Procedures to obtain evidence and an audit test relevant to purchases and other expenses:
Inspection
Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.
– Inspect a sample of purchase invoices and agree the amount is included correctly within the purchase ledger.
– Inspect purchase orders for evidence of authorisation by a responsible official.
Observation
Observation consists of looking at a process or procedure being performed by others.
– Observe the process for logging purchase invoices into the system to ensure that all invoices are entered completely and accurately.
– Observe the goods received department to assess whether goods received are checked against purchase orders and reviewed for adequate quality.
Analytical procedures
Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
– Calculate the operating profit margin/overhead ratio and compare it to last year and budget and investigate any significant differences.
– Review monthly other expenses to identify any significant fluctuations and discuss with management.
Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity.
– Discuss with management whether there have been any changes in the key suppliers used and compare this to the purchase ledger to assess completeness and accuracy of purchases.
– Inquire of department heads the process they follow in authorising orders to ensure that it follows the specified company authorisation process.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.
– Recalculate the accuracy of a sample of purchase invoices.
– Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the other expenses.
Reperformance
Reperformance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
– Reperform the purchase ledger control account reconciliation to ensure accuracy.
– Select a sample of purchase orders and match them to the goods received notes and purchase invoices to ensure completeness of the purchase cycle.
Tutorial note: Marks will be awarded for any other relevant purchases and expenses tests.
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