1. Learning Objectives LO1 Describe the purchases, payables, and payments process, including typical risks, transactions, account balances, source documents, and controls. LO2 Describe the auditor’s control risk assessment and control tests for auditing control over the purchase of inventory, services, and fixed assets, and for the disbursement of cash. LO3 Describe the typical substantive procedures used to respond to the assessed risk of material misstatement in the main account balance and transactions in the purchases, payables, and payments process. 1

2. Understanding the Purchases, Payables and Payments Process Purchases of goods and services are a major part of cash outflow in most organizations.  High level of management planning and control. LO1 2

3. Risk Assessment for Purchases Payables and Payments To assess risks in the purchasing-related processes, the auditor considers purchasing and cash payment transactions and accounts payable.  Understanding of business will point auditors towards specific risks.  Existence, ownership, completeness, valuation and disclosure must all be considered. LO1 3

4. Purchases, Payments, and Payables Process: Typical Activities Exhibit 12-1 shows the activities and transactions, accounts and records in the purchases, payables, and payments processes.  The basic activities are:  purchasing goods and services, and  paying the bills. LO1 4

5. Purchase, Payables and Payment Process Start Here Request for purchases Enter accounts payable Cash disbursement Receive vendor invoice Receive goods and services LO1 5

6. Authorization Purchases are made by purchasing departments or authorized purchasers.  Purchasing controls such as competitive bids should be in place. Disbursements are authorized by an accounts payable department.  Purchase orders, invoices and receiving reports are matched prior to payment.  Cheques are signed by authorized personnel. LO1 6

7. Custody  A receiving department receives goods purchased and forwards them to the proper departments.  Custody of cash is the responsibility of personnel assigned to authorize and sign cheques.  Access to blank documents should also be considered as an aspect of custody. LO1 7

8. Recording  Purchases should be recorded once the purchase order, receiving report, and vendor invoice are matched.  Disbursements are recorded when the cheques are prepared. LO1 8

9. Periodic Reconciliation Periodic comparison of existing assets to recorded amounts in various accounts occurs in several ways.  Physical inventory is compared to the accounts.  Bank reconciliations are prepared.  Fixed assets are compared to the accounts.  A trial balance of accounts payable is compared to the control account. LO1 9

10. Audit Evidence in Management Reports Computer processing of purchase and payment transactions will produce several management reports which may provide audit evidence: Management Report Control PurposePotential Audit Evidence Open purchase orders Completeness of accounts payable Purchase commitments, valuation of inventory unmatched receiving reports Validity of purchases recorded Unaccrued liabilities for purchases LO1 10

11. Audit Evidence in Management Reports Management Report Control PurposePotential Audit Evidence Unmatched vendor invoices Validity of purchases recorded Unaccrued liabilities for purchases Accounts payable trial balance Proper accounting, cash flow management Existence and completeness of payables Purchases journal Completeness and validity or purchases, inventory or expenses Analysis of inventory changes and expense reasonability Inventory reportsCompleteness, validity and valuation of inventory Analysis of inventory balances, valuation, selection of samples for test counts and valuation tests LO1 11

12. Audit Evidence in Management Reports Management Report Control PurposePotential Audit Evidence Fixed Asset Reports Completeness, validity and valuation of fixed assets, accumulated depreciation and depreciation expense Analysis of changes in fixed assets balances. Selection of sample additions for vouching. Recalculation of depreciation expense Cash disbursements report Expenditure reviews by management for validity, authorization Selection of sample for testing existence, authorization and proper cut-off of payments. LO1 12