Question

Auditing and Assurance: Answer the following question.

1. Explain Test of Control (TOC) in payment and purchase cycle.
2. Explain Test of Substantive (TOS) in payment and purchase cycle.

Answer 1

1.

Test of control(ToC):

A test of controls is an audit procedure to test the effectiveness of control placed by a client organization for the purpose of prevention or detection of material misstatements. Based on the results of such a test, auditors may choose whether to rely upon a client's system of controls as part of their audit engagement or not.

Test of Control (TOC) in the payment and purchase cycle:

An organization, in general, requires a very high degree of control over purchases because of the large volume of transactions the function of the organization involves. The following list is bifurcated based on the control type.

(A) Orders:

• Requisition notes for purchases to be made should be authorized.
• All orders should be authorized by the official responsible whose authority having pre-defined limits.
• Major items e.g. capital expenditure should be authorized by those having specific high-level controls in general by the directors.
• All orders should be passed over official documents specifying the name of the supplier, order quantity, and order price.
• Copies of such purchase orders should be maintained by the organization.

(B) Receipt of goods:

• Goods inwards places should be pointed to keep up with the receipt of all goods.
• Goods received should be verified for quantity, quality, and description. Goods received notes(GRN) should be made for all of the goods accepted in. The GRN should be marked by the official responsible.
• GRNs should be checked against POs and procedures should be in place to inform the supplier of under or over-delivery of goods. GRNs should be numbered sequentially and checked periodically.

(C) Invoicing and purchase returns:

• Purchase invoices received should be marked and given a unique serial number or barcode to make ensure that the purchase invoices will not get astray.

• invoices received against the Purchases should be matched with the goods received notes(GRN) and purchase orders and should not be processed further until this is complete.

• The invoice should be verified against the PO and the GRN.

• The invoices should be signed and approved for payment by an authorized official who is independent of the ordering and receipt of goods activities.

(D) Purchase ledger and suppliers:

• The payables ledger control account should be maintained and regularly verified against the balances in the purchase ledger by an official of the organization, who is independent.
• Payables ledger records should be kept by the management personnel who are independent of the functions like receiving of goods, authorizing invoices, and payment ques.
• The statements from the suppliers should be verified with the payable ledger account as maintained by the organization concerned.

2.

Test of substantive(SoT):

Test of substantive(SoT) Substantive testing is an audit procedure that goes through the financial and supporting documentation maintained by the organization to check if they contain any errors. These tests are required as evidence to support the assertion that the financial of an entity is complete, valid, and accurate.

Substantive procedures required in case of purchase transaction:

Substantive procedures required in case of payment transactions: