Question

1. Transactions processed through a typical purchasing process involve the recognition of an expense and its corresponding liability and then the eventual payment of that liability. There are multiple documents and records that are part of this process.

1. Name the documents involved in the purchasing process.
2. For each of the assertions listed below, describe how an auditor could use one of the documents in the purchasing process to test the assertion.

1. Occurrence
2. Completeness
3. Authorization
4. Accuracy
5. Cutoff
6. Classification

Answer 1

Importatnt Documents Involved in the purchase process in the order of occurrence are

Purchase Requisition

Quotation

Purchase Order

Delivery challan/Delivery note of the seller

Goods Received Note(GRN)

Tax Invoice

Quotation of price given by the seller to buyer gives the price range for goods based on the quantity to be purchased.It is an estimate to make a decision to buy or not

Purchase Order is a formal placement of order .It Shows the list of goods along with quantity that has been ordered and PO date and PO Authorisation is an important document to serve as an audit evidence

Delivery challan /Delivery note of the seller is a proof that goods that are ordered have been released for transportation and usually made for  freight carrier to handover the said quantity to buyer

Goods Received Note is a register maintained to record the actual quantity of goods that enter the factory/godown and can be used to compare the variations in quantity if any with PO or Delivery note and helps in identifying the Normal Loss in Transit

Tax Invoice is official authenticated bill for the sale of goods by the seller.It is the main document evidencing purchase and for recording a transaction in books.Excluding the payment part the actual process of purchase of goods ends with receiving and recording the Tax Invoice

B.

Occurrence

Invoice is the basis for recording a purchase transaction.If auditor is not satisfied with the originality of invoice ,occurrence can be counter checked with GRN and Stock register which coneys the actual physical movement of goods into the factory/godown of the entity and when compared with PO /purchase requisition, auditor can confirm the Occurrence.Delivery note given by seller is external evidence which is reliable than internally generated GRN

Completeness

The Process of purchase except to the payement part ends with receiving and recording a taxable invoice.So Invoice received for PO made is a proof of completeness of purchase except to the payment part if purchases are made on account instead of cash.

Starting from Purchase requisition and receiving a quotation and placing a PO and receiving goods along with invoice the Whole process flow should be checked by the Auditor to assure the completeness of a purchase transaction

Authorization

Every PO(purchase Order) should be authorised by purchase department and by the person who has the authorisation to decide the purchase .Authorisation signature,Date of PO is a vital audit evidence to conclude that purchases are valid and authorised

Accuracy

Invoice is the Official document that contains the accurate details of quantity ordered ,Rate per unit and total purchase amount and also contains the tax amount on purchase along with Name and Details of the supplier.

Auditor should counter check the same with GRN and PO to identify the normal loss of transit if any and accuracy is validated if there are no differences between quantity and amount mentioned in PO,GRN and Invoice

Maker,Checker concept of involving different people in the same process is needed to counter check and have control over the money outflow

Cutoff

Cutoff is a test to check if the date of transaction is recorded properly and can be verified with Delivery note given by the seller .Through this auditor can decide the year of purchase.There should be a logical flow of dates (Occurrence) from PO to Invoice to arrive at cut off. Auditor should assure that transaction is recorded based on official Invoice containing the same date and amount as mentioned in invoice.

Classification

PO made but goods not received cannot be accounted as purchases.

Purchases to be classified as credit or cash will be mentioned in Invoice and if it is purchased on credit,credit terms will also be mentioned

Auditor should check the same to classify it is a cash purchase or a credit purchase