Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

TEST OF CONTROLS PURCHASE TRANSACTIONS Audit Objective Validity (to find out whether there are purchases recorded but not received) Audit procedure Observe & evaluate proper segregation of duties between: Purchasing/requisitioning & receiving functions. &est a sa#ple of ' pay#ent vouchers for the presence of a purchase requisition! authorised purchase order & receiving report. Findings ince it not possible for you to observe anything here! thin" about why the segregation of duties is i#portant. $ictitious purchases can be #ade theft of goods & pay#ent for unauthori%ed purchases. (ll docu#ents are attached ) O*. P+, ) as" client if -ustin .a#bang is a phar#acist/doctor/chief nurse ) O*. P+/ ) as" client if 0rs. 1ong *it 0an is the #anager of the boutique ) O*. PO, & PO/ ) as" if -ac" -ones is the Purchasing 0anager of the co#pany ) O*. 2our lecturer is the client. (s" her what are the client procedures in accounting for nu#erical sequence of receiving reports & pay#ent vouchers. 3ecturer4s response: +eceiving reports & pay#ent vouchers are pre5printed with fi6ed serial nu#bers. &he serial nu#bers are controlled by the Purchasing 0anager and the $inance 0anager so that nu#bers do not repeat. +educes the ris" of fraudulent receiving reports/pay#ent vouchers or 7#issing4 docu#ents that are #isused. , cancelled docu#ent 5 9PV :;5:' 2ou have already perfor#ed this above. =se the docu#ents which you have already. >o e6ceptions noted. =se the docu#ents which you have already. >o e6ceptions noted.

+eview & test client procedures for accounting for nu#erical sequence of receiving reports & pay#ent vouchers.

<o#pleteness (to find out whether there are any incidences where purchases #ade but not recorded)

86a#ine paid vouchers & supporting docu#ents for indication of cancellation (to prevent #isuse). +eview & test client procedures for accounting for nu#erical sequence of receiving reports & purchase vouchers. &race / receiving reports to their respective supplier invoices and vouchers. &race / pay#ent vouchers to the purchases ?ournal.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. TEST OF CONTROLS PURCHASE TRANSACTIONS Contd!" Audit Objective &i#eliness (to avoid purchase transactions fro# being recorded in the wrong period) (uthorisation (to unauthorised purchases! avoid purchases at unauthorised prices or on unauthorised ter#s) Audit procedure <o#pare the dates on the pay#ent vouchers & receiving reports to the dates they were recorded in the purchases ?ournal. +eview client4s authorisation li#its for acquisitions. Findings 0ust have a #ini#u# delay. >o e6ceptions noted. (s" the client about this & ensure that authori%ation li#its are followed. 3ecturer4s response: Purchasing 0anager (-ac" -ones) can authori%e up to +0,;!:::. >ote that the acquisition li#it is breached for the /nd purchase! i.e. PO 9/. Purchase orders are properly approved by Purchasing 0anager! -ac" -ones. (s" the client about the bidding procedures. .idding procedures are for the selection of purchases/ contracts with the best ter#s and prices. 3ecturer4s response: 1e call for suppliers to sub#it their tenders on a closed tender basis. &hey drop the tenders in a sealed bo6 before a stipulated deadline. On the deadline! we have a &ender <o##ittee who will open the tenders. &hey will then decide on the best tender to accept and infor# the supplier accordingly. >o e6ceptions noted. =se the voucher pac"ets that you have on hand. >o e6ceptions noted. .ased on the purchases ?ournal! classification of 0aternity dresses were wrong ) i.e. classified as $i6ed (ssets and not @nventories. o there is a brea"down in internal verification. =se the purchase ?ournal & (ccounts Payable subsidiary ledger for (ugust /::A. >o e6ceptions noted. =se the (ccounts Payable subsidiary ledger & general ledger for (ugust /::A. >o e6ceptions noted.

86a#ine purchase orders for proper approval. +eview client4s co#petitive bidding procedures.

Valuation (to ensure that purchase transaction is recorded at the correct a#ount) <lassification (to ensure that the purchase transaction is properly classified) Posting & su##arisation (to ensure correct posting to purchases ?ournal or custo#er4s accounts in the (ccounts Payables subsidiary ledger! and fro# purchases ?ournal to the general ledger)

+eco#pute the #athe#atical accuracy of supplier invoices & ensure that calculations & a#ounts are internally verified. (gree the infor#ation on a sa#ple of voucher pac"ets for product! quantity & price. +eview purchases ?ournal and general ledger for reasonableness. &est the reconciliation of entries fro# purchases ?ournal to (ccounts Payable subsidiary ledger. +eview the reconciliation of (ccounts Payable subsidiary ledger to general ledger control account.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

TEST OF CONTROLS CASH PA#$ENT TRANSACTIONS Audit objective Validity (to avoid incidences whereby cash pay#ents are recorded but not #ade) <o#pleteness Audit procedure Observe & evaluate the proper segregation of duties between (ccounts Payable & custody of signed cheques. Findings ince it not possible for you to observe anything here! thin" about why the segregation of duties is i#portant. =nauthorised cheques supported by fictitious docu#ents can be issued & unauthori%ed transactions can be recorded cash theft. (s" the client about this. 3ecturer4s response: (t the end of every #onth! we obtain all the suppliers4 state#ents & co#pare the balances to the (ccounts Payable ubsidiary 3edger. 1e note all the differences between the / balances: usually these are pay#ents #ade but not yet received by the supplier! or invoices billed by the supplier but not received by us. @f there are differences which we do not agree with! we will notify the supplier accordingly. &he differences are all su##ari%ed in a upplier tate#ent reconciliation and reviewed by the $inance 0anager. 2ou have already done this in last wee"4s +evenue <ycle. >o need to do this now. Only / <heques are given ) you can #a"e the relevant assu#ptions. =se the pay#ent vouchers & (ccounts Payable subsidiary ledger ((ug /::A) given to you. >o e6ceptions noted. 0ust have a #ini#u# delay. >o e6ceptions noted. >one e6ist.

+eview client4s procedures for reconciling supplier state#ents.

<o#pleteness (to ensure that cash pay#ents #ade but not recorded) &i#eliness (to ensure that cash pay#ents are not recorded in the wrong period)

+eview client4s #onthly ban" reconciliations to ensure that they have been independently reviewed. +eview & test client4s procedures for nu#erical sequence of cheques. &est the reconciliation of pay#ents with posting to (ccounts Payable subsidiary ledger. <o#pare the dates of cheque issues with posting to cash pay#ents ?ournal & (ccounts Payable subsidiary ledger. @nquire whether unrecorded cheques e6ist.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. TEST OF CONTROLS CASH PA#$ENT TRANSACTIONS Contd!" Audit objective (uthorisation (to ensure that cash pay#ents are authori%ed) Audit procedure Observe & evaluate proper segregation of duties between: (i) Purchase approval/cash pay#ent functions. Findings ince it not possible for you to observe anything here! thin" about why the segregation of duties is i#portant. =nauthorised purchases can be #ade fro# a supplier (in collusion with the purchaser) & pay#ents processed accordingly. Purchase transactions can be processed at the wrong price/ter#s! cash pay#ents can be processed for services/goods not received overpay#ent for goods! theft of cash. =nauthorised cheques supported by fictitious docu#ents can be issued & unauthori%ed transactions can be recorded cash theft. Cefalcation can be concealed! which can nor#ally be detected by reconciling subsidiary records with the B3 control account. Pay#ent vouchers are properly approved by @brahi# bin &ahar! $inance Cirector. =se <ash Pay#ents -ournal for (ug /::A and the cheques which you have already been given. >o e6ceptions noted. 2ou will be doing this later as part of &est of .alances for (ccounts Payable. >o need to do now. 2ou will be doing this as part of the &est of .alances for <ash. >o need to do this now. =se the voucher pac"ets that have already been distributed to you. >o e6ceptions noted. >o e6ceptions noted. (ssu#e that all reconciliations are independently reviewed. >o need to do this further. >o e6ceptions noted. >o e6ceptions noted.

(ii) @nvoice processing/(ccounts Payable functions.

(iii) Pay#ent function/(ccounts Payable functions. (iv) (ccounts Payable/B3 functions. 86a#ine indication of authori%ation/approval on pay#ent voucher. +eview & test reconciliation of <ash Pay#ents -ournal to cheques issued. +eview & test reconciliation of supplier state#ents to (ccounts Payable records. 8nsure that the reconciliations are independently reviewed. +eview & test #onthly ban" reconciliations ensure that they are independently reviewed. +eview the general ledger account classification on voucher pac"ets for reasonableness. +eview the <ash Pay#ents -ournal for proper classification. +eview the reconciliation of suppliers4 state#ents to (ccounts Payable subsidiary ledger. 8nsure that the reconciliations are independently reviewed. +eview the posting fro# the cash pay#ents ?ournal to the general ledger. 86a#ine the reconciliation of (ccounts Payable subsidiary ledger to the general ledger.

Valuation (to ensure that cash pay#ents are recorded at the correct a#ount)

<lassification (to ensure that cash pay#ents are recorded in the correct account)

Posting & su##arisation (to ensure that cash pay#ents are posted to the right custo#er account! and properly posted to the right general ledger accounts)

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. SU%STANTI&E PROCE'URES TRANSACTIONS RELATE' TO ACCOUNTS PA#A%LES Audit objective Validity <o#pleteness <ut5off Audit procedure $or a sa#ple of purchase transactions recorded in the purchases ?ournal! trace vouchers to authori%ed purchase order & receiving report. &race a sa#ple of vouchers to the purchases ?ournal. <o#pare the dates on a sa#ple of vpuchers with the dates they are recorded in the purchases ?ournal. Vouch selected purchase transactions recorded in the purchases ?ournal to the voucher pac"ets! thus ensuring that they were obligations of the entity. $or a sa#ple of purchase vouchers! test posting to the purchases ?ournal & (ccounts Payable subsidiary ledger for the correct a#ounts. +eco#pute the #athe#atical accuracy of a sa#ple of purchase vouchers. Verify classification of charges for a sa#ple of purchase transactions. &est a sa#ple of vouchers to ensure that the nature of the transaction is consistent with the nor#al course of business. Findings 2ou have already perfor#ed this test above. 2ou have already perfor#ed this test above. =se the purchase vouchers & purchases ?ournal that you already have. >o e6ceptions noted. =se the purchase vouchers & purchases ?ournal that you already have. >o e6ceptions noted. >o e6ceptions noted. 2ou have already perfor#ed this test above. +eview purchase ?ournal. >o e6ceptions noted. >o e6ceptions noted.

Ownership

(ccuracy Valuation <lassification Cisclosure

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. SU%STANTI&E PROCE'URES ANAL#TICAL PROCE'URES FOR ACCOUNTS PA#A%LES ( ACCRUE' E)PENSES Audit objective Purchases &o find out any under/overstate#ent of liabilities & e6penses Audit procedure <o#pare purchases with prior year. <o#pare the payables turnover and days outstanding in (ccounts Payable to previous years & industry data. Findings @ncrease in purchases by .outique. .outique e6panded its product line to include baby5related products during the year. D(ppendi6 (E >o need to co#pare for industry data. <reditors4 turnover has increased fro# '.:F to '.A, fro# last year. Cue to better cash flow of the co#pany! so better ability to repay debts. (lso to avoid paying interest on late pay#ent. =se (ccounts Payable 3isting as at ', Cece#ber /::A. (P balances have re#ained consistent fro# that of previous year. Per (P 3isting! no #a?or variances.

<o#pare current year balances in (ccounts Payable & accruals with prior years4 balances. <o#pare a#ounts owed to individual suppliers over +0,::!::: with previous years. Purchases returns & allowances =nder/over state#ent <o#pare purchases returns & allowances as a percentage of of purchases returns cost of sales with previous years.

ee (ppendi6 <. Purchase returns have re#ained consistent fro# that of previous year.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. SU%STANTI&E PROCE'URES TEST OF %ALANCES FOR ACCOUNTS PA#A%LE ( ACCRUE' E)PENSES Audit objective Validity Audit procedure Obtain selected suppliers4 state#ents & reconcile to supplier4s account balance. <onfir# balances of (ccounts Payable! including accounts with s#all or %ero balances. Findings Obtain suppliers4 state#ents for the first / creditors on the (ccounts Payable 3isting as at ',.,/./::A. .oth balances agree with the suppliers4 state#ents. Obtain the standard confir#ation for# as used by auditors. Cecide on which a#ounts you will need to send confir#ation requests to. +eview the confir#ation request to see how you can fill it. &hin" of why s#all/%ero balances are i#portant to be confir#ed. <oncern about liabilities is understate#ent! not overstate#ent. #all & %ero balances are confir#ed because client #ay owe such suppliers for purchases but the a#ounts #ay not be recorded. $or the purpose of this e6ercise! agree selected totals to the (ccounts Payable 3isting to the (ccounts Payable subsidiary ledger. (ll balances agree to the general ledger. (a) (ssu#e that the receiving reports are dated the sa#e date as the supplier4s invoices. +eceiving +eport 9::G, dated /H.,/./::A should have been ta"en up in the /::A (ccounts Payable ubsidiary 3edger. $ro# the review of cash pay#ents ?ournal /::F! noted that pay#ent of invoices 18 0edical upplies 9/FG;I & 9/;AHI ) client should e6plain that these refer to invoices dated in /::A and have already been ta"en up. >o invoices dated in /::A that have not been ta"en up in /::A. (b) >o bills unpaid after year end other than those ta"en up in (ccounts Payable ubsidiary 3edger. (c) +eceiving report 9G: relates to @nvoice 9 '::::! which was not ta"en up. &o consider ta"ing up as an additional liability. (d) >one found. 2ou have already perfor#ed this above. 2ou have already perfor#ed this above. (ll transactions can be traced to receiving reports and are proper.

Obtain the (ccounts Payables listing as at ', Cece#ber /::A. (gree the total to the general ledger. <o#pleteness Perfor# search for unrecorded liabilities: (a) 86a#ine the purchases ?ournal & cash pay#ents ?ournal after the year end. 86a#ine the date on each receiving report/supplier4s invoice ) if the date of the invoice/ receiving report is before the year end! chec" whether the transaction has been ta"en up as a liability in the (ccounts Payable ubsidiary 3edger (b) 86a#ine the files of un#atched supplier invoices for bills not paid after the year end ) see if the bills have been ta"en up as liability in the (ccounts Payable ubsidiary 3edger (c) &race receiving reports issued before year end to related suppliers4 invoices ) to ensure that related invoices have been ta"en up (d) Obtain suppliers4 state#ents as at ', Cec /::A )chec" if any invoices have not been ta"en up

Obtain selected suppliers4 state#ents & reconcile to supplier4s account balance. <onfir# balances of (ccounts Payable! including accounts with s#all or %ero balances. elect the last / purchase transactions fro# the current year4s purchases ?ournal and the first / fro# the subsequent year.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction. &race each purchases transaction to their receiving reports! chec"ing for the date of actual delivery & the correct recording. SU%STANTI&E PROCE'URES TEST OF %ALANCES FOR ACCOUNTS PA#A%LE ( ACCRUE' E)PENSES Contd!" Audit objective <ut5off Audit procedure +eview voucher pac"ets for presence of purchase requisition! purchase order! receiving report & supplier invoice. Obtain the (ccounts Payable listing & account analysis schedules for accrualsK foot listing & schedules. (gree the total to the general ledger. &race selected ite#s fro# the (ccounts Payable listing to (ccounts Payable subsidiary ledgers & voucher pac"ets. Findings 2ou have already done this under &est of <ontrols ) Purchase &ransactions. Jowever! note that the focus of this test here is to ensure that the dates of the transactions are ta"en up in the proper accounting period. 2ou have already perfor#ed part of this above. $or this e6ercise! no voucher pac"ets are provided. &herefore! assu#e that ite#s on the (ccounts Payables ubsidiary 3edger can be properly traced to voucher pac"ets. (ll accounts on the (ccounts Payable 3isting should be correctly traced to (ccounts Payable ubsidiary 3edger. @n this e6a#ination! we are e6a#ining whether the a#ounts confir#ed agree with the a#ounts in the (ccounts +eceivable ubsidiary 3edger. @f the a#ounts don4t agree! then we would need to investigate the difference. $or this e6ercise! assu#e that all agree. 2ou have already perfor#ed this above. (ssu#e that there are no cash discounts. Possible non5trade payables 3e"trone6 8ngineering ) supplier of lifts (fi6ed assets). +atu <leaning ervices ) supplier of cleaning services (on contract basis). (s" client. >one noted. (s" client. >one noted.

Ownership (ccuracy

86a#ine the results of the confir#ation of (ccounts Payables.

Valuation

<lassification

Obtain selected suppliers4 state#ents & reconcile to supplier4s account balance. +eview (ccounts Payable for ite#s affected by cash discounts. +eview the (ccounts Payable listing for #aterial debits! long5ter# payables & non5trade payables.

Cisclosure

@nquire whether there are any related party payables/accruals. 8nsure that they are properly disclosed. +eview contracts or supplier state#ents for purchase co##it#ents.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Appendix A
Pharmacy 2006 2005 2 !,"#$.00 2!",#00.00 Bout ique 2006 2005 2"#,%$7.00 &"0, #!.00 Tot al 2006 !%&,""".00 2005 %",%#!.00

Purchases

Appendix B
Pharmacy 2006 2005 2 !,"#$.00 2!",#00.00 Bout ique 2006 2005 2"#,%$7.00 &"0, #!.00 Tot al 2006 2005 !%&,""".00 %",%#!.00 & #,2"0.00 &2$,$ &.00 .#& .07

Purchases Accounts Paya'le Creditors( turnover

Appendix C
Pharmacy 2006 2005 2 !,"#$.00 2!",#00.00 2, "#.00 2,!##.$& Bout ique 2006 2005 2"#,%$7.00 &"0, #!.00 ",#7$.00 &2".!" Tot al 2006 !%&,""".00 $,0 !.00 2005 %",%#!.00 2,"%2.2#

Purchases Purchases returns