Procurement Audit and Purchase Cycle

Study Notes

Procurement Audit

Procurement is the process of purchasing for a business
Procurement audits focus on the purchasing department's systems
Internal auditors check if the system meets key objectives and company guidelines
Auditing reviews internal business processes and functions
Internal audits provide information to business owners to ensure employees follow guidelines
Procurement is responsible for major purchases or acquisitions
Procurement faces scrutiny due to spending company capital
Three classes of transactions: Acquisitions of goods and services, Cash disbursements, Purchase returns and allowances and purchase discounts
The acquisition and payment cycle involves decisions and processes needed to obtain goods and services for business operations
The cycle starts with a purchase requisition and ends with payment on accounts payable

Purchase Cycle

The purchase cycle begins with an authorized employee's purchase requisition
It ends with payment on accounts payable

Classes of Transactions

Acquisitions: Includes inventory, property, plant, and equipment, prepaid expenses, leasehold improvements, manufacturing expenses, selling expenses, and administrative expenses.
Cash Disbursements: Involves cash in bank (from cash disbursements), accounts payable, and purchase discounts.

Documents and Records

Transactions are supported by documents like Purchase requisitions, Purchase orders, Receiving reports, Vendor's invoices, Debit memos, Vouchers, Acquisitions transaction file, Acquisitions journal or listings, Accounts payable master file, Accounts payable trial balance, Vendor's statement, Check or electronic payment, Cash disbursement transaction file, and Cash disbursement journal or listing.

Complete Purchase Cycle

The cycle starts with a supplier extending credit
The purchasing department raises an order
Goods are received
A goods received note (GRN) is raised
Goods are carried to production

Control Objectives, Controls and Tests of Controls

Occurrence and Existence: Recorded purchases represent goods and services received. Controls include authorization procedures and policies, segregation of duties, and purchase orders raised for each purchase, authorized by appropriate senior personnel. Tests of controls include inspecting policies and procedures, evaluating segregation, reviewing purchase orders ensuring proper authorization, and reviewing the delegated list for purchases.
Completeness: All purchase transactions that occurred are recorded. Controls involve matching purchase orders and GRNs with vendor invoices and periodic accounting for pre-numbered GRNs and purchase orders. Tests of controls include examining supporting documentation, reviewing procedures for accounting for pre-numbered documents, and checking purchase journal amounts.
Rights and Obligations: Recorded purchases represent the liabilities of the entity. Controls involve matching purchase orders and GRNs with vendor invoices. Tests of controls include examining supporting documentation.
Accuracy, Classification, and Valuation: Purchase transactions are correctly recorded in the accounting system. Controls include matching purchase orders, GRNs and vendor invoices, verifying mathematical accuracy of supplier invoices, posting amounts to the general ledger and reconciling to purchases ledger. Tests of control include examine documents, recalculating accuracy of supplier invoices, and checking reconciliations.
Cut-off: Purchase transactions are recorded in the correct accounting period. Controls involve having all goods received reports forwarded to accounts payable daily and procedures in place for recording purchases as soon as possible after goods/services are received. Tests of controls include comparing dates on reports to dates on relevant vouchers and comparing voucher dates to purchase journal dates.

Audit Tests

Audit procedures for cash in bank, payments, accounts payable, and acquisition expenses are detailed. Including substantive tests of transactions (STOT), tests of controls (TOC), analytical procedures (AP), and tests of details of balances (TDB)