Question

Provide responses to each of the following statements. Find supporting literature to make your

arguments. Please provide references for any source used.

1. Describe the acquisition and expenditure cycle, including typical source documents.

2. Identify significant accounts and relevant assertions related to the acquisition and

expenditure cycle.

3. Discuss the risk of material misstatement in the acquisition and expenditure cycle.

4. Apply your knowledge to perform audit procedures in the acquisition and expenditure cycle

and evaluate the findings of your tests.

Answer 1

1. Describe the acquisition and expenditure cycle, including typical source documents.

The Acquisition and Payment Cycle is mainly comprised of two classes of transactions. The first class is the acquisition class. The typical journal entry for this class of transactions is a debit to inventory or an expense and a credit to accounts payable.

The second class of transactions in the acquisition and payment cycle is the cash disbursements class.

All in all, this cycle is mainly about incurring payables and paying off those payables with cash.

Typical Business Functions and Important Documents

The process generally starts with a purchase requisition that an employee of the company generates. The purchase requisition is a document that describes the product needed and the quantity required. The document is then sent to the purchasing department that generates a purchase order. The purchase order lists the product to purchase, the quantity to order, and the price the company is willing to pay.

Employees are only permitted to buy from an approved vendor’s list. Once the ordered goods have been received by the next department, the company issues a receiving report. The report should reconcile with the purchase order and is sent to the accounts payable team in the accounting department. Here, the employee reconciles the received goods with the vendor invoice and the journal entry to accounts payable is recorded. Finally, the payment is processed in treasury and the cash is actually paid out.

1- Purchase Goods and Services

a) Department requesting purchase of item(s) prepares a PURCHASE REQUISITION

b) Bidding may be required on high dollar purchases

c) Purchasing prepares a PURCHASE ORDER approved by the appropriate person

d) May be done electronically by EDI

2- Receiving the Goods or Services- After vendor approval, goods are received by company and evidenced by preparing a RECEIVING REPORT

3- Recording the Asset or Expense and Related Liability- Vendor bills company for goods using a VENDOR'S INVOICE

4- Paying the invoice through the cash disbursement process

Identify significant accounts and relevant assertions related to the acquisition and expenditure cycle.

Discuss the risk of material misstatement in the acquisition and expenditure cycle.

Apply your knowledge to perform audit procedures in the acquisition and expenditure cycle and evaluate the findings of your tests.

• Understand the entity and its environment
• For each cycle, identify internal controls that exist
• Assess control risk and the risk of material misstatement
• Evaluate the cost-benefit analysis of testing controls and following a combined audit approach vs a purely substantive audit approach
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