Part Nine Purchase & Payable Audit

1. Part Nine Purchase & Payable Audit

2. Structure of Seminar • 1.Control objective and control procedures • 2. Tests of control • 3. Substantive tests • 4. Trade payable and accrual

3. 1.Control objective and control procedures

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Tradepayableand 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

15. 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

16. 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

17. 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