Chapter 11: Auditing the Purchasing Process

voucher

control payment form. basis for recording the invoice.

purchase order form

description, quality, quantity, of the goods and services to buy. must state who approved it and then send to vendor.

accounts payable

normal and recurring trade obligations

accounts payable confirmations

not a common confirmation. used if internal control for completeness is weak. look at large dollar values and frequent vendors. uses blank or zero balance confirmation. rarely interim as they are concerned with unrecorded liabilities

occurrence: purchase tests of controls

observe and evaluate segregation. test a sample of vouchers for the presence of an authorized purchase order and receipt. examine application controls. review numerical sequence of reports.

occurrence: cash tests of controls

observe segregation of duties. review the reconciliation of vendor statements. review monthly bank reconciliations

deferred taxes

on the balance sheet are estimates of tax payable or deductible in the future incurred from current temporary differences.

valuation: tests of details purchases

one of the big assertions for accrual balances. recorded at gross or net cash discount. accruals tracked. obtain listings of accounts payable and account analysis schedules foot and agree. trace to subsidiary ledgers .

second few steps of tax provision

review uncertain tax provision credits. consider realizability of DTA review the payable. document everyone.

example internal control questionnaire

1) are there written policies? 2) are approvals made to criteria? 3) are vendors approved? 4) are price quotations obtained? 5) do purchase orders include descriptions, terms and instructions. 6) are purchase orders approved before issuance?

information and communication: purchasing process

1) how purchases, payments and returns are initiated. 2) accounting records, supporting documents and all-related accounts. 3) flow from initiation to financial statements. 4) estimates of accrued liabilities. walkthroughs

searching for unrecorded liabilities

1) inquire on controls to identify unrecorded and accruals at year end. part of closing process. 2) vouch large dollar items from purchases and disbursements journals a little past period end. look at due dates and check math. 3) examine files for unmatched purchase orders, receiving reports, vendor invoices

need of tax specialists

1) multi location with lots of foreign operations and foreign tax credits. 2) business combination and or subsidiary. 3) uncertain tax positions. 4) significant changes in ownership, operations or tax status. 5) questionable collection of significant DTA.

purchasing process

1) purchase requisition. 2) purchase order for vendor. 3) on receipt record a liability. 4) pay it.

purchasing inherent risk: industry

1) the supply of raw materials. 2) volatility of raw material price markets. the valuation assertion is huge.

components of the purchasing process

1) type of account and transactions. 2) documentation and records. 3) major functions. 4) segregation of duties

major steps in setting purchasing control risk

1) understand and document the purchasing process based on a reliance strategy. 2) plan and perform tests of controls on purchase transactions. 3) set and document the control risk for the purchasing process.

voucher packet

a compilation of the voucher, vendor invoice, receiving report, purchase order, purchase requisition.

key segregation of duties

a huge part of purchasing is this. we really want to be sure that [requisition, purchasing, receiving] are not the same as [invoice processing, accounts payable or general ledger.

positive confirmation request

a request that the confirming party respond directly to the auditor by providing requested information or indicating whether the confirming party does or not agree

exception

a response (to a confirmation) that indicates a difference between information requested to be confirmed (contained in entity's records) and information provided by the confirming party

walkthrough

a transaction being traced by an auditor from origination through the info system until it reaches the financial reports. initiating, authorizing, recording, processing, reporting of individual transactions and controls for any significant process.

period costs

a type of expense that does not relate to any specific revenue. recognized in the period of cash expenditure, incurrence of a liability, use of assets. not traceable and no future benefit.

product costs

a type of expense. the expense is made and connected to a revenue. matched expenses. and cost of goods sold

completeness: purchase control activities

accounting for numerical sequence of purchase orders, receipts and vouchers. match receipts to vendor invoices and entered in the purchases journal.

valuation and allocation: period end purchases

accounts payable and accrued expenses are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been made

rights and obligations: period end purchases

accounts payable and accrued expenses are the obligations of the entity

existence: end of period purchases

accounts payable and accrued expenses are valid liabilities at period end

what accounts purchase controls affect

accounts payable. accrued expenses. income.

income tax payable

actually to pay based on taxable income.

completeness: period end purchases

all accounts payable and accrued expenses have been recorded

completeness: purchases disclosure

all disclosures relating to accounts payable and accrued expenses that should have been included in the financial statement have been included.

completeness: purchase transactions

all purchase and cash disbursement transactions and events that should have been recorded have been.

authorization: purchase transactions

all purchase and cash disbursement transactions are properly authorized.

occurrence: purchase transactions

all purchase and cash disbursement transactions that have been recorded pertain to the entity.

cutoff: purchase control activity

all receiving reports forwarded to the accounts payable department daily. existence of procedures that require recording the purchases as soon as possible post receipt.

blank confirmation

also known as a zero-balance confirmation. usually for a positive type. a confirmation request on which the recipient fills in the amount or furnishes the information requested

accuracy: purchase transactions

amounts and other data relating to recorded purchase and cash disbursements and events have been recorded correctly.

check or EFT

an approved disbursement of money.

accounts payable is not general ledger

an individual could conceal any defalcation that would normally be detected by the reconciliation of subsidiary ledgers and the general ledger.

authorization: purchase control activities

approval of acquisitions consistent with dollar limits. approved purchase requisition and purchase orders. competitive bidding

purchasing function

approval of purchase orders and proper execution as to price, quantity, quality and the vendor themselves. purchasing department. competitive bidding and multi vendor good.

permanent differences

are fundamental revenue and expense differences between gaap and tax code.

tests of controls

audit procedures performed to test the operating effectiveness of controls in preventing and detecting material misstatements at an assertion

vendor statement

beginning balance, current period activity, end balance owed to a vendor. timing difference common

vendor invoice

bill from the vendor. description, quantity, price shipping, terms of trade, date of sale.

classification: cash misstatement

cash disbursement charged to wrong account

occurrence: cash misstatement

cash disbursement recorded but not made

completeness: cash misstatements

cash disbursements made but not recorded.

authorization: cash misstatements

cash disbursements not authorized

accuracy: cash misstatements

cash disbursements not recorded at the correct amount. not properly posted.

cutoff: cash misstatement

cash disbursements recorded in the wrong period

classification: purchase control activity

chart of accounts. independent approval and review of accounts charged for acquisitions.

classification: cash control activity

chart of accounts. independent approval of voucher packet

other analytical procedures

compare current year balances in accounts payable to prior years. compare amounts owed to individual vendors in the current year to prior. compare purchase returns and allowances as a percentage of revenue or costs of sales to prior years and industry data.

first few steps of tax provision

compare provision to related balance sheet accounts over time. walkthrough, test design, test operating effectiveness, identify risks. document all tests. test mathematical accuracy.

cutoff: purchase tests of controls

compare the dates on receiving reports with the dates on the relevant vouchers. compare the dates on the vouchers with dates of journal

application controls

controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system

general controls

controls that relate to the overall information processing environment. they have a pervasive effect on the entity's computer operations.

accuracy: cash control activities

daily cash disbursements reports reconciled to checks. vendor statements reconciled to accounts payable record. cash disbursements reports reconciled with postings. monthly cash disbursements journal agreed to general ledger.

cutoff: cash control activity

daily reconciliation of checks issued with postings to the cash disbursements journal and accounts payable subsidiary ledgers.

purchases journal

debits and credits of the outstanding payables.

income tax provision

estimate of taxes paid. on the financial statements

analytical procedures

evaluations of financial information through evaluation of plausible relationships among financials and nonfinancial information.

accuracy: purchase tests of controls

examine reconciliations of vouchers to daily accounts payable report. review reconciliation of subsidiary records to general ledger.

accrued expenses

expenses incurred but not yet paid.

assertions

expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

accuracy and valuation: purchases disclosure

financial and other information relating to accounts payable and accrued expenses are disclosed appropriately.

classification and understandability: purchases disclosure

financial information relating to accounts payable and accrued expenses are appropriately presented and described and disclosures are clearly expressed.

compare payables turnover and DPO to previous years and benchmarks

finds the under or overstatement of payables and expenses

risk assessment: purchasing process

how does the entity identify risks, weigh them, estimate significance, assess likelihood and set actions? new technology and rapid growth are major concerns

trade accounts payable

the most common liability of the purchases function

monitoring: purchasing process

how management assess the design and operational effectiveness of controls. how are the controllers evaluated. flowcharts, questionnaires. memos. narratives.

plan and tests the controls: purchasing

identify the relevant controls. very sample based

purchasing function is not the requisitioning and receiving

if this isn't right then fake or unauthorized purchases can be made. theft of goods and payments for unauthorized stuff

requisitioning function

initial. initiation and approval of requests for goods and services by authorized individuals consistent with management criteria. at this point in time classification should start.

prior audit misstatements

just like for revenue the evidence of old misstatements mean we could have some now. a good starting point.

completeness: test of details purchases

list of accounts payable. footed. cross footed. agree to general ledger. trace to sample of vouchers to purchases journal. account analysis schedule

voucher register

list of unpaid vouchers. record them. debits and credits.

authorization: cash tests of controls

one of the big assertions for transactions. evaluate the segregation of duties. examine indication of approval on voucher packet.

occurrence: test of details purchases

one of the big assertions of purchase transactions. test a sample of vouchers for the presence of an authorized purchase order and receiving report

occurrence and rights and obligations: purchases disclosures

one of the key assertions for accruals. all disclosed events, transactions and other matters relating to accounts payable and accrued expenses have occurred and pertain to the entity.

control environment: purchasing process

organizational structure and assessing how power is distributed is big. the org structure is the context for controls. the authority distribution deals with limits on purchasing spend at various org levels.

expenses

outflows or use of an asset or the making of a liability due to operations

examples of disclosure items for purchases

payable by type (trade, officer, employee). short and long term payables. long term purchase contracts. purchases from and payables to related parties. dependence on a single vendor. costs by reportable business segment

cash disbursement transaction

payment of purchasing liabilities. affects cash. AP. and cash discounts

liabilities

probable future economic sacrifices of benefits from present obligations to others as a result of past transactions

disbursements function

processing of payments to vendors. authorize. legit payments. appropriate amount. marking vouchers cancelled or paid.

invoice processing function

processing of vendor invoices for goods and services received. processing of adjustments for allowances, discounts and returns. classification assertion. matches purchase orders to receiving reports. match invoices to terms.

general ledger function

proper accumulation. classification. summarization of purchases, cash disbursements and payables in the general ledger.

cutoff: tests of details purchases

proper period. dual purpose. coordinate with inventory. get number of last receiving report and sample packets pre and post period end. shouldn't be a number greater than that last one

classification: purchase transactions

purchase and cash disbursement transactions and events have been recorded in the proper accounts.

cutoff: purchase transactions

purchase and cash disbursements and events have been recorded in the correct period

authorization: purchase misstatements

purchase of goods or services not authorized. purchase at unauthorized prices or quantities

occurrence: purchase misstatements

purchase recorded but goods or services not ordered or received.

documents and records of the purchasing process

purchase requisition. purchase order. receiving report. vendor invoice. voucher. voucher register. purchases journal. accounts payable subsidiary ledger. vendor statement. check. cash disbursements journal.

invoice-processing is not accounts payable

purchase transactions could be processed at the wrong price or terms. or a cash disbursement can be processed for stuff not received. overpayment or theft

classification: purchase misstatements

purchase transactions not properly classified.

cutoff: purchase misstatements

purchase transactions recorded in the wrong period.

completeness: purchase misstatements

purchases were made but not recorded

receiving report

receipt of goods document. copy of the order form without a quantity. date, description, quantity all recorded. goods are too specification.

receiving function

receipt of properly authorized goods or services. inspect those vendor goods. forward receiving report to accounts payable

existence: tests of details purchases

recorded liabilities are valid obligations. vouch to packets. from accounts payable listings to voucher. reconcile vendor statements to accounts.

accounts payable function

recording of all vendor invoices, cash disbursements, adjustments in individual vendor accounts.

control activity: purchasing process

reliance. what is the organization doing to ensure purchasing objectives and assertions are being met

purchase return transactions

return to supplier for credit. purchase return account. purchases allowances account and accounts payable.

accuracy: cash tests of controls

review all reconciliations.

classification: cash tests of controls

review cash disbursements journal for reasonableness.

authorization: purchase tests of controls

review dollar limit authorization. examine docs for approval. review competitive bidding.

classification: purchase tests of controls

review purchases journal and general ledger for reasonableness. examine a sample of vouchers for proper classification.

cutoff: cash tests of controls

review reconciliations of period.

completeness: purchase tests of controls

review the procedures for accounting for numerical sequence. trace a sample of receipts to vendor invoices and vouchers. trace vouchers to purchases journal

fraudulent purchases

the payments for these go to shell or ghost vendors.

rights and obligations: tests of details purchases

review voucher packets for presence of purchase requisition, purchase order, receiving report and vendor invoice.

completeness: cash control activities

same as for occurrence. accounting for numerical sequence of checks. daily cash disbursements reconciled to postings to accounts payable subsidiary ledger.

completeness: cash tests of controls

same as for occurrence. review the procedure for checking numerical sequences. review reconciliation processes

authorization: cash control activities

segregation of duties. checks prepared only after all source documents have been independently approved.

occurrence: purchase control activities

segregation of duties. purchase not recorded without approved purchase order and receiving report. accounts for numerical sequence of receiving reports and vouchers

occurrence: cash control activity

segregation of duties. vendor statements independently reviewed and reconciled to accounts payable records. monthly bank reconciliations

alocable expenses

systematic expenses. these are expenses that are allocated systematically to period we benefit from the use of an asset. look at depreciation.

tests of details of account balances and disclosures

tests that concentrate on the components of amounts in a balance or footnote

substantive tests of transactions

tests to detect errors or fraud in individual transactions.

tests of details in purchases

tests to find any misstatement usually made at the same time as control tests.

reliance strategy

the auditor's decision to rely on the entity's controls, test them and reduce direct substantive tests. (we will not test transactions)

purchase requisition form

the form that is an authorized request for goods or services

temporary differences

timing differences of revenue or expenses by GAAP and the tax code.

disbursement is not accounts payable

unauthorized checks can be issued. unauthorized transactions could be recorded. theft of cash

when to use receiving reports

use for the acknowledgement of tangible goods not services.

accounts payable subsidiary ledger

used when we use a purchases journal. record the transactions and balances owed to a vendor. total should be the AP balance on the General ledger

understand and document purchasing process

using the coso cube. the five elements of environment, activities, information and communication, monitoring

purchase of goods or services

usually for cash or credit. a purchasing transaction. known as acquisition. affects AP, Inventory, purchases, cogs.

controls over returns of purchases

usually not material. debit memo is the vendor.

accuracy: purchase misstatements

vendor invoices improperly priced or calculated. purchase transactions not posted to the purchases journal or ledgers.

accuracy: purchase control activities

verify math accuracy of invoice. agree purchase order to receipt and vendor invoice for quantity, price and product. vouchers reconciled to daily accounts payable listings and then postings. register reconciled to general ledger

set and document control risk: purchasing

will end up changing the detection risk and substantive work. use flowcharts. results and memorandum

inherent risk of purchasing

you need to consider: the prices of material and the availability of materials not to mention prior audit misstatements mostly for this type of risk in the purchasing process