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Substantive Tests of Expenditure Cycle Accounts Substantive Tests

This document discusses substantive tests that auditors perform on expenditure cycle accounts, including understanding data files related to purchasing and payables. It describes risks like understatement of liabilities and outlines tests to evaluate accuracy and completeness assertions, such as comparing invoice prices to purchase orders, searching for unauthorized disbursement vouchers, and reviewing for multiple checks to vendors. The tests are aimed at detecting material misstatements or fraud.

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Juvelyn Reduta
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299 views3 pages

Substantive Tests of Expenditure Cycle Accounts Substantive Tests

This document discusses substantive tests that auditors perform on expenditure cycle accounts, including understanding data files related to purchasing and payables. It describes risks like understatement of liabilities and outlines tests to evaluate accuracy and completeness assertions, such as comparing invoice prices to purchase orders, searching for unauthorized disbursement vouchers, and reviewing for multiple checks to vendors. The tests are aimed at detecting material misstatements or fraud.

Uploaded by

Juvelyn Reduta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Reduta, Juvelyn P.

November 22, 2021


4 Year – BSA
th
Auditing in CIS Environment

Written Report
In
Chapter 10: Auditing the Expenditure Cycle
SUBSTANTIVE TESTS OF EXPENDITURE CYCLE ACCOUNTS

SUBSTANTIVE TESTS
These are detailed investigation of specific account balances and
transactions performed by the auditor to detect material misstatement or fraud
at the assertion level.

Expenditure Cycle Risks and Audit Concerns


Primarily external auditors are most concern with the potential for
understatement. In broader context it includes process efficiency, fraud, and
losses due to errors this risk happens due to attempts to improve financial
statement presentation may involve actions to suppress the recognition and
reporting of valid liabilities just to have a good report that is attractive to
investors the following discussion is based to used ACL Software Applications.

Understanding Data
The auditor needs to understand the systems and controls that produced
the data as well as the physical characteristics of the files that contain them.
● Inventory File
The Inventory file contains quantity, price, supplier, and warehouse
location data for each item of product inventory.

● Purchase Order File


This file contains records of purchases placed with suppliers.

● Purchase Order Line Item File


The Line Item file contains a record of every item ordered.
● Receiving Report File
When the ordered items arrive from the supplier, they are counted and
inspected, and receiving documents are prepared.

● Disbursement Voucher File


Based on the supplier’s terms of trade and the company’s
payment policy, the payment due date is determined and placed in the
disbursement voucher record.

Testing the Accuracy and Completeness Assertions


- An analytical review can provide the auditor with an overall perspective
for trends in accounts payable and related expenses.
- Current expenses may be compared to historical expenses and
management budgets.

Review Disbursement Vouchers for Unusual Trends and Exceptions


- The involves the scanning of data files for unusual transactions and
account balances in identifying potential audit risks

- An excessive purchases from a single supplier may reflect an unusual


business dependency large number of small volume suppliers may reflect
a highly inefficient purchasing process

Reviewing for Accurate Invoice Prices


- Comparing prices on supplier invoices to original purchase order prices
provides evidence for testing the management assertion of accuracy.

Testing the Completeness, Existence, and Rights and Obligations Assertions


- Inventories received from valid suppliers in response to authorized
purchase orders constitute liabilities. In most systems, however, the trigger
that causes the liability to be recognized and recorded as an account
payable (in our example, a disbursement voucher) is the receipt of the
supplier’s invoice, which often lags the receipt of the merchandise.
Searching for Unauthorized Disbursement Vouchers
- A variation on the preceding test can be used to address questions
pertaining to overstated accounts payable. By selecting the Disbursement
Vouchers file as the primary file and the Receiving Report file as the
secondary file, the preceding test will produce a file of vouchers for which
the organization has no record of inventory receipts.

Review for Multiple Checks to Vendors


- Corporate losses from multiple payments to vendors for the same
merchandise have been estimated to be in the hundreds of millions of
dollars per year. Malfunctioning computer programs, data entry errors,
and the failure of authorization controls are usually the basis for duplicate
payments.

Auditing Payroll and Related Accounts


- Testing accrued payroll and related accounts for completeness and
accuracy consist primarily of analytical procedures and reviews of cash
disbursements made in the following period.

This file contains records of purchases placed with suppliers.


a) Purchase Order Line Item File
b) Purchase Order File
c) Inventory File
d) Receiving Report File

The audit procedures described in this section provide evidence relating to


management assertions of accuracy and efficiency.
a) True
b) False

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