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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