Question

1. Explain the normal business process in the acquisition and payment cycle. As part of your explanation, state which documents firms would normally use to record activities in that cycle. 2. Describe the control procedures that firms commonly use for acquisition and payment activities. Explain which controls and tests of controls would be appropriate for each of the specific controls that you mentioned. 3. Describe common substantive analytical procedures that would be used for account balances related to the acquisition and payment activities. 4. Describe common substantive tests of transactions and account details that would be used for the acquisition and payments cycle balances.

Answer 1

Solution:-

The Acquisition and Payment Cycle mainly consists two classes of transactions.

The first class refers to the acquisition class.The second class refers to the payment class.

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.

Once the ordered goods have been received by the next department, the company will issue 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 will reconcile 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.

Important control procedure:

Remember that for classes of transactions, there are five applicable assertions: cut-off, classification, completeness, occurrence, and accuracy.

An internal control pertaining to the occurrence assertion is that each purchase is accompanied by the necessary supporting documents such as the purchase requisition, purchase order, receiving report, and vendor’s invoice). Without such documents, a purchase cannot “occur” and hence should not have been recorded. Other controls include the approvals of purchase orders by higher level staff, the cancellation/defacing of documents once a transaction has been recorded/accounted for, and approving any changes to the vendor’s list.