Function and control activities:

Purchase returns and allowances

To reduce the risk of mistatement:
All purchase return should be authorized by
vendor
Goods should be return only with a proper
purchase return authorization, and an
independent count of goods returned should
be recorded on shipping document such as
packing slips and bills of lading
The computer should match debit memo
information with the authorization for purchase
return and the shipping documents
The computer generates a report of all
authorized purchase returns that have not been
shipped or have no resulted in debit memo


*there should be adequate segregation of duties
between obtaining authorization for purchase
returns, shipping goods, and recording debit memos
Other control in expenditure cycle
The primary account balance in the
expenditure cycle is A/P. If good control exist
over purchases, cash disbursement, and
purchase adjustments, A/P should also be
controlled.
Many auditors plan to test controls in the
purchases cycle because of the high volume of
routine transaction in this cycle.
If the auditors plan to assess control risk as low
for expenditure cycle assertions, they usually
have to:
1. Test effectiveness of general controls
2. Use computer assisted audit technique
(CAATs) to evaluate the effectiveness of
programmed controls
3. The test of procedures to follow up on
exceptionsidentified by programmed
controls.
Substantive test of accounts payable
balances
Existence and Occurrence
Inherent risk is assessed at high level because of
the potential for employee fraud and
missappropriation of assets.
Completeness
Inherent risk for the completeness assertion is set
at maximum because of the risk of unrecorded
liabilities. Analytical procedures risk set at high.
Test of detail risk set at low.
(IC: daily follow up on items received that had not
resulted in vouchers)
Rights and obligation
often controlled at the transaction level by
ensuring that only the obligations of the entity
are recorded in the books of original entry as
payable. Analytical procedures are a fairly blunt
tool for auditing this objective.
Valuation or Allocation
inherent risk set at high because the high volume
of transactions that flow through A/P.
controls over valuation or allocation assertion
involve the control over valuation of: purchase,
cash disbursement and purchase adjustment.
Presentation and Disclosure
the greatest risk is the risk of missclassification
of expenses as capital assets. Inherent risk set
at minimum.
Designing substantive test
1. Initial procedures
understand the significance of the purchase cycle
to the entity eprovides a context for important
risk assessment.