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