2/25/2017 1 Audit of the Acquisition and Payment Cycle Dr. Donald K. McConnell Jr. 2/25/2017 2 Auditor ’ s Usual Concern: Asset Overstatement and Liability Understatement ? Overstatement of sales or inventories: existence or occurrence assertion violations ? Something has to be on the books that we can audit ? Asset overstatement detectable through: ? Confirmation ? Vouching ? Physical examination ? pany: Existence or occurrence assertion usually riskier for assets 2/25/2017 3 Auditor ’ s Usual Concern: Asset Overstatement and Liability Understatement ? Understatement of expenses and accounts payable: completeness assertion violations ? Requires simply omitting expenses and related payables to overstate e! ? Inherently harder to pleteness than existence or occurrence assertion ? pany: Completeness assertion usually riskier for liabilities 2/25/2017 4 However, Don ’ t Focus Only On Earnings Overstatement Risk! ? Asset reserves (. allowances for bad debts) can be intentionally overstated ? Accrued liabilities (. product liab . wty . accruals) can be intentionally overstated ? Why? e smoothing (earnings management) schemes ? Sometimes called “ rainy day, ”“ cookie jar reserves, ” or “ hidden ” reserves ? An irony: it ’ s GAAP in some European countries to create such reserves! ? SEC increasingly concerned with such practices ? A personal audit experience 2/25/2017 5 Obtaining an Understanding of and Testing Internal Controls: an Overview 2/25/2017 6 Three Primary Year-end Substantive Procedures ? Either audit a sample of year-end vendor statement reconciliations to books, or confirmation of accounts payable [latter unusual] ? Search for unrecorded liabilities [ Arens , et. al. calls this “ out-of-pd liabilities test ”] ? Purchase cutoff testing 2/25/2017 7 Why Aren ’ t Accounts Payable Typically Confirmed? ? Confirming recorded liabilities of little value pleteness concerns ? Our concern is with what is not
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