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Understanding and Auditing Purchasing Processes
Oct 3, 2024
Auditing the Purchasing Process
Overview of the Lecture
Discussion on auditing the purchasing process.
Steps covered so far:
Understanding the purchasing process.
Identifying significant accounts and relevant assertions.
Assessing risk and material misstatement.
Evaluating the design of internal controls.
Walkthrough of the Purchasing Process
Purpose: To map out the purchasing process and understand internal controls in place.
Steps covered in the walkthrough:
Initial request for goods and services
Purchase order creation
Receiving report generation
Cash disbursement and accounting records updating.
Internal Controls Evaluation
At each step, ask:
Has an internal control been designed to prevent or detect material misstatement?
Currently focused on identifying internal controls before testing their effectiveness in the next step.
Entity Level Controls
Importance of entity-level controls in the purchasing process.
Key points to evaluate:
Active role of the audit committee (e.g., regular meetings, concerns about internal controls).
Existence of written policies and procedures for purchase authorization.
Requirement of authorized signatures for purchase requisition and orders.
Dollar limits for purchases for various managerial levels.
Monitoring of days payable outstanding.
Internal Controls Related to Management Assertions
Key internal controls include:
Three-way match
of purchase order, receiving report, and vendor invoice.
Validates occurrence and existence assertions.
Using
pre-numbered documents
to support completeness assertion.
Ensuring
segregation of duties
to mitigate fraud risk.
Importance of Segregation of Duties
Avoiding overlap of responsibilities among employees to prevent fraud.
Example: One employee should not handle purchase requisitions, purchasing, and receiving goods.
Custody of assets and documents must be restricted.
Prevent unauthorized access to blank forms (e.g., purchase orders, checks).
Specific Internal Controls for Purchase Transactions
Assertions and corresponding internal controls include:
Occurrence
: Verify that purchases occurred (three-way match).
Completeness
: Ensure all purchases are recorded (pre-numbered documents).
Authorization
: Verify purchases are authorized and from approved vendors.
Accuracy
: Check that prices and quantities are correct.
Cut-off
: Ensure liabilities are recorded in the correct period (timely forwarding of receiving reports).
Classification
: Properly classify purchases using a chart of accounts.
Cash Disbursement Transactions Internal Controls
Internal controls for cash disbursements include:
Monthly bank reconciliations to verify occurrence assertion.
Maintaining segregation of duties.
Accounts Payable Internal Controls
Assertions and internal controls for accounts payable:
Existence
: Verify that liabilities are real obligations (approved vendor list, three-way match).
Completeness
: Ensure all liabilities are recorded (using pre-numbered documents).
Cut-off
: Check liabilities are recorded in the correct period by reviewing incoming payables post-year-end.
Next Steps
The next lecture will focus on testing the effectiveness of the internal controls identified during the walkthrough.
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