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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 25
TESTING THE PURCHASES SYSTEM
Control Objectives
Purchases are often made on credit and so the purchases cycle includes payables. You also need to bear in
mind that 'purchases' has a wide meaning in terms of the purchases cycle as purchases will include not only
inventory items but also all types of expense and the purchase of non current assets.
The control objectives are as follows. To ensure that:
e)  Purchased goods/services are ordered under proper authority and using proper procedures
f)  Purchased goods/services are only ordered as necessary for the proper conduct of the business
operations and are ordered from suitable, approved suppliers
g) Goods/services received are inspected for quality, quantity and description
h) Invoices and related documentation are properly checked and approved as being valid before
being entered as trade creditors
i)  All valid transactions relating to payables (suppliers' invoices, credit notes and adjustments), and
only those transactions, should be accurately recorded in the accounting records.
Control Procedures over Purchases and Payables
As with the sales system, there are a large number of controls that may be required in the purchases cycle
due to the importance of this area in any business and once again, the following list is classified by type of
control.
(a)
Orders
(i)
Requisition notes for purchases should be authorized.
(ii)
All orders should be authorized by a responsible official whose authority limits should
be pre-defined.
(iii)
Major items e.g. capital expenditure, should be authorized at an appropriate level,
possibly by the Board of Directors
(iv)
All orders should be recorded on official documents showing suppliers' names,
quantities ordered and price.
(v)
Copies of orders should be retained as a method of following up late deliveries by
suppliers.
(vi)
Re-order levels and quantities should be pre-set and preferably recorded in advance on
the requisition note.
(b)  Receipt of goods
(i)
Goods inwards areas should be identified to deal with the receipt of all goods.
(ii)
All goods should be checked for quantity, quality and description. Goods received
notes should be raised for all goods accepted. The GRN should be signed by a
responsible official.
(iii)
GRNs should be checked against purchase orders and procedures should exist to
notify the supplier of under or over-deliveries. GRNs should be sequentially
numbered and checked periodically for completeness.
(c)
Invoicing and returns
(i)
Purchase invoices received should be stamped with an approval grid and given a
unique serial number to ensure purchase invoices do not go astray.
(ii)
Purchase invoices should be matched with goods received notes and company orders
and should not be processed until this is done.
(iii)
The invoice should be checked against the order and the GRN, and casts and
extensions should also be checked.
(iv)
The invoices should be signed as approved for payment by a responsible official
independent of the ordering and receipt of goods functions.
(v)
Invoice sequential numbers should be checked against purchase day book details.
(vi)
Input VAT should be recorded separately from the expense element of the invoice
total.
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Fundamentals of Auditing ­ACC 311
VU
(vii)
Invoices should be properly allocated to the nominal ledger accounts, perhaps by
allocating expenditure codes. A portion of such coding should be checked
independently.
(viii)
Batch controls should be maintained over the posting of invoices to the purchases day
book, nominal ledger and purchase ledger.
(ix)
A record of goods returned should be kept and checked to the credit notes received
from suppliers.
(d)
Purchase ledger and suppliers
(i)
A payables ledger control account should be maintained and regularly checked
against balances in the purchase ledger by an independent official.
(ii)
Payables ledger records should be kept by persons independent of the receiving of
goods, invoice authorization and payment routines.
(iii)
Statements from suppliers should be checked against the ledger account.
TESTS OF CONTROL
As already noted, tests of control should be drawn up so as to check that control procedures are being
applied and to achieve control objectives. One suggested way to design tests of control for a particular
situation is to list the documents in a transaction cycle and generate appropriate tests of control for each
document. We shall illustrate this approach here in connection with the purchases cycle (Note that a similar
technique could be applied to other transaction cycles!)
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT