Introduction to Acquisition and Payment Cycle | Auditing and Attestation | CPA Exam

Summary

In this session, Professor Farhad introduces the Acquisition and Payment Cycle in auditing, explaining key concepts such as the classes of transactions (acquisition, payment, and returns), and the critical accounts involved like accounts payable and cash. The video outlines essential documents such as purchase requisitions, orders, invoices, and receiving reports, which help track and verify financial transactions. The lecture also emphasizes the importance of internal controls and audit tests to ensure accuracy and compliance in the payment process. This overview is valuable for students and professionals preparing for exams or working in auditing roles.

Takeaways

• 😀 The acquisition and payment cycle consists of three key types of transactions: acquisition of goods and services, cash disbursements, and returns or allowances.
• 😀 Accounts payable plays a central role in the acquisition and payment cycle, with purchases and payments both flowing through this account.
• 😀 The process starts with preparing a purchase requisition, which is followed by creating a purchase order after authorization and receiving goods/services with a receiving report.
• 😀 The company can recognize liability once the purchase requisition, purchase order, and receiving report are in place, though some companies may also wait for the vendor’s invoice before recording the liability.
• 😀 Vendor invoices are external documents and carry more weight for auditors, but companies should verify these documents to ensure their legitimacy.
• 😀 A voucher is a formal file that includes all necessary documents (purchase requisition, purchase order, receiving report, invoice) that support a transaction and helps in the auditing process.
• 😀 A debit memo may be issued by the vendor when they provide a reduction in price for any reason (e.g., damaged goods), and this document is important for adjusting liabilities.
• 😀 The acquisition journal or purchase journal is used to record all acquisition transactions, including vendor name, purchase details, and amounts.
• 😀 An accounts payable master file is used to track the purchases, returns, and payments made to each vendor, and helps in preparing the accounts payable trial balance.
• 😀 The final step in the cycle involves processing cash disbursements to pay for goods and services, requiring careful verification of documents such as the invoice, purchase order, and receiving report before payment.
• 😀 Internal controls and substantive tests of transactions are vital in ensuring the accuracy and legitimacy of the acquisition and payment cycle, and auditors will review all related documentation to ensure compliance.

Q & A

What are the three main classes of transactions in the acquisition and payment cycle?

The three main classes of transactions are the acquisition of goods and services, cash disbursement, and returns or allowances, including discounts.

What is the role of accounts payable in the acquisition and payment cycle?

Accounts payable is central in the cycle as it records the liabilities incurred when goods or services are purchased on credit, and it is settled when cash disbursements are made.

How does the purchase requisition process work in the acquisition cycle?

A purchase requisition is prepared to request authorization for the purchase of goods or services. Once authorized, a purchase order is created and sent to the vendor to initiate the purchase.

What is a receiving report and what is its purpose in the acquisition process?

A receiving report is prepared by the receiving department when goods are delivered. It documents the quantity and condition of items received, ensuring that what was ordered matches what was delivered.

What is a vendor invoice, and why is it significant in the acquisition cycle?

A vendor invoice is a document issued by the vendor detailing the amount owed for goods or services provided. It is crucial for initiating the recognition of liabilities in the accounting records.

What is the purpose of a voucher system in the acquisition and payment cycle?

A voucher system compiles all the documents related to a transaction—such as the purchase requisition, purchase order, and receiving report—into a single file for easier tracking and verification.

What is a debit memo and how is it used in the acquisition process?

A debit memo is issued by the vendor when there is a reduction in the price of goods, such as due to damaged items or late delivery. It adjusts the amount owed by the buyer.

What types of accounts are involved when making a payment in the acquisition cycle?

When making a payment, the accounts involved include cash, accounts payable, and purchase discounts (if paid early). Cash is credited when payments are made.

How does the accounts payable trial balance assist in the acquisition and payment cycle?

The accounts payable trial balance lists the amounts owed to vendors at any given point in time, ensuring that the total liabilities match the company’s obligations.

What are the steps involved in cash disbursement in the acquisition cycle?

The cash disbursement process involves reviewing and approving payment documents, cutting the check or processing an electronic payment, and ensuring that the payment is made to legitimate vendors for legitimate purchases.