Assurance - Execution - Audit of Purchases, Payable and Payment Cycle

Question 1

What is the purchase credit system?

Answer 1

Phase 1 - Vendor is screened and added to the approved list
Phase 2 - Purchase order is made by an authorized individual
Phase 3 - Receipt of goods with a shipping or packing slip
Phase 4 - Invoice processing (three-way matching) - payable is created
Phase 5 - Payment is processed and payable is settled

• Process can vary based on entity, internal control at each phase may also vary
  Payable - risk generally relates to understatement
  Expenses - Accumulation of transactions for the period under audit risk also generally relates to understatement

Question 2

What are some assertion for the A/P & expenses

Answer 2

A/P - Existence - The A/P balance recorded does not exist
Rights and Obligation - A/P balance is not the obligation of the entity
Completeness - A/P balance owed by the entity are not recorded
Accuracy, valuation, allocation - A/P balance are not measured at the correct amount
Classification - A/P balance are not classified in the appropriate B/S account
Presentation - The appropriate disclosures for A/P have not been made

Expenses - Occurrence - Expenses recorded did not occur
Completeness - Expenses that the entity incurred are not recorded
Accuracy - Expenses are not recorded at the correct amount
Cutoff - Expenses are recorded in the wrong period
Classification - Expenses are not classified in the appropriate I/S account
Presentation - Appropriate disclosure for expenses has not been made

Question 3

What are the general audits over purchases, payable, and payment

Answer 3

1. An analytical review of the current year’s expense result and a comparison with the prior year’s result and or any significant variation are followed up on by inquiring with the client as to why the expense fluctuated budget could include procedures over the internal control surrounding the budget
2. Select a sample of expense from various expense line items and trace it to the supporting invoice to gain an understanding amount and ensure the amount has been correctly included in the correct F/S
3. R&M (depending on the change in the R&M account auditor concern. If expenses increase from the prior year’s budget the auditor would obtain a copy of the RMM sub-ledger & select significant R&M expenditure
4. Property tax - Examine the property tax assessment to ensure accurate entry and review the depreciated of the prepaid property taxes to the property tax expense account (occurrence, completeness, accuracy)
5. Rent expenses - The auditor would inspect the lease agreement to determine if the rent recorded is consistent with the amount contained in the agreement, examine the prepaid expense
   (Rent expenses & occurrence, completeness, accuracy)

• Vouch a sample from the purchase ledger to the supporting invoice to ensure they were recorded appropriately (A/P - existence, accuracy, valuation, allocation, Expenses - occurrence, accuracy)