Acquisition and Payment Cycle

Chapter 18

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Classes of Transactions, Accounts, Business Functions, and Related Documents and Records for the Acquisition and Payment Cycle

The acquisition and payment cycle involves the acquisition of raw materials, equipment, supplies, utilities, repairs and maintenance, and research and development. It is important to audit the acquisition and payment cycle in order to confirm whether or not the accounts affected by the acquisitions are accurately presented in accordance with accounting standards. There are three different classes of transactions involved with this cycle--acquisitions of goods and services, cash disbursements, and purchase returns and allowances and purchase discounts. The accounts that are typically involved in the acquisition and payment cycle are--cash, purchase returns and allowances, purchase discounts, manufacturing expense control, accounts payable, selling expense control, raw material purchases, property, plant and equipment, prepaid expenses, and administrative expense control.

One class of transactions, acquisitions of goods and services, affect accounts such as inventory prepaid expenses, accounts payable, and property, plant and equipment. One example of a business function of this class of transaction is processing purchase orders. The documentation used for that function a purchase requisition and a purchase order. A purchase requisition is the document used to request goods and services by an authorized employee. A purchase order is the document that a customer uses to order goods and services from the vendor. The purchase order should be detailed with a description and quantity of the intended purchases. Another business function of acquisitions of goods and services is receiving goods and services which is supported by the receiving report. The receiving report is a document created upon receiving the purchased goods or service. Like the purchase order, the receiving report will provide a description and quantity of the goods.

Another class of transactions, cash disbursements, affects accounts such as cash, accounts payable, and purchase discounts. The main business function of cash disbursements is processing and recording cash disbursements. A common document that supports this business function is a check. When a check is used to pay for a good or service, it goes to the payee with copies of that check filed for future reference. The checks written are recorded in a cash disbursements transaction file, which is a computerized file including all the cash disbursements of a specified period. A report that comes from the cash disbursements transaction file is the cash disbursements journal or listing, which includes all the transactions of any time period.