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Chapter 11-Auditing - producinggoods,renderingserv

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  Chapter 11-Auditing the Purchasing Process Expense and Liability Recognition -Auditor must understand expense and liability recognition to audit purchasing process -Expenses- outflows or other using up of assets or incurrence’s of liabilities from delivering or  producing goods, rendering services, or carrying out other activities that constitute the entity’s  ongoing major operations  - Liabilities- probable future sacrifices of economic of economic benefits from the present  obligations of a firm to transfer assets to other firms in the future as a result of past transactions  -Expense recognition policies and type of expenses affect how transactions are recorded and  accounted for in FS - Classification of expenses: 1. Product Costs o Expenses that can be matched directly to specific transactions or events and are  recognized upon recognition of revenues  2. Period Costs o Expenses recognized during period that cash is spent or liabilities incurred for  goods that are used up at that time or shortly thereafter  o Expenses are assumed to provide no future benefit  o Can’t directly related to specific transactions 
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o Ex. Rent expense or administrative salaries  3. Expenses that are allocated by systematic procedures to periods during which assets are  expected to provide benefits  o Ex. Depreciation of plant and equipment  Overview of Purchasing Process -Purchase transaction begins with purchase requisition created by a dept. -Purchasing dept. creates a purchase order for the purchase of goods from a vendor  -When goods are received, a liability to the vendor is recorded  Types of Transactions and FS Accounts Affected  - Types of transactions processed through purchasing process Purchase of goods for cash or credit (Purchase transaction) Payment of liabilities arising from such purchases (Cash disbursement  transaction)  Return of goods to suppliers for cash or credit (Purchase return transaction) Types of Documents and Records  Purchase Requisition Requests goods for an authorized individual or dept. within the firm  Ex. of such requests: order for supplies, order for newspaper advertisement Purchase Order
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Include description, quality, and quantity of goods purchased  Indicates who approved the acquisition and represents  authorization  to purchase  the goods Receiving Report Records receipt of goods  Is a copy of the purchase order with the quantities omitted  Encourages receiving dept to make an adequate independent count of goods  received  Receiving dept. records date, description, quantity, and other info. on this  document 
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