PURCHASES AND

PAYMENT CYCLE
1. NOR SYAKIRAH BINTI MOHD HASSAN 2017662238
2. NUR AMELIA WATI BINTI MD NASIR 2017203688
3. NURUL IZZAH BINTI MOHD DAUD 2017201408
4.NURUL SYAZWANI BINTI AIDID 2017204138
5.SITI NUR BALQIS BINTI NORHISHAM 2017698484
 INTRODUCTION
AUDIT OF PURCHASE CYCLE
• THIS CHAPTER DISCUSSES ABOUT
1. THE AUDIT CLASSES OF PURCHASE TRANSACTIONS
2. CASH PAYMENTS
3. BALANCE OF ACCOUNT PAYABLE
• GENERALLY, PURCHASE TRANSACTION INCLUDES :
1. PURCHASING TRANSACTIONS THAT BEGIN WITH THE REQUISITION OF
GOODS AND SERVICES
2. PURCHASE ORDER FOR GOODS AND SERVICES
3. THE GOODS AND SERVICES THEN RECEIVED FROM SUPPLIERS
4. RECORDING BILLS AND PAYMENT OF ACCOUNT PAYABLE
• IN THIS CHAPTER, SPECIFICALLY DISCUSSES FURTHER AUDIT
PROCEDURES PERFORMED FOR PURCHASE AND PAYABLE SUCH AS
TEST OF CONTROL AND SUBSTANTIVE TEST
 AUDIT OBJECTIVES FOR PURCHASES AND
PAYABLES
• Concerned with obtaining sufficient audit evidence for the transactions and balances
• Key issues in auditing purchases and payables are to ensure that:
1) all purchases are recorded and not understand
2) all payables resulting from credit purchase are recorded

BALANCE PRESENTATION &

TRANSACTION
OBJECTIVES DISCLOSURE
OBJECTIVES
• Existence OBJECTIVES
• Occurance • Occurrence
• Rights and
• Rights and obligation
• Completeness obligation • Completeness
• Accuracy • Completeness • Classification and
• Cut-off • Valuation and understandbility
allocation • Accuracy
• Classification
• Valuation
 NATURE OF PURCHASES AND ACCOUNT
PAYABLE
Receiving requests from departments
(requisition form)

Recording process Purchasing department will

(journals, accounts & statements) PURCHASE completing the purchase order
form
CYCLE

Receiving & billing from suppliers

(delivery notes & purchases invoices)
• Each process in the purchase cycle, controls should be place by the
companies to mitigate any frauds or misstatements in the financial
statements.

• Auditors should asssess whether such controls are actually working

effetively to mitigate misstatements in a specific financial statement
assertion.

• The auditor should assign an appropriate audit approach based on the

asssessment of the identified risks at the both financial statement level &
assertion level.
 Accounting System and Control Activities
Receiving & storing Recording the
Purchase requisitions goods purchase & liability
- Purchase requisition - Good received note -Purchase journal,
form - Inventory record account payables

Preparing Approving the

purchase order supplier’s invoice
- Purchase - Supplier’s invoice
order form
 PURCHASE REQUISITION
This is a form from department in the entity to
request goods or services to be purchased.

The authenticity of the request

needs to be checked :

• To ensure that there are • To ensure the occurrence of

no fictitious transactions the purchase transactions.
created.

Pre-numbered purchase
requisition form

To ensure that the goods requested are appropriately

ordered and received.
 It is used as audit evidence It should be pre-numbered and
It is prepared by purchase
on occurrence of purchase properly authorized by purchasing
department.
transactions. managers.

PREPARING
PURCHASE
ORDERS

An independent review is performed by the To entrusted to an independent department

purchasing officer to determine that the from the warehouse to avoid fraudulent
goods ordered are received and recorded. requisition of goods for personal use.
Receiving & Storing the Goods for Inventory Approving Supplier’s Invoice
1) Supplier’s invoice Accounting department,
1) Storekeeper will after the storekeeper receives the goods.
check the:
• Description 2) Controls should be established by entity to
• Quantity & ensure that all supplier’s invoice are:
condition Audit objective
1) Recorded by providing
serial numbers for all invoice Completeness
received.
2) Storekeeper prepares
a pre-numbered GRN 2) Relate to a valid purchase
transaction by checking the
invoice and matching against
Occurrence
the GRN & purchase order

3) GRN will be send to 3) Accurately calculated the

account department and amount at an agreed price.
Accuracy
serves as an important
evidence to support the 4) Correctly recorded to Accuracy,
occurrence of the appropriate accounts classification
purchase transaction.
 Recording the Purchases & Liability
Controls should be established when recording
the purchases and liabilities to ensure:
1. All transactions are recorded
2. No overstatement of liabilities
3. Ensure the purchase amounts are recorded
accurately & in the proper period

Steps in recording the purchases

Supplier’s invoices Supplier’s journal is Monthly supplier’s

Purchase journal
are entered in a posted to account statement is reconciled
posted to general
purchase journal in payable subsidiary against the account
ledger
numerical sequence ledger payable balance
 Payment Transactions
3 4
1
A list of payable balances due Once the payment are
Process of cash payment for
for payment is prepared authorized & the cheques are
purchase and payable involves :
periodically Payment issued to suppliers, the
1. Paying the liability
Department Information payment transactions will be
2. Recording the payments
concern the current status of updated in the payment journal
account payables. & general ledger

Control over recording the

Control over payments that should be payment:
2 established by a company are as follows: a) Compared the amount
Cash payments for payable a) Segregation of duties between recorded
account payable reduce the personnel b) Prepared the bank
amount of payable b) Only authorized personnel have access reconciliation
to blank cheque & electronic signature
c) Pre-numbered cheques should be
issued
d) Cheques should be prepared under the
supplier’s name and not payable to
‘bearer’ or ‘cash’
 DEVELOPING AUDIT
PLAN
Obtaining an
Understanding the understanding of Assessing risks of
Designing further
entity to identify internal controls material
inherent risks audit procedures.
over purchase misstatements
and payables
 1. Understanding the entity to identify
inherent risks.
•Understanding the entity and its environment is very important in audit planning.
•Helps determine potential misstatements in financial reports.
•Regarding the purchase and payable, the auditor should understand the nature of the entity’s business in
terms of:
The types of company’s products and services-cost of sales & gross margins can be determined by
understanding the products
The nature of expenses-level of purchases and payables can be estimate by understanding client’s
business and the average payment period of the industry
•Moreover, its helps to assess inherent risks relating to assertions for purchases and payables. A number of
potential inherent risks are derived from motivation of management to inaccurate report expenses, such as:
Pressure o achieve the targeted profits may lead the clients to understate their expenses
High volume of transactions that would affect all assertions.
 2. Obtaining an understanding of internal
controls over purchases and payables.
 Inherent risks related to purchases and payables can be reduced by establishing appropriate and effective
internal controls.
 Thus, auditor should understand the control over purchases and payables by preparing written description
/flowchart.
 Furthermore, auditor may complete internal control questionnaire for purchases and payables to obtain an
understanding of the internal controls.
 Auditor may determine if internal controls over purchases and payables are implemented effectively.
 For example, the implementation of segregation of function between invoice verification and approval, and
function of cash disbursement ,can be observed by the auditor.
 To obtain an understanding of internal control, auditors may observe, make enquiries seeking further
details from management, review document –purchase document to determine whether sequence of pre-
numbered document are recorded appropriately.
Based on information obtained from
an understanding of the entity,
inherent risks and internal control,
auditor assesses the risks of material
misstatements.
Besides, auditor should assess if control
over purchases cuts-offs are effective to
ensure that purchases &payables are
recorded in its proper period.

3. Assessing risks of material

misstatements.

For example, auditor may determine

whether the purchases are susceptible to
risks of understatement due to pressure
to repost high profit.
 Comprise of tests of control and For example, auditor should include test of
substantive procedures. controls in the event that auditor believes
that there are internal controls in place for
maintaining records of purchases & payables

4. Designing
further audit
procedure.

The auditor should evaluate the

amount of further tests that should
be performed because amount of
procedures performed are based on
the assessed risk level.
 TEST OF CONTROL
It designed to determine whether controls over purchases
and payable function effectively.

Test for design effectiveness Test for operating effectiveness

 Determine the presence of essential • Should perform tests for operating

controls over purchases and payable.
 Determine the necessary control and
potential misstatements.
 After identify the presence of necessary
control, they should make a preliminary
assessment of the control skills.
effectiveness of the controls.
• Auditors may obtain substantive evidence
whilst testing the operating effectiveness of
the controls. Its also known dual purpose
tests.
• However, should careful when making
conclusions, it is because it only concern
about the number of misstatement, not the
size.
 CONTROL RISK ASSESSMENT
FUNCTION
Requisition of goods and services
Preparing the purchase orders
Receiving and storing goods
Approving the supplier’s invoice
POTENTIAL MISSTATEMENTS
• Request are made for
unauthorized purposes.
• Purchases are unauthorized
purposes.
• Unordered goods are received.
• The quantity and goods
received are not in agreement
with the order purchase.
• Damaged goods are received.
• Invoices include unordered
goods.
CONTROL PROCEDURES
 Requisition are checked prior to
approval of the goods or
services requested.
 Each purchases requisition
should be approved.
 All goods issued are checked
against approved purchase
orders in terms of quantity and
types of goods by independent
personnel.
 Pre-numbered GRN are
prepared for each goods
received.
 GRN are matched with the
approved purchase order for
each invoice.
 SUBTANTIVE PROCEDURES

• It is prepared based on preliminary assessment of control risks.

• The nature, timing or extent of substantive procedures → the result of the tests
of control and the level of detection risk.
• When inherent risk for purchase and payable transaction are ↑ and their control
risk are ↓
• Thus,set a moderate level of detection risks to achieve the required audit risk.
• Level of detection risk influences the amount of procedures undertaken by
auditors.
Designing Substantive
Procedure
 Analytical Procedures
Planned to confirm expectations, and performed in 4 stages:

1)To review the understanding of the entity as to whether any changes to payable balance
are to be expected.

2)To determine any fluctuations in amount of purchases and payable balances between this
year and the previous year.

3)To determine ratios and trends for gross profit and average payment period. An unusual
change in gross profit margin compared to previous year’s figures signifies the possibility
of misstatements in recording purchases.

4)To analyse expenses accounts by reviewing the ratio between each category of purchases
with the total sales and compare with the previous year’s ratio to determine the level of
activity for the current year to ensure the completeness of the purchase records.
 Test of Details of Transactions
Used to corroborate tests of details of balances. Normally performed during interim
audit and in the form of dual-purpose tests.

Vouching Tracing
• Document inspections

• Auditors vouch recorded • Auditors trace from purchase

purchase transactions to orders, GRN, supplier’s invoices to
supporting documents such as purchase journals & accounts
purchase orders, GRN & supplier’s payables to verify completeness
invoices to verify the occurrence of records.
of the transactions, or in other
word, to identify that the
transaction are valid.
 Purchase Cut-off Test
Performed to ensure that current year purchases & payables are recorded in the current
period and that changes in purchases & payables are reflected in the records of
inventories and cost of sales for the current year.

• Obtain the number of the last GRN for the final receipt of the year.
• Select sample of GRN before the last number and match with the purchase orders
date to ensure that purchases are recognized in the current year.
• Also check on the agreement with entries in purchase journals to ensure that they
are recorded in the current year.
• Obtain the first GRN for subsequent year.
• Select sample of the GRN after the date and match with the purchase orders and
supplier’s invoices date to ensure that purchases are recognized in the subsequent
year.
• Also check on the agreement with entries in purchase journals to ensure that they
are recorded in the subsequent year.
 Payments Cut-off Test
Selected payment vouchers
Designed to provide Proper cut-off is before the last number of
evidence that payments important to ensure the the final payments for the
correct presentation of current year will be
are recorded in the inspected in terms of date
appropriates period. cash & liabilities.
and they will be traced to
the payment journals.

Auditors also perform verification on the date of

presentation of cheques unpresented as at the end
of the reporting period, which is part of the test on
bank reconciliations.
 Test Of Details Of Balance
• CONCERN THE REVIEW OF MONTHLY PAYABLE RECONCILIATION
OBTAINING OF • The authenticity of the dcument should be cautiously rely upon.
01 • Auditors should review the reconciliation prepared by the client and investigate any
EVIDENCE FOR unreconciled balances.
ACCOUNTS • Auditors should be concerned about understatement of account payables, the selection
of accounts for testing should be based on the volume of transations & not the list of
PAYABLE account payables provided by client.
BALANCES
CONFIRMATION OF BALANCES
• A written confirmation is sen to individual suppliers to confirm the amount outstanding
• THE TESTS DO 02 & payable to supplier but the procedures are less frequent perform.
• The confirmation does not provide assurance to uncover unrecorded liabilities,thus it
NOT CONCERN does not provide evidence of completeness.
DEBIT OR • Recommended to be use when the volume of transactions is substantial & detection
risk are planned to be low.
CREDIT OF
INVESTIGATING FOR UNRECORDED LIABILITIES
TRANSACTION
3 procedures:
BUT THE 03 1. To examine subsequent period's purchase & payment transaction.
2. To perform analytical procedures on expense to determine any unusual reduction in
BALANCE OF
expenses, as it signifies the presence of unrecorded liabilities.
THE END OF THE 3. To examine any contractual agreements or commitments that raise the existence of
PERIOD liabilities not yet provided for in the accounts, e.g: progress payment on long term
contracts.
Thank You