Question

Explain the relationship between tests of acquisition and payment cycle and tests of accounts payable. Give examples of how these two types of tests affect each other. It will be also valuable if you have any personal experience related to this topic.

Answer 1

Answer
The relationship between tests of acquisition and payment cycle and tests of accounts payable :
It is procure to Pay cycle generally known as P2P cycle. Procurement and payment are two important aspects of P2P cycle. For Procurement there are various steps to it such as purchase requisition, request for quotations, Purchase order generation, GRN , Invoicing and then start the cycle of payment. For each invoice prepared , there will be a fix payment cycle and fix number of payable accounts created. Acquisition and payment cycle are directly related because when a company purchases or acquire any goods or services, there arise a liability of payment with it. It result in increase in inventory and decrease in asset or we can say increase in inventory and increase in payment liabilities to vendor.
Give examples of how these two types of tests affect each other. It will be also valuable if you have any personal experience related to this topic.
Examples are as under :
1) Egg. Company Purchase a good worth 6000 USD . Now company needs to record the same in its accounting software. When the acquisition of goods is recorded then , accountant is required to record the payment terms and create payable account and as and when payment is due, he needs to make payment. Test of existence , valuation and completeness is required here
Journal entry for above example
Purchase of Goods Dr	6,000.00	-
To Payable for Goods account cr	-	6,000.00
( Here purchase recorded and payable account created )
Payable For goods account Dr	6,000.00	-
To bank account	-	6,000.00
( Payable account dr and payment made to vendor)
2) Goods acquired are recorded in inventory and creditor is booked in same period. By this test we can verify the cut off assertion
on receipt of material and when payment is done, following process is followed in company X.
on receipt of materials Stores Executive counts the goods and checks whether they are received from the same vendor to whom PO is placed, materials received is as per the PO terms, quantity, description, rate, etc. After this the Stores Head signs off the hard copy of GRN. After that on the date of receipt of material vendor payment liability is book. both should be on the same date, then only cut off assertion is correct