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Chapter 08 - Acquisition and Expenditure Cycle CHAPTER 8 Acquisition and Expenditure Cycle LEARNING OBJECTIVES Review Checkpoints Exercises, Problems, and Simulations 1. Identify significant inherent risks in the acquisition and expenditure cycle. 1 43 2. Describe the acquisition and expenditure cycle, including typical source documents and controls. 2, 3, 4, 5, 6 39 3. Give examples of tests of controls for auditing the controls over purchase of inventory and services, and disbursement of cash. 7, 8, 9 39 4. Explain the importance of the completeness assertion for the audit of accounts payable liabilities, and list some procedures for a “search for unrecorded liabilities.” 10, 11 40, 41, 42, 49, 51, 52 5. Discuss audit procedures for other accounts affected by the acquisition and expenditure cycle. 12, 13, 14, 15, 44, 45, 46, 47, 48, 50 6. Specify some ways fraud can be found in accounts payable and cash disbursements. 16, 17, 18 39, 43, 44 7. Describe some common errors and frauds in the acquisition and expenditure cycle, and design some audit and investigation procedures for detecting them. 19, 20, 21, 22 39, 43, 44 8. Describe the payroll cycle, including typical source documents and controls. 8C1, 8C2 8C3, 8C4, 8C5, 8C6, 8C7, 8C16, 8C17, 8C18, 8C19, 8C20 8-1
Chapter 08 - Acquisition and Expenditure Cycle SOLUTIONS FOR REVIEW CHECKPOINTS 8.1 The short-term effect on the financial statements for improperly capitalizing expenditures is to increase net income because items that should be expensed are included as assets. The long-term effect is the same because the assets are eventually charged to expense as depreciation. 8.2 A “voucher” is a package of documents, usually with a cover page. (The package can be a small envelope.) The package-voucher contains supporting documents for a transaction. For example, a purchase voucher usually contains a purchase requisition, purchase order, receiving report, vendor invoice, and a negotiable check (check copy when the vendor invoice has been paid). Required approvals and signatures are on the documents. The voucher presents evidence of the documentation and control over a transaction. Computerized systems may have all this documentation in memory. In a voucher system, each voucher is “payable”, and the detail of the payables is the vouchers themselves. At any time, the company may owe a single vendor more than one invoice represented on several vouchers. In a voucher system, there is no balance payable to each vendor—just a file of different vouchers payable. 8.3 A purchasing manager can direct purchases toward vendors who provide the manager kick-backs or other inducements. This can be prevented by notifying suppliers that the company will not permit payment of kick-backs to its employees. The company can also rotate purchasing managers to different vendors. Finally, significant purchases should be reviewed and approved by a higher level manager.
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