Question

Your client is a local independent grocer with five stores which competes with a number of large grocery chains. It purchases goods from several large grocery supply chains as well as from various vendors that sell directly to the store. Some vendors offer various advertising rebates or other price concessions for stocking goods.

Explain how your knowledge of the business and industry would impact your audit of total purchases and accounts payable for the client.

Answer 1

Knowledge of the business and industry is of absolute significance for conducting the audit for the total amount of purchases and accounts payable.

Knowledge of industry helps an auditor to identify the materkality beyond which deviations would not be ignored AMPT i.e. audit misstatements percentage threshold and the significant and inherent risk of the business which might lead to misappropriation

Audit of purchases and accounts payable can be conducted by performing three way match. Three way match includes reconciling the amount of purchases recorded in books of accounts with the purchase invoices and the bank statements which comprises of payments made to suppliers or accounts payable for the goods supplied.

By performing three way match chances of misconduct reduces to a significant level.

Further, payments made to accounts payable can be verified through bank confirmations. Bank confirmations are provided by independent party on which an auditor can easily rely.