Chapter 15

Auditing Purchases,
Payables and Payroll

Key Issue
That liabilities and expenses are not understated
That payables are fully recorded in the accounts
The payroll expense has been properly recorded

Purchase transactions
Purchase transactions relate to the purchase (from
outside entities) of goods (including inventory and
plant and equipment) and services (such as electricity
and advertising)
Payment transactions relate to the payment for such
goods and services

Purchase transactions
The processing of purchase transactions involves the
following functions:
requisitioning goods and services
preparing purchase orders
receiving the goods
storing goods received for inventory
checking and approving the suppliers invoice
recording the liability

Purchase transactions
The two payments functions are:

paying the liability

recording the payments

The same department or individual should not perform
both these functions

Payroll transactions
The relevant functions for payroll are those of:
hiring employees
authorising payroll changes
preparing attendance and timekeeping data
preparing the payroll
recording the payroll
paying the payroll and protecting unclaimed wages

Audit objectives
The audit objectives for purchases, payables and
payroll relate to obtaining sufficient appropriate
evidence about each significant financial statement
assertion for the applicable transactions and balances
The next four slides show the main objectives for
these transaction classes and account balances

Key Issue
That liabilities and expenses are not understated
That payables are fully recorded in the accounts as a
liability
Payroll expenses have been properly recorded

Purchase transactions
Purchase transactions relate to the purchase (from
outside entities) of goods (including inventory and
plant and equipment) and services (such as electricity
and advertising)
Payment transactions relate to the payment for such
goods and services

Purchase transactions
The processing of purchase transactions involves the
following functions:
requisitioning goods and services
preparing purchase orders
receiving the goods
storing goods received for inventory
checking and approving the suppliers invoice
recording the liability

10

Purchase transactions
The two payments functions are:

paying the liability

recording the payments

The same department or individual should not perform
both these functions

11

Payroll transactions
The relevant functions for payroll are those of:
hiring employees
authorising payroll changes
preparing attendance and timekeeping data
preparing the payroll
recording the payroll
paying the payroll and protecting unclaimed wages

12

Audit objectives
The audit objectives for purchases, payables and
payroll relate to obtaining sufficient appropriate
evidence about each significant financial statement
assertion for the applicable transactions and balances
The next four slides show the main objectives for
these transaction classes and account balances

13

Audit objectives
Transaction objectives
Occurrence (OE)

Recorded purchase transactions represent goods and

services received during the period under audit (OE1)
Recorded payment transactions represent payments made
during the period to suppliers and creditors (OE2)
Recorded payroll expenses relate to employee services in
the period (OE3)

Completeness (C)

All purchase transactions that occurred during the period

and that should have been recorded have been recorded
All payments that occurred during the period and that
should have been recorded have been recorded (C2)
Recorded payroll expenses include all such expenses
during the year (C3)

Audit objectives
Transaction objectives
Accuracy (AV)

Purchase, payment and payroll transactions are properly

(accurately) recorded (AV1)

Cut-off (CO)

Particularly relevant to transactions around the end of the

year; all purchases, cash payments, purchase adjustment
and payroll transactions arsing before the period end are
recorded in the current period and those arising after the
period end are included in the next accounting period (CO1)

Classification (PD)

All purchases (PD1), payments (PD2), and payroll

transactions (PD3) are recorded in the correct accounts

Audit objectives
Balances objectives
Existence (OE)

Recorded accounts payable represent amounts owed by the

entity at the end of the reporting period (OE4)
Accrued payroll liability balances represent amounts owed
at the end of the reporting period (OE5)

Rights and obligations

(RO)

Accounts payable (RO1) and accrued payroll liabilities

(RO2) are liabilities of the entity at the end of the reporting
period

Completeness (C)

Accounts payable include all amounts owed by the entity to

suppliers of goods and services at the end of the reporting
period (C4)
Accrued payroll liabilities include all amounts owed in
respect of payroll and deductions there from at the end of
the reporting period (C5)

Audit objectives
Balances objectives
Valuation and
allocation (AV)

Accounts payable represent gross amounts due to

suppliers and agree with the sum of the accounts payable
in the payables subsidiary ledger (AV2)
Accrued payroll liabilities are stated at the appropriate
amounts (AV3)
Related expense balances conform to applicable
accounting standards (AV4)

Audit objectives
Presentation and disclosure objectives (PD)
Occurrence and rights
and obligations

Disclosed purchase and payroll events have occurred and

pertain to the entity (PD4)

Completeness

Accounts payable, accrued payroll liabilities and related

expenses are properly identified and classified in the financial
statements (PD5)
Disclosures pertain to commitments, contingent liabilities and
related party creditors are adequate (PD6)

Classification and
understandability

Purchase cycle and payroll information is appropriately

presented and information disclosed is clearly expressed
(PD7)

Accuracy and
valuation

Purchase cycle and payroll information is disclosed accurately

and at appropriate amounts (PD8)

Developing the audit plan

Issues include:
Reference to ASA 315 Identifying and Assessing the
Risks of Material Misstatement through Understanding
the Entity and Its Environment
Assessment of inherent and control risk to determine
the appropriate level of detection risk for each major
assertion in purchases, payables and payroll

19

Developing the audit plan

The auditor also considers materiality and relationship
to risk
The auditor then determines the audit strategy and
plans an appropriate mix of tests of controls and
substantive procedures
Tests of controls confirm (or otherwise) the auditors
preliminary assessment of control risk by testing
operating effectiveness

20

Developing the audit plan

Results of the tests of controls may require a
reassessment of control risk and a revision of the
planned level of substantive procedures

21

Understanding the entity and

identifying inherent risks
Understanding the entity and its environment assists in:
Developing an understanding of the cost of sales and
gross margins
Developing an understanding of levels of expenses
Developing expectations of payable levels
Analytical review
Give indications of the reasonableness of cost of
sales and expense levels

Understanding the entity and

identifying inherent risks
Materiality
purchase and payroll expenses account for major
expenses incurred by a business

Control Risk

Substantive procedures
Accounts payable is usually the largest current liability in
a balance sheet and a significant factor in the evaluation
of an entitys short-term solvency
Is generally affected by a high volume
of transactions and thus is susceptible
to misstatements
The auditor is always concerned with understatement of
payables

25

Substantive procedures
Considerations
Management may understate payables in order to
report a more favourable financial position
Thus, the audit of payables places more emphasis
on gathering evidence about the completeness
assertion than the existence assertion

26

Initial procedures
The auditor performs initial procedures on payables
balances and records by:
Tracing the opening balance for payables to the
previous years working papers
Reviewing activity in the general ledger account for
payables, and investigating entries that appear
unusual in amount
or source

27

Initial procedures
The auditor obtains a listing of accounts payable at
balance date:
adds the listing and determines agreement with the
total of the subsidiary ledger and the general
ledger control account balance
tests the agreement of suppliers and balances on
the listing with those included in the underlying
accounting records

28

Analytical procedures
Compare current and previous year balances
Calculate significant ratios such as:
gross profit
accounts payable turnover
Obtain explanations for unexpected changes

29

Analytical procedures
Corroborate explanations
Analytical procedures are significant in achieving the
desired level of detection risk for payroll balances
e.g. average wages per employee and payroll
expenses as a percentage of sales

30

Tests of details of
transactions
Procedures followed by the auditor include:
Vouching a sample of recorded creditor transactions to
supporting documentation
Vouching credits to supporting suppliers invoices,
receiving reports and purchase orders or other
supporting documents
Vouching debits to payments

31

Tests of details of
transactions
Performing purchases and payments cut-off tests
Checking subsequent payments between the balance
date and the end of fieldwork
Investigating unmatched purchase orders, receiving
reports and suppliers invoices at the year-end

32

Tests of details of balances

The three tests included in this category for payables
are:
reconciling payables to monthly statements
received by the entity from suppliers
confirming accounts payable
searching for unrecorded liabilities

33

Tests of details of balances

The two tests for payroll balances are:
recalculating payroll liabilities
verifying directors and executive officers
remuneration
executive remuneration will be reviewed by
reference to employment contracts and board
minutes

34