ACCT 417 (Fall 2026) - Chapter 11 Lecture
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Overview
Michael Barnes explains how auditors assess the purchasing process, emphasizing that completeness is the primary assertion for purchases and accounts payable because companies are more likely to understate liabilities than overstate them. He connects purchasing controls and tests to segregation of duties, demonstrates how to search for unrecorded liabilities, and explains why auditors often use blank or zero-balance positive confirmations for payables.
Key takeaways
- Accounts payable and purchasing audits prioritize completeness because unrecorded obligations can understate liabilities and improve reported liquidity ratios.
- Tracing receiving reports to purchase records tests completeness, while vouching recorded transactions back to source documentation tests existence or occurrence.
- Segregating purchasing authorization, receiving custody, invoice approval, payment custody, and accounting records helps prevent unauthorized purchases, theft, and improper payments.
- A subsequent payment that exceeds a recorded vendor balance, or goes to a vendor with no recorded balance, is a lead for investigating unrecorded liabilities rather than proof of one.
- Blank positive confirmations ask vendors to provide the balance themselves, helping detect understated payables and limiting the tendency to agree with an amount supplied by the client.
- WorldCom’s improper capitalization of line costs deferred expenses over 15 years and inflated current-period income, illustrating why auditors must scrutinize expense-versus-asset classification.
Chapters
- Barnes announces that Excel assignments are due Friday and advises students to begin early rather than wait until the final day.
- Professional interaction activities are due the following week; Barnes says he cannot attend the Trubisky forum because of a conflicting meeting.
- Four groups must choose presentation topics and dates by the end of next week; six syllabus topics include SOC reports, audit analytics, and PCAOB standards.
- Barnes uses WorldCom to show how misstating costs can inflate income even without overstating revenue.
- WorldCom improperly capitalized recurring line costs, which should have been expensed, and spread recognition over 15 years instead of one year.
- Small line-cost transactions, sometimes around $15, were difficult to detect against the materiality thresholds of a large company; an internal auditor uncovered the fraud.
- A purchase can initially create an asset and a liability, as with supplies, with the expense recognized later when the supplies are used.
- Barnes reviews three SFAC No. 5 expense categories: costs matched to revenue, period costs recognized when incurred, and depreciation, depletion, or amortization allocated over benefit periods.
- Product costs become expenses when inventory is sold, while depreciation recognizes the consumption of a long-lived asset over time.
- Purchasing-cycle transaction types are purchase transactions, cash disbursements, and purchase returns, affecting accounts payable, cash, inventory, and expense accounts.
- The voucher package can include a purchase requisition, purchase order, receiving report, and vendor invoice; related records include the voucher register and vendor subsidiary ledger.
- The process functions run from requisitioning and purchasing through receiving, invoice processing, disbursement, accounts payable recording, and general ledger recording.
- Barnes maps requisitioning mainly to recording, purchasing to authorization, receiving to custody of goods, and disbursements to custody of cash.
- Invoice processing primarily authorizes when and how a vendor invoice should be paid, while accounts payable and general ledger are separate recording levels.
- Segregate purchasing from requisitioning and receiving to reduce fictitious or unauthorized purchases, theft of goods, and improper payments.
- Also separate invoice processing from accounts payable, disbursements from accounts payable, and accounts payable from general ledger.
- Inherent purchasing risks include industry cost pressures, such as rising diesel-related shipping costs, and misstatements identified in prior audits.
- Under a reliance strategy, auditors test client controls and assess transaction-level assertions before setting control risk.
- Barnes highlights textbook Tables 11-6 and 11-7, which align risks and assertions with controls and tests; students should understand the relationships rather than memorize the tables.
- The exam may draw a practice-style question from revenue and cash receipts, purchases and cash disbursements, or human resources and inventory.
- For purchase completeness, trace receiving reports through vendor invoices and purchase records to identify goods received but not recorded.
- Tracing moves from source documents toward accounting records and tests completeness; vouching proceeds from recorded items back to evidence and tests existence or occurrence.
- For cash disbursement occurrence, monthly bank reconciliations can reveal payments recorded in the books that never cleared the bank.
- Auditors can inspect the client’s bank reconciliations for evidence of independent preparation and review.
- Purchase returns are generally not material; when they are immaterial, auditors may use substantive analytical procedures alongside relevant control work.
- Compare accounts payable turnover and days payable outstanding across prior years and industry data to identify unexpected trends.
- Accrued interest expense can be estimated from loan terms and outstanding balances, while unusual analytical results may require expanded tests of details.
- Completeness is the primary assertion for liabilities because understated payables are generally a greater concern than overstated payables.
- A search for unrecorded liabilities tests whether all obligations were recorded; other relevant assertions include existence, valuation, rights and obligations, and presentation.
- Auditors should investigate material debit balances in accounts payable and check that short-term and long-term payables are classified correctly.
- Understating current payables by shifting them to long-term liabilities can improve the current ratio; cutoff testing checks that purchases are recorded in the proper period.
- A search for unrecorded liabilities examines year-end payables against subsequent cash disbursements, receiving reports, vendor invoices, and unmatched purchase documents.
- A payment larger than the recorded balance, or a payment to a vendor with no recorded balance, signals a need for further investigation, not definitive proof of an unrecorded liability.
- Payable confirmations primarily address completeness, unlike receivable confirmations, which generally emphasize existence or occurrence.
- Auditors often send positive blank or zero-balance confirmations that require vendors to supply the amount owed, reducing the risk that a vendor will simply agree with an overstated figure.
Transcript excerpt
0:01 All right, folks. How are we doing today? Yeah, I'm I'm in a I'm in a weird mood today. I've I've I was starting out in advanced AIS my first class and I was telling them I was just in a grouchy mood and then I realized in AIS that I just felt old today. And there's a specific reason. So, I have two friends from high school that I guys maintain pretty close contact to. We talk text pretty regularly like couple times a week. And to understand these individuals, they're both named Mark. Um and to understand these individuals, just imagine my sense of humor like multiplied times three. That's kind of what we're at. So, they retain these terrible jokes for the longest period of time and one of the jokes actually had to do with today's date, which is October 28th. So, back in high school, one of them called a friend of ours named Danny,
0:48 called his house and his father answered and the father said, "I said, is Danny there?" And the father just responded cuz he was tired and it was late at night. He says, "It's 10:28. I don't know." And so, that that should not be funny and it's not funny to anybody who hears the story, but there's more to this. So, they just thought it was hilarious and they repeated that over and over and over again for the rest of the the senior year. It was just unbelievable how much of the mileage they got out of it. And then they started referring to anything that referred to 10:28 as something someday that they didn't know. So, basically, today's October 28th, 10:28, okay? And you know, on October 28th, they traditionally said they don't know anything and I realize that's that that
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Related notes
Summary, takeaways, and chapters were generated by AI from the video's transcript and may contain errors. The video belongs to its creator, Michael Barnes.