Chapter 11

Auditing the
Purchasing
Process

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 LO# 1

Expense and Liability

Recognition
Expenses are outflows or Liabilities are probable
other using up of assets future sacrifices of
or incurrences of liabilities economic benefits arising
from delivering or from present obligations
producing goods, of a particular entity to
rendering services, or transfer assets or provide
carrying out other services to other entities
activities that constitute in the future as a result of
the entity’s ongoing major past transactions or
or central operations. events.

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 LO# 2

Overview of the Purchasing

Process
A purchase transaction usually begins with a
purchase requisition generated by the user
department. The purchasing department
prepares a purchase order that is sent to the
vendor. When the goods are received or the
services rendered, a liability is recorded.
Finally, the entity pays the vendor.
Purchase Purchase Receiving
requisition order report and
Vendor
liability
recorded

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 LO# 3

Types of Transactions and Financial

Statement Accounts Affected
Three types of transactions are processed
through the purchasing process:
Type of Transaction Account Affected
Purchase Transaction Accounts payable
Inventory
Purchases or cost of goods sold
Various asset and expense accounts
Cash disbursement transaction Cash
Accounts payable
Cash discounts
Various asset and expense accounts
Purchase return transaction Purchase returns
Purchase allowances
Accounts payable
Various asset and expense accounts

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 LO# 4

Types of Documents and Records

Purchasing documents and records . . .
1. Purchase Requisition – request to purchase goods or services.
2. Purchase Order – includes description, quality, and quantity of goods
or services being purchased.
3. Receiving Report – records the receipt of goods.
4. Vendor Invoice – the bill from the vendor.
5. Voucher – serves as the basis for recording a vendor’s invoice.
6. Voucher Register – used to record vouchers for goods and services.
7. Accounts Payable Subsidiary Ledger – includes amount owed to
individual vendors.
8. Vendor Statement – represents the purchase activity with vendor.
9. Check – pays for goods or services.
10. Check Register – contains columns to record credits to cash and
debits to accounts payable and cash discounts.
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 LO# 5

The Major Functions

Functions of the Purchasing Process
Initiation and approval of requests for goods and services
Requisitioning by authorized individuals consistent with management
criteria.
Approval of purchase orders and proper execution as to
Purchasing
price, quantity, quality, and vendor.
Receiving Receipt of properly authorized goods and services.
Processing of vendor invoices for goods and services
Invoice processing received; also, processing of adjustments for allowances,
discounts, and returns.
Disbursements Processing of payment to vendors.
Recording of all vendor invoices, cash disbursements, and
Accounts payable
adjustments in individual vendor accounts.
Proper accumulation, classification, and summarization of
General ledger purchases, cash disbursements, and payables in the
general ledger.
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 LO# 6

Key Segregation of Duties

Segregation of Duties Possible Errors or Fraud
The purchasing function should be If one individual is responsible for the requisition,
segregated from the requisitioning purchasing, and receiving functions, fictitious purchases
and receiving functions. can be made. This can result in the theft of goods and
possibly payment for unauthorized purchases.
If one individual is responsible for the invoice-
processing and accounts payable function, purchase
The invoice-processing function
transactions can be processed at the wrong price or
should be segregated from the
terms, or a cash disbursement can be processed for
accounts payable function.
goods not received. This can result in overpayment of
goods or the theft of cash.
If one individual is responsible for the disbursement
function and also has access to the accounts payable
The disbursement function should be
records, unauthorized checks supported by fictitious
segregated from the accounts
documents can be issued, and unauthorized
payable function.
transactions can be recorded. This can result in theft of
the entity's cash.
If one individual is responsible for the accounts
The accounts payable function payable records and also for the general ledger, that
should be segregated from the individual can conceal any defalcation that would
general ledger function. normally be detected by reconciling subsidiary records
with the general ledger control account.
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 LO# 7

Inherent Risk Assessment

Industry Related Factors
1. Is the supply of raw materials adequate?
2. How volatile are raw materials prices?

Misstatements Detected in Prior Audits

Generally, the purchasing process is not difficult
to audit and does not present contentious
accounting issues. However, the auditor’s
experience in past audits must be considered
when assessing inherent risk.
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 LO# 8

Control Risk Assessment

Major steps in setting the control risk in the
purchasing process.
Understand and document the purchasing
process based on a reliance strategy.

Plan and perform tests of controls on purchase

transactions.

Set and document the control risk for the

purchasing process.
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 LO# 9
Control Activities and Tests of
Controls – Purchase Transactions
Assertions about Classes of Transactions and Events for
the Period under Audit
All purchase and cash disbursements have been
Occurrence
recorded and have occurred and pertain to the entity.

Completeness
All purchase and cash disbursements that should
have been recorded have been recorded.
All purchase and cash disbursements are properly
Authorization
authorized.
Amounts relating to recorded purchase and cash
Accuracy disbursements have been recorded appropriately and
properly accumulated from journals and ledgers.

Cutoff Purchase and cash disbursements have been

recorded in the correct accounting period.
Classification
Purchase and cash disbursements have been
recorded in the proper account.
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 LO# 10

Auditing Accounts Payable

and Accrued Expenses
Assertions about Account Balances at the Period End:
Existence. Accounts payable and accrued expenses are valid
liabilities.
Rights and obligations. Accounts payable and accrued
expenses are obligations of the entity.
Completeness. All accounts payable and accrued expenses
have been recorded.
Valuation and allocation. Accounts payable and accrued
expenses are included in the financial statements at appropriate
amounts, and any resulting valuation or allocation adjustments
are appropriately recorded.

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 LO# 10

Auditing Accounts Payable

and Accrued Expenses
Assertions about Presentation and Disclosure:
Occurrence and rights and obligations. All disclosed events,
transactions, and other matters relating to accounts payable and accrued
expenses have occurred and pertain to the entity.
Completeness. All disclosures relating to accounts payable and accrued
expenses that should have been included in the financial statements have
been included.
Classification and understandability. Financial information relating to
accounts payable and accrued expenses is appropriately presented and
described, and disclosures are clearly expressed.
Accuracy and valuation. Financial and other information relating to
accounts payable and accrued expenses are disclosed fairly and in
appropriate amounts.
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 LO# 12

Tests of Details of Transactions,

Account Balances, and Disclosures
Completeness
The auditor should conduct a search for unrecorded
liabilities that includes the following:
1. Ask management about control procedures used to identify
unrecorded liabilities at the end of the period.
2. Obtain copies of vendors’ monthly statements and reconcile
the amounts to the client’s accounts payable records.
3. Confirm vendor accounts, including accounts with small or
zero balances.
4. Vouch large-dollar items from the purchases journal and
cash disbursements journal for a limited time after year-end.
5. Examine the files of unmatched purchase orders, receiving
reports, and vendor invoices for any unrecorded liabilities.
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 LO# 12

Tests of Details of Transactions,

Account Balances, and Disclosures
Disclosure Items for the Purchasing Process
Payables by type (trade,
Purchases from and
officers, employees,
payables to related parties.
etc.).

Dependence on a single
Short- and long-term
vendor or a small number
payables.
of vendors.

Long-term purchase
contracts, including any Costs by reportable
unusual purchase segment of the business.
commitments.

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 LO# 13

Accounts Payable Confirmations

Accounts payable confirmations are used less
often than accounts receivable confirmations. The
auditor is able to examine externally created
source documents relating to accounts payable.
When confirmations are used, they are usually
positive and referred to as blank confirmations. The
vendor is asked to supply the balance owed by the
client.

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 LO# 14

Evaluating the Audit Findings

All identified misstatements should be aggregated
(including any consideration for sampling risk). The
likely misstatement is then compared to tolerable
misstatement. If the likely misstatement is less than
the tolerable misstatement, the auditor has evidence
that the account is fairly presented. Conversely, if
the likely misstatement exceeds the tolerable
misstatement, the auditor should conclude that
the account is not fairly presented.

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 LO# 15

Auditing the Tax Provision and

Related Balance Sheet Accounts
The basics: Use of specialist:
GAAP accounting vs. Multiple locations/foreign
Tax accounting. operations.

Temporary differences. Business combinations.

Changes in ownership or
Permanent differences. tax status.

Accounting for uncertain tax positions.

Deferred tax assets – Valuation issues.

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End of Chapter 11

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