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Chapter 19 Instructor's Guide - Chapter 19 Audit of the...

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Chapter 19 Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable If only two cycles are to be covered in an introductory auditing course, which is what we usually do, we cover the sales and collection cycle and the acquisition and payment cycle. We try to make our coverage parallel to that followed in the sales and collection cycle to emphasize similarities and differences, and reinforce what has already been learned. The following are the topics covered: Chapter opening vignette Accounts and classes of transactions in the acquisition and payment cycle Business functions in the cycle and related documents and records Accounting rules for determining the timing of recording transactions Effects of e-commerce on the acquisition and payment cycle Decision making - deciding an approach Overview of the audit Methodology for designing tests of controls and substantive tests of transactions for the acquisition and payment cycle Methodology for designing tests of details of balances for accounts payable Summary Chapter Opening Vignette “False Purchases Camouflage Overstated Profits” This vignette is an excellent tool to discuss how fraud occurs in businesses, including fraud involving the acquisition and payment cycle. It is interesting to discuss with students how such a fraud could have been discovered by the auditors and whether the auditors should have been held responsible for not discovering the fraud given management override of controls. We remind students that SAS 99 now requires auditors to perform procedures to address management override of controls. Accounts and Classes of Transactions in the Acquisition and Payment Cycle (page 634) We use Figure 19-1 (page 635) to identify the accounts affected in the acquisition and payment cycle. (See Figure 19-1) 19-1
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Business Functions in the Cycle and Related Documents and Records (page 634) Next we go through the relationships of account balances to records using T-19- 1 . (See T-19-1) It is important that students understand the documents and records that affect acquisitions and cash disbursements. We spend as much time as is needed to make sure they do. Table 19-1 on page 636 is helpful to accomplish this goal. (See Table 19-1) Accounting Rules for Determining the Timing of Recording Transactions We briefly cover key terms on T-19-2 for definitional purposes, giving an example of each. (See T-19-2) How E-commerce Affects the Acquisition and Payment Cycle (page 638) Because many companies use the Internet to streamline processes for the acquisition of goods and services, we next address the types of cycle activities that are commonly conducted across the Internet and through private extranets and other EDI arrangements with business suppliers and customers. This discussion also highlights how companies may use business-to-business auctions hosted over the Internet to purchase supplies and services. We emphasize how many of these e-
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