CHAPTER 15 Auditing the Expenditure CycleSpring 2007.ppt

CHAPTER 15 Auditing the Expenditure CycleSpring 2007 Expenditure Cycle Transaction Classes and Accounts: Purchases Expenditure Transaction Classes and Accounts: Cash Disbursement Adjustments General Audit Strategy Assess Inherent Risk Use Knowledge of Business and Industry to Perform Analytic Procedures and Assess Analytic Procedures Risk Assess Control Risk Evidence of effectiveness gained while obtaining an understanding of internal controls Evidence of effectiveness of management controls Evidence of effectiveness from direct tests of programmed controls Design Appropriate Substantive Tests of Details Expenditure Cycle: Initial Audit Procedures Obtain an understanding of the business and industry. Significance of purchase cycle Economic drivers Industry trade terms Concentration of suppliers / purchase commitments Expenditure Cycle: Initial Audit Procedures cont. Business Aspects of the Expenditure Cycle What does the operating cycle look like? Normal A/P turn Normal Inventory turn Normal A/R turn What do we know about costs? Fixed/variable Volatility Dependency on suppliers Expenditure Cycle: Initial Audit Procedures cont. Consider management incentives pressures Liabilities Understate current liabilities to meet debt covenants Cash Disbursements High volume and overall susceptible to fraud Expenses Decision to capitalize vs. expense impacts net income Expenditure Cycle: Initial Audit Procedures Understand how key expenditure cycle issues of economic substance are reflected in the financial statements How is the transaction initiated (initiate)? How does receipt of good or service take place? (movement) How is the transaction recorded (recording)? What is the standards business practice for settling liability? (consideration) See flowchart 15-5 on page 698 noting where transactions involve outside entities. Expenditure Cycle Audit Objectives Assertion Completeness Existence Occurrence Valuation Rights and Obligations Presentation and Disclosure