Page 25 - eBook Audit Of Financial Statement Components

For each process in the purchase cycle, controls should be in place

by the companies to mitigate any frauds or misstatements in the

financial statements. Auditors should assess whether such

controls are working effectively to mitigate misstatements in a

specific financial statements assertion. The controls assessments

are performed in the tests of controls after considering results
There are five
from risk assessments.
main functions

in the purchase
Figure 2.1 Purchase and Payables Functions
cycle:
Receiving and Recording the
Purchase Preparing Approving the purchases
requisitions- purchase storing goods- supplier's and liability-
goods
i. requisition of purchase order- received note invoice- Purchases
requisition purchase supplier's journal,
form order form - inventory invoice account
record
goods and payables

services,
The auditor should design an appropriate audit approach based
ii. preparing
on the assessment of the identified risks at both the financial
purchase
statement level and the assertion level. The assessed risks differ
orders,
between the material classes of transactions, account balances

iii. receiving and and disclosures, hence the most appropriate and effective audit

storing goods approach will vary.

received for
inventory, For example, tests of controls are more appropriate to test for the

completeness of purchases, while substantive tests are applicable
iv. reviewing
for other assertions. Furthermore, tests of controls focus on the
and approving
operation of controls over purchase transactions and the
the suppliers'
recording process in a purchase cycle; rather than on the accuracy
invoices, and
of purchase and payable amounts.

v. recording the

liabilities.

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