AUDITING AND ASSURANCE SERVICES IN MALAYSIA

TOPIC 9: AUDIT OF PURCHASE AND PAYMENTS CYCLE + ACCOUNT PAYABLES

References: Chapter 18AUD390 2014AUDITING AND ASSURANCE SERVICES IN MALAYSIA

LEARNING OUTCOMESAUD390 2014OVERVIEW OF THE ACCOUNTS & CLASSES OF TRANSACTIONSBUSINESS FUNCTIONS &DOCUMENTSFINANCIAL REPORT ASSERTIONSMAJOR INTERNAL CONTROL & RELATED AUDIT PROCEDURESSUBSTANTIVE TESTS FOR ACCOUNT PAYABLE

OVERVIEW OF PURCHASE & PAYMENT CYCLEAUD390 2014Objective to audit: To evaluate whether the account affected by the purchase of goods and services and the cash payment for those purchased are fairly presented in accordance with generally accepted accounting principles

Accounts In The CycleAUD390 2014Cash Purchase: Cash/Bank Acc vs. Purchase AccCredit Purchase: Acc Payable vs. Purchase AccPurchase Return & Allowance: Purchase Return Acc vs. Acc Payable vs. Cash/Bank Acc

Classes Of TransactionsAUD390 2014Acquisition / Purchase of goods & servicesCash disbursementsPurchase returns and allowances and purchase discounts

AUD390 2014CLASSES OF TRANSACTIONSACCOUNTSBUSINESS FUNCTIONSDOCUMENTS & RECORDS1. Acquisition /PurchaseInventoryProperty, Plant & EquipmentPrepaid ExpensesLeasehold ImprovementsAccounts PayableManufacturing ExpensesSelling ExpensesAdministrative ExpensesProcessing purchase orderReceiving goods & servicesRecognizing the liabilityPurchase requisitionPurchase orderReceiving report

Acquisition transaction fileAcquisitions journal or listingVendors invoiceDebit memoVoucherAccounts payable master fileAccounts payable trial balanceVendors statement2. Cash disbursements/ PaymentCash in bankAccounts PayablePurchase Discount4. Processing & recording cash disbursementsChequeCash disbursements transaction fileCash disbursements journal or listing

KEY CONTROL ACTIVITIESAUD390 2014Authorization of purchasesSeparation of asset custody from other functionsTimely recordingIndependent review of transactionAuthorization of payment

1. Authorization Of PurchasesAUD390 2014Purpose: To ensure that the goods & services purchase are for authorized company purposesTo avoid the purchase of excessive or unnecessary itemsFor example, company to established approval authority i.e. purchase of capital assets above RM1 million may require approval from BODInternal control issues: After the purchase requisition have been approved, a purchase order to purchase the good must be initiated.Purchase order issued should be pre-numbered and should include sufficient column and spaces to minimize the likelihood of unintentional omission on the form when goods are ordered.

2. Separation Of Asset Custody From Other FunctionsAUD390 2014Separate the receiving department, storeroom unit and accounting functionTo prevent theft or misuse of goods

3. Timely RecordingAUD390 2014Method of recording:Upon the receipt of the goods & services ORUpon the vendors invoice is receivedProper recording involves verifying goods received against relevant documents i.e. details on the purchase order, the receiving report & vendors invoice, to determine all information are correct

4. Independent Review Of TransactionAUD390 2014Independent party check on information recorded in the system is required to ensure proper procedure of record keeping

5.Authorization Of PaymentAUD390 2014Establish List of Approval authorityDifferent ranking of personnel responsible to approve different amount of paymentFor example:

Amount of Payment (RM)Approval AuthorityAbove RM1,000,000Board of Directors500,000 1,000,000Senior Managers100,000 500,0000Head of Administration Department

ContAUD390 2014Separation of responsibilities between those:Recording the transactionPreparer of the chequeApproval of the paymentProper documentationCheque should be in sequence of numberPrinted on special paper that makes it difficult to alter the payee or amountEstablish a special physical control over blank, voided and signed cheque

AUDIT OF ACCOUNT PAYABLESAUD390 2014Using Tests of Details of BalanceDetail Tie-inExistenceCompletenessAccuracyClassificationCutoffObligationsPresentation and disclosures

Accounts Payable Detail Tie-InAUD390 2014To determine:Account Payable (AP) in the AP list agree with related master fileThe total is correctly added, and agrees with the general ledger (GL)Examples of Audit Tests:Re-add the total of AP listsTrace the total to GL

Accounts Payable ExistenceAUD390 2014To determine:AP is the AP List existExamples of Audit Tests:Trace from AP List to vendors invoices and statementsConfirm AP, emphasizing large and unusual amounts

Accounts Payable CompletenessAUD390 2014To determine:Existing AP are included in the AP listExamples of Audit Tests:Perform out-of-period liability tests

Accounts Payable AccuracyAUD390 2014To determine:Account Payable (AP) in the AP list are accurateExamples of Audit Tests:Trace from AP List to vendors invoices and statements

Accounts Payable ClassificationAUD390 2014To determine:Account Payable (AP) in the AP list are properly classifiedExamples of Audit Tests:Review the list and master file for related parties, notes or other interest-bearing liabilities, long term liabilities and debit balances

Accounts Payable CutoffAUD390 2014To determine:Transactions in the acquisition and payment cycle are recorded in the proper periodExamples of Audit Tests:Perform out-of-period liability testsPerform detailed tests as part of physical observation of inventoryTest for inventory in transit

Accounts Payable ObligationsAUD390 2014To determine:The company has an obligation to pay the liabilities included in accounts payableExamples of Audit Tests:Examine vendors statements and confirm accounts payable

Account PayablesPresentation & DisclosureAUD390 2014To determine:Accounts in the acquisition and payment cycle are properly presented and disclosedExamples of Audit Tests:Review statements to make sure material related parties and long-term and interest-bearing liabilities are segregated