Page 26 - eBook Audit Of Financial Statement Components

2.1 THE ACCOUNTING SYSTEM AND

CONTROL ACTIVITIES FOR EXPENDITURE

There are five main functions in the purchase cycle:

i. requisition of goods and services,

ii. preparing purchase orders,

iii. receiving and storing goods received for inventory,

iv. reviewing and approving the suppliers' invoices, and
v. recording the liabilities.

It is important to place controls in each function, especially the

segregation of duties and independent checks for each function.

2.1.1 TEST OF CONTROL FOR EXPENDITURE

Tests of controls are designed to obtain sufficient evidence to

The tests of determine effectively; whether controls over purchases and
controls payables function effectively. The assessment for tests of controls
should be
performed involves:
prior to the
substantive
tests. (a) Tests for design effectiveness

Auditors need Auditors use their understanding of the information system
to understand
and internal control systems specific to the client to
the functions
within the determine the presence of essential controls over
purchase cycle
purchases and payables. Auditors need to understand the
to determine
the presence functions within the purchase cycle to determine the
of the
necessary controls and potential misstatements. Once
necessary
controls and auditors identify the presence or absence of the necessary
potential
misstatement controls, they should make a preliminary assessment of the
control risks.

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