AUDITING

PURCHASES
Prof. Dr Safdar A. Butt

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Scope of Trading Activities

• Purchases
• Trade creditors
• Purchases Returns, or Returns Outwards
• Sales
• Trade debtors
• Sales Returns, or Returns Inwards

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Internal Control on Purchases:
Objectives
• Right goods, at right price, in right quantity, in good condition, at
right time.
• Due approvals for placing an order, accepting the goods and paying
for them.
• Only due amount is paid, availing due credit period, and due
discounts.
• Correct record of orders, receipt, return, and payment of goods.

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Internal Control Measures:
Ordering Procedure
• Separate Buying Department
• Steps in placing an order:
• Requisition
• Quotation / Tenders for larger orders
• Order / LPO or IO
• Pre-set authority limit for requisition and order
• Maintaining a file of regular suppliers

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Internal Control Measures:
Receipt of Goods Procedure
• Documentation
• Goods Inwards or Received Note
• Suppliers Delivery Note
• Goods Received Register
• Comparison with order and subsequent invoice
• Inspection
• Inspection note

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Internal Control Measures:
Others Controls on Purchases
• All documents should be pre-numbered.
• Frequent checks on sequential accuracy of various documents
• Division of duties to ensure that no one person or department
undertakes all or most aspects of purchasing process.
• Budgetary controls.
• Stock Coding for all items.

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Internal Control Measures:
Purchases Returns
• Formal documentation:
• Goods Returned Note
• Short Delivery Notification
• Credit Note from supplier should be compared with above notes.
• Follow up on all outstanding goods returned notes / short delivery
notes to ensure timely receipt of credit notes.

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Auditing Purchases & Returns

• Test check and trace a number of:

• Requisition notes right upto payment, ensuring that all
related documents are there and match each other.
• Payments to creditors right back to requisition notes.
in the process also verifying arithmetical accuracy
and due authorization at each stage.
• Check in depth all major purchases.
• Verify numerical sequence of all documents, and
investigate missing numbers.

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Auditing Purchases & Returns 2

• Investigate where:
• Goods have been received but invoice is still awaited
• Goods have been ordered but not yet received
• Invoices have been received but not yet paid.
• Goods have been returned, or short received, but credit note is still awaited.

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Auditing Purchases & Returns 3

• In respect of selected invoices:

• Re-compute gross and net amounts.
• Trace them to purchases book, appropriate nominal account in general
ledger, and suppliers account in purchase ledger.
• Verify if due credit has been received for returned / short delivered goods.
• Check if approval for order and payment are within prescribed limits.

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Audit of Creditors

• Get a schedule of creditors and

• Check its arithmetical accuracy
• Verify individual balances from ledger
• Audit in depth selected creditors’ accounts.
• Direct confirmation should be sought where suppliers statements are
not available.

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Thank you
Dr Safdar A Butt

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