The first point to consider is the objectives of
the audit of purchases and expenses system.
the audit of purchases and expenses system.
Audit objectives – purchases and expenses system
The audit objectives are to carry out audit work so
as to gather sufficient
as to gather sufficient
appropriate evidence to validate the assertions about
the purchases system. These can be summarized as:
·
Purchases
of goods and services relate to the company being audited (occurrence);
Purchases
of goods and services relate to the company being audited (occurrence);
·
All
purchases of goods and services that should have been recorded have been recorded (completeness);
All
purchases of goods and services that should have been recorded have been recorded (completeness);
·
Purchases
of goods and services have been recorded at the correct amounts (cut-off);
Purchases
of goods and services have been recorded at the correct amounts (cut-off);
·
All the
relevant transactions have been recorded in the correct accounting period
(cut-off);
All the
relevant transactions have been recorded in the correct accounting period
(cut-off);
·
Purchases
of goods and services have been recorded in the correct amounts in the nominal
and purchase ledgers and any other related records, e.g. stock or costing
records (classification).
Purchases
of goods and services have been recorded in the correct amounts in the nominal
and purchase ledgers and any other related records, e.g. stock or costing
records (classification).
System objectives – purchases and expenses system
The purchases and expenses system has objectives
which are the basis for the internal controls designed into the system.
which are the basis for the internal controls designed into the system.
We can consider the purchases system in three
sections:
sections:
·
Ordering;
Ordering;
·
Receipt
of goods and invoicing;
Receipt
of goods and invoicing;
·
Accounting.
Accounting.
Ordering
·
All
orders for goods and services are properly authorized, are for goods and
services that are actually received and are for the company (occurrence).
All
orders for goods and services are properly authorized, are for goods and
services that are actually received and are for the company (occurrence).
·
Orders
are made only to authorized suppliers (accuracy).
Orders
are made only to authorized suppliers (accuracy).
Receipt of goods and invoicing
·
All goods
and services received are for the purpose of the business and not for the
private purpose of any individual (occurrence).
All goods
and services received are for the purpose of the business and not for the
private purpose of any individual (occurrence).
·
Goods and
services are accepted only if they have been ordered (completeness).
Goods and
services are accepted only if they have been ordered (completeness).
·
All
receipts of goods and services are accurately recorded (accuracy).
All
receipts of goods and services are accurately recorded (accuracy).
·
Liabilities
are recognized for all goods and services received (accuracy).
Liabilities
are recognized for all goods and services received (accuracy).
·
Any credit
due to the business for faulty goods and services has been claimed
(completeness).
Any credit
due to the business for faulty goods and services has been claimed
(completeness).
·
It is
possible to record a liability for goods or services which haven’t been
received (completeness).
It is
possible to record a liability for goods or services which haven’t been
received (completeness).
Accounting
·
All
payments have been properly authorized (occurrence).
All
payments have been properly authorized (occurrence).
·
All
payments are for goods and services which have been received (completeness).
All
payments are for goods and services which have been received (completeness).
·
All
expenditure has been recorded correctly in the books and records of the
business (accuracy).
All
expenditure has been recorded correctly in the books and records of the
business (accuracy).
·
All
credit notes have been properly recorded in the books and records of the business
(accuracy).
All
credit notes have been properly recorded in the books and records of the business
(accuracy).
·
All
entries in the purchase ledger are to the correct suppliers accounts
(classification).
All
entries in the purchase ledger are to the correct suppliers accounts
(classification).
·
All
entries in the nominal ledger are to the correct account (classification).
All
entries in the nominal ledger are to the correct account (classification).
·
Cut-off has
been applied correctly (cut-off).
Cut-off has
been applied correctly (cut-off).
System controls – purchases and expenses system
The purchases and expenses system will have within
controls and procedures which are designed to:
controls and procedures which are designed to:
·
Achieved
the system objectives;
Achieved
the system objectives;
·
Minimize
the possibility of fraud and error;
Minimize
the possibility of fraud and error;
You should be familiar with the principles of
internal control from chapter 9 but if not you should review them before
reading further.
internal control from chapter 9 but if not you should review them before
reading further.
Ordering
Organizational controls – written
procedures
procedures
– Policy on ordering from approved suppliers
– Authority levels for order limits
– Defined structure of who can order what
Segregation of duties – separation of staff responsible for raising
orders from those involved in processing and paying invoices
orders from those involved in processing and paying invoices
Physical controls –
safeguarding blank order forms
safeguarding blank order forms
Authorization –
all orders to be authorized by a responsible person
all orders to be authorized by a responsible person
Arithmetical and –
pre-numbered order forms
pre-numbered order forms
Accounting checks -review
of orders placed but not delivered or invoiced
of orders placed but not delivered or invoiced