Learning ObjectivesLO1 Describe the purchases, payables, and payments process, including typical risks, transactions, account balances, source documents, and controls.LO2 Describe the auditor’s control risk assessment and control tests for auditing control over the purchase of inventory, services, and fixed assets, and for the disbursement of cash.LO3 Describe the typical substantive procedures used to respond to the assessed risk of material misstatement in the main account balance and transactions in the purchases, payables, and payments process.

1

Understanding the Purchases, Payables and Payments Process

Purchases of goods and services are a major part of cash outflow in most organizations.

High level of management planning and control.

LO1

2

Risk Assessment for Purchases Payables and Payments

To assess risks in the purchasing-related processes, the auditor considers purchasing and cash payment transactions and accounts payable.

Understanding of business will point auditors towards specific risks.

Existence, ownership, completeness, valuation and disclosure must all be considered.

LO1

3

Purchases, Payments, and Payables Process: Typical Activities

Exhibit 12-1 shows the activities and transactions, accounts and records in the purchases, payables, and payments processes.

The basic activities are: purchasing goods and services, and paying the bills.

LO1

4

Purchase, Payables and Payment Process

Start Here

Request for purchases

Enter accounts payable

Cash disbursement

Receive vendor invoice

Receive goods and services

LO1

5

AuthorizationPurchases are made by purchasing departments or authorized purchasers.

Purchasing controls such as competitive bids should be in place.

Disbursements are authorized by an accounts payable department.

Purchase orders, invoices and receiving reports are matched prior to payment.

Cheques are signed by authorized personnel.

LO1

6

Custody A receiving department receives goods

purchased and forwards them to the proper departments.

Custody of cash is the responsibility of personnel assigned to authorize and sign cheques.

Access to blank documents should also be considered as an aspect of custody.

LO1

7

Recording Purchases should be recorded once the

purchase order, receiving report, and vendor invoice are matched.

Disbursements are recorded when the cheques are prepared.

LO1

8

Periodic ReconciliationPeriodic comparison of existing assets to recorded amounts in various accounts occurs in several ways.

Physical inventory is compared to the accounts. Bank reconciliations are prepared. Fixed assets are compared to the accounts. A trial balance of accounts payable is compared

to the control account.

LO1

9

Audit Evidence in Management Reports

Computer processing of purchase and payment transactions will produce several management reports which may provide audit evidence:

Management Report

Control Purpose Potential Audit Evidence

Open purchase orders

Completeness of accounts payable

Purchase commitments, valuation of inventory

unmatched receiving reports

Validity of purchases recorded

Unaccrued liabilities for purchases LO1

10

Audit Evidence in Management Reports

Management Report

Control Purpose Potential Audit Evidence

Unmatched vendor invoices

Validity of purchases recorded

Unaccrued liabilities for purchases

Accounts payable trial balance

Proper accounting, cash flow management

Existence and completeness of payables

Purchases journal

Completeness and validity or purchases, inventory or expenses

Analysis of inventory changes and expense reasonability

Inventory reports Completeness, validity and valuation of inventory

Analysis of inventory balances, valuation, selection of samples for test counts and valuation tests

LO1

11

Audit Evidence in Management Reports

Management Report

Control Purpose Potential Audit Evidence

Fixed Asset Reports

Completeness, validity and valuation of fixed assets, accumulated depreciation and depreciation expense

Analysis of changes in fixed assets balances.

Selection of sample additions for vouching.

Recalculation of depreciation expense

Cash disbursements report

Expenditure reviews by management for validity, authorization

Selection of sample for testing existence, authorization and proper cut-off of payments.

LO1

12