbursement:
- Processing payments using checks or electronic methods.

Accounts Payable:
- Assertions include Completeness, Cutoff, Existence, Presentation, and Valuation
Expenses:
- Assertions include Completeness, Cutoff, Accuracy, and Classification

Accounts Payable Risks:
- Incomplete recording of liabilities.
- Liabilities recorded in incorrect periods.
- Non-existent obligations may be recorded.
- Improper disclosure in financial statements.
Expenses Risks:
- Unrecorded expenses.
- Expenses recorded inaccurately or in wrong accounts.

Information Processing Controls:
- Validate purchase orders against receiving reports and vendor invoices.
- Recompute vendor invoices to ensure correctness.
Separation of Duties:
- Different functions are performed by separate individuals (e.g., purchasing, receiving, recording).
Physical Controls:
- Maintain security for inventories and restrict access.
Performance Reviews:
- Compare current purchasing data with historical data to identify anomalies.

Completeness Tests:
- Examine prenumbered receiving reports to ensure all are accounted for.
- Compare payables recorded with purchase orders and receiving reports around year-end.
Existence Tests:
- Perform three-way match tests on purchase orders, receiving reports, and vendor invoices.
Presentation Tests:
- Ensure proper classification and disclosure of liabilities in footnotes.

Completeness Assertion Tests:
- Review unmatched vendor statements, receiving reports, and cash disbursements post-year-end.
Cutoff Procedures:
- Confirm inventory received is recorded in the correct accounting period.

Prepaid Expenses and Accrued Liabilities:
- Test for accuracy and existence by agreeing balances with prior years, checking agreements, and ensuring appropriateness of classifications.
Income Taxes Payable:
- Specific procedures are required due to complexity; assess compliance with tax obligations.
Property, Plant, and Equipment:
- Validate purchases, disposals, and adequacy of depreciation calculations.

Inspect for photocopied invoices, round number invoices, two identical addresses, etc.
Use data analysis for identifying patterns that suggest fraud.

Highlight findings in the context of auditing processes, emphasizing testing controls related to financial statements.

The cycle includes various activities from personnel hiring through payroll processing and accounting. Rely on appropriate internal controls to combat risks such as ghost employees or incorrect classifications.