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Auditing Purchases, Trade Payables and Payroll

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Audit ObjectivesThe audit objectives for purchases, payables and payroll relate to obtaining sufficient evidence

about each significant assertion for the applicable transactions and balances.

The principal audit objectives for these transaction classes and account balances are shown in Table 1.

An overview flow chart of the processing of purchase and payment transactions is shown in Table 2.

To achieve each audit objective, auditors employ a combination of tests of control and substantive procedures (as determined in the audit strategy adopted), following the audit planning and testing methods described earlier. The procedures are much the same as those illustrated for sales and trade receivables.

Purchase, Payment and Payroll Transactions

Purchase Transactions Functions:• Requisitioning goods and services (these originate from stores-the warehouse- for inventory

or from any department; they should be dully authorized and are usually numbered, possibly by department)

• Preparing purchase orders (purchasing department should issue purchase order only after due check for authorization; it should ascertain the best source of supply and, for major items, should obtain competitive bids; purchase orders should contain precise description of the goods and services, quantities, prices, delivery instruction and supplier’s details).

Auditing Purchases, Trade Payables and PayrollTable 1: Audit Objectives

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Auditing Purchases, Trade Payables and Payroll Table 2: Purchase and Payment Transactions Process

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Auditing Purchases, Trade Payables and Payroll

Purchase Transactions Functions (cont’d)• Receiving the goods (receiving department is authorized to receive goods only on a valid

purchase order; careful counting and comparison of the goods received to the order specs should be made; receiving and ordering functions should be segregated)

• Storing goods received for inventory (the receiving clerks should sign the delivery note, give one copy to the purchasing department and file another; safe-keeping of inventory and maintenance of records will be considered in the next session)

• Checking and approving the suppliers invoice (this is usually sent directly to the accounts department; prior to being recorded invoices should be checked and approved; applicable procedures include:– Serially numbering suppliers invoices on receipts, so that subsequent tests can confirm that all invoices

have been posted– Reconcile invoices with (a) purchase orders and (b) delivery notes– Determine mathematical accuracy of supplier’s invoices– Approving payment by having them signed by an authorized person– Preparing a daily prelist of suppliers’ invoices approved for payment

• Recording the liability (approved invoices are posted into the purchase journal and credited to the supplier’s account; monthly statements received from suppliers should be reconciled with recorded supplier balances; periodic performance reviews by management, in the form of comparisons of asset, liability and expense balances with budgeted amounts, can provide a means of both controlling expenditures and detecting misstatements in recorded purchase transactions)

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Auditing Purchases, Trade Payables and Payroll

Payment Transactions Functions• Paying the liability (payment terms vary according to country and industry-UK is usually

30days, Greece over 90 days!; due payables balances are normally paid once a month; prompt payment may qualify for cash discount; payments are usually made by cheques; controls over cheque preparation and signing include:– Signing should be by authorized personnel not otherwise responsible for initiating or processing the

purchase transaction– Signer should ensure that each cheque is accompanied by properly approved supplier’s invoice and

that name and amount of payee agree with the invoice– No cheques should be made payable to “cash” or “bearer” and no blank cheques should be issued– Prenumbered cheques should be used)– Access to blank cheques and to signatures plates should be limited to authorized personnel

• Recording the payment (journalization of payments should be made by different persons than those involved in the purchase transactions; controls include:– an independent check by an accounting supervisor of the agreement of the amount journalized and

posted to the purchase ledger with the cheque summary received from the treasurer– Independently prepared ban reconciliations)

Payment Transactions Functions• Hiring employees (usually hiring is made by the HR department; this should be segregated

from payroll)• Authorizing payroll changes (can be initiated by the employee’s supervisor, but must be

authorized by the HR department, which should also issue termination notices)

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Auditing Purchases, Trade Payables and Payroll

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Payment Transactions Functions (cont’d)• Preparing attendance and timekeeping data (usually the responsibility of a timekeeping

department; time clocks are frequently used; these should be placed in view of a supervisory or security personnel; time worked should be approved by supervisor)

• Preparing the payroll (usually done by computer programmes, the draw data from valid payroll transactions, personnel data and earnings files)

• Recording the payroll (gross pay, deductions and net pay update the employee earnings file and accumulates total to payroll journal for further entry to the master ledger; controls include– A copy of the payroll registers should be returned to the payroll department for comparison with the

original data– A second copy of the payroll register and Prenumbered payroll cheques should be sent to the

treasurer’s office

• Paying the payroll and protecting unclaimed wages (Applicable controls include:– Treasurer’s office personnel should check the agreement of the names and amounts on the cheques

with the payroll register entries– Payroll cheques should be signed and distributed to the employees by the treasurer office personnel no

involved in preparing the payroll– Unclaimed payroll cheques should be safely stored in the safe;Increasingly entities are paying payroll by direct debit, thus eliminating risks of cheques misuse

Auditing Purchases, Trade Payables and PayrollTable 3: Control Risk Assessment Considerations-Purchase Transactions

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Auditing Purchases, Trade Payables and PayrollTable 4: Control Risk Assessment Considerations-Payment Transactions

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