Question

1. a. Describe common substantive tests of transactions and account details that would be used for the acquisition and payments cycle balances

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Answer 1

Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate.

There are many substantive tests that an auditor can use. The following list is a sampling of the available tests:

• Issue a bank confirmation to test ending cash balances
• Contact customers to confirm that accounts receivable balances are correct
• Observe the period-end physical inventory count
• Confirm the validity of inventory valuation calculations
• Confirm with experts that the fair values assigned to assets obtained through a business combination are reasonable
• Physically match fixed assets to fixed asset records
• Contact suppliers to confirm that accounts payable balances are correct
• Contact lenders to confirm that loan balances are correct
• Review board of directors minutes to verify the existence of approved dividends

As indicated by the examples, substantive testing is likely to include confirmation of account balances with third parties (such as confirming receivables), recalculating calculations made by the client (such as valuing inventory), and observing transactions being performed (such as the physical inventory count).

If substantive testing turns up errors or misstatements, additional audit testing may be required. In addition, a summary of any errors found is included in a management letter that is shared with the client's audit committee.

Substantive testing may also be conducted by a company's internal audit staff. Doing so can provide assurance that internal recordation systems are performing as planned. If not, the systems can be improved to eliminate the issues, thereby providing for a cleaner audit when the external auditors conduct their tests at year-end. Internally-conducted substantive testing may occur throughout the year.

A/P Master File

computer file for maintaining a record for EACH VENDOR of:
INDIVIDUAL ACQUISITIONS
CASH DISBURSEMENTS
ACQUISITION RETURNS AND ALLOWANCES
VENDOR BALANCES

A/P Trial Balance

a listing of the amount owed to each vendor at a point in time

prepared from A/P master file

Acquisition and Payment Cycle

transaction cycle that includes the acquisitions of and payment for goods and services from suppliers outside the organization

Acquisition journal

journal or listing from Acquisition Transaction File and includes info such as:
vendor name
date
amount
account classification for each transaction

Cut-off tests

test to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period

Debit memo

document indicating a REDUCTION IN THE AMOUNT OWED to a vendor because of RETURNED GOODS/ALLOWANCE GRANTED

FOB Destination

title passes on date when GOOD RECEIVED

FOB Shipping

title passes on date when GOODS ARE SHIPPED

Purchase order

document PREPARED and ISSUED by PURCHASING DEPARTMENT tells:
-description
-quantity
-related info for goods/services that they intend to purchase

Purchase requisition

REQUEST by an AUTHORIZED EMPLOYEE to the PURCHASING DEPARTMENT to place an order for inventory & other items used by company

Receiving report

document PREPARED by RECEIVING DEPARTMENT at the TIME goods are RECEIVED tells:
-description of goods
-quantity received
-date received

part of the documentation NECESSARY for PAYMENT TO BE MADE

Vendor's Invoice

document SPECIFIES the DETAILS of an ACQUISITION TRANSACTION and AMOUNT MONEY OWED to the vendor for an aquisition

Vendor's statement

monthly prepared by vendo and indicates:
-beg. balance
-acquisitions
-payments
-ending balance

Voucher

document used to ESTABLISH a formal means of RECORDING and CONTROLLING ACQUISITIONS

primarily by enabling each acquisition transaction to be SEQUENTIALLY NUMBERED