Audit Procedures for Purchasing: Procedures and Risks

Nature:

Purchasing is one of the most critical functions in an organization, as it directly affects the company’s bottom line by controlling the cost of goods and services. 

An effective purchasing process helps a company to purchase goods and services at the best price, quality, and delivery time. 

An internal audit of the purchasing process helps an organization to identify potential problems, ensure compliance with policies and procedures, and improve the purchasing process.

Audit Risks:

  1. Unauthorized Purchases: Purchases made without proper authorization lead to a company’s financial position misstatement.
  2. Overpayments: Overpayment for goods and services leads to a company’s financial position misstatement.
  3. Fraudulent Purchases: Purchases made to defraud the company, leading to a misstatement of a company’s financial position.
  4. Obsolete Inventory: Purchasing obsolete inventory before it is used leading to a misstatement of a company’s financial position.
  5. Inadequate Price Verification: Inadequate verification of the prices paid for goods and services, leading to a misstatement of a company’s financial position.
  6. Unreasonable Prices: The payment of unreasonable prices for goods and services, leading to a company’s financial position misstatement.
  7. Non-Compliance with Procurement Policies: Non-compliance with procurement policies and procedures leads to a misstatement of a company’s financial position.
  8. Inadequate Quality Control: Inadequate quality control of purchased goods and services, leading to a company’s financial position being misstated.
  9. Poor Delivery Management: Poor delivery management of purchased goods and services leads to a company’s financial position being misstated.
  10. Inadequate Contract Management: Inadequate contract management of purchased goods and services leads to a company’s financial position being misstated.

Audit Assertions:

When auditing purchasing, auditors should focus on the following audit assertions:

  1. Existence: The purchases exist and are recorded accurately in the financial statements.
  2. Authorization: The purchases are authorized and made under procurement policies and procedures.
  3. Completeness: All purchases are recorded in the financial statements.
  4. Accuracy: The purchases are recorded at the correct amounts and are properly supported.
  5. Classification: The purchases are classified and recorded in the appropriate accounts.
  6. Cutoff: The purchases are recorded in the correct accounting period.
  7. Valuation: The purchases are recorded at their correct value and are appropriately valued based on the terms of the purchase agreements.
  8. Rights and Obligations: The company has the right to receive the purchased goods and services and the obligation to pay for them.
  9. Allocation: The purchases are appropriately allocated among the various accounts and recorded in the appropriate periods.
  10. Presentation and Disclosure: The purchases are presented and disclosed following applicable accounting standards and regulatory requirements.
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Audit Procedures for Purchasing:

The purchasing process is critical to a company’s financial health as it involves acquiring goods and services that are essential to the company’s operations. 

As such, auditors must perform thorough audit procedures to identify and mitigate any risks associated with the purchasing process. 

The following are ten audit procedures that auditors should perform when auditing the purchasing process:

  1. Review of Contracts and Agreements: Review all contracts and agreements related to the purchasing process to ensure that they comply with the company’s policies and procedures and regulatory requirements.
  2. Examination of Purchase Orders: Examine all purchase orders to ensure they are approved, authorized, and accurately recorded in the company’s financial records.
  3. Analysis of Invoices: Analyze invoices to ensure that they match the terms of the purchase orders, that the amounts billed are reasonable and accurate, and that they are properly recorded in the company’s financial records.
  4. Physical Inventory Observation: Observe physical inventory to ensure that it matches the quantities recorded in the company’s financial records and to ensure that it is properly accounted for.
  5. Vendor Records Examination: Examine vendor records to ensure that they are accurate, complete, up-to-date, and properly recorded in the company’s financial records.
  6. Analysis of Payment Cycles: Analyze the payment cycles for purchasing transactions to ensure that they are reasonable, consistent, and in compliance with the company’s policies and procedures.
  7. Examination of Credit Terms: Examine credit terms for purchasing transactions to ensure that they are reasonable and consistent with industry standards.
  8. Review of Freight and Delivery Charges: Review freight and delivery charges to ensure they are reasonable, accurate, and properly recorded in the company’s financial records.
  9. Examination of Cash Disbursements: Examine cash disbursements for purchasing transactions to ensure they are properly authorized, recorded, and reconciled.
  10. Assessment of Internal Controls: Assess the internal controls related to the purchasing process to ensure that they are effective, efficient, and in compliance with the company’s policies and procedures, as well as regulatory requirements.
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