Part Nine

Purchase & Payable Audit

Structure of Seminar

• 1.Control objective and control procedures

• 2. Tests of control

• 3. Substantive tests

• 4. Trade payable and accrual

1.Control objective and control procedures

2. Tests of control

• Walk-through test to ensure procedures are being followed

• Purchase order • Sequence check • Test of authority • Trace orders through system, conforming

authorized suppliers, correct pricing, accurate amount invoice

• Goods receivable note

Tests of control

Test for evidence of sequence check • Goods returned note • Test for evidence of sequence check • Purchase invoice • Serial numbering • Match with GRNs and purchase orders • Initial of invoice grid for work done • Approval of purchase invoice

Tests of control

• Credit note

Test for evidence of matching credit notes to GRNs • Payable ledger account and control account • Test for evidence of review of reconciliation • Evidence of authorization of adjustment to the

account • Review exception reports

3. Substantive tests

• Substantive tests in respect of purchases focus primarily on whether or not purchases have been overstated as a result of:

• Duplicate invoice • Non business related items • Invoices being processed when no goods have

been received

Substantive tests

• 1. Analytical procedures • Financial and non financial to confirm purchasing

level • Review unusual trends: outside limits, non

authorized suppliers • Payables: comparing ageing analysis with previous

and payable days • 2. accounting records • check a schedule of TP with control account and

purchase ledger

Substantive tests

• check addition and cross-cast of PDB • vouch PDB to invoice and credit note • scrutinize the record for large and unusual

transactions of purchase • test the year end control account reconciliation • Check purchase ledger agree to supplier’s

statements • Review payments to payables just after year end • Consider the need of confirmation

Substantive tests

• Invoices and credit notes • Check invoices and credit notes with PDB • Vouch invoice to orders • Agree price on invoice to supplier’s price list • Check calculation and additions on invoices • Y/E cut-off test

4. Trade payable and accrual

• 1) Risk

There is a risk that trade creditors and accruals will be misstated because:

• Liabilities have been incurred but not recorded • Accruals have been omitted • Liabilities have been recorded for goods not

actually received

Trade payable and accrual

• 2) Substantive tests• (1) Supplier statement reconciliation

Agreeing a sample of the client's reconciliation of supplier statements to the purchases ledger provides evidence of existence, completeness and rights and obligations

• Looking for understatement so, when selecting sample, consider:

• major suppliers

Trade payable and accrual

• balances where a large number of transactions have taken place

• low or nil balances • Seek explanations for all differences • cash in transit • goods in transit • other differences

• (2) Creditor’s circularization

Not usually performed as the reconciliation of

Trade payable and accrual

supplier statements provides such strong third party evidence.

• May be however be performed if: • Supplier statement are not available • it is thought client is deliberately trying to

understate creditors • (3) Cut off testing• For a sample of pre year end GRN agree • included in inventory records

Trade payable and accrual• invoice in purchases and liabilities

• For a sample of post year end GRN agree • excluded from inventory records • invoices not in purchases or liabilities • For a sample of pre year end returns • excluded from inventory records • credit note in returns and liabilities • For a sample of post year end returns • included in inventory • credit note not in returns or liabilities

Trade payable and accrual

• (4) Accruals • review: • expense items where an accrual might be expected • previous year's accruals • invoices received and cash paid straight after the

year end • check calculation • agree to supporting documentation