Purchases

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Purchases Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company incurs significant costs in purchasing raw materials, components, and services necessary for its manufacturing processes. Given the volume and variety of transactions, and the potential for misstatement or fraud, auditing purchases is crucial for ensuring the integrity of cost of goods sold and expenses reported in the financial statements.

Audit Objective

To obtain reasonable assurance that purchase transactions recorded in ABC Manufacturing Company’s financial statements are complete, accurate, have occurred, are recorded in the correct accounting period, are properly classified, and reflect the rights to and obligations for the goods or services purchased.

Types of Audit Evidence and Documentation for Purchases Assertions

1. Occurrence

• Case: Verify that recorded purchase transactions represent actual acquisitions of goods or services.

• Documentation: Document procedures such as matching selected purchase invoices to receiving reports, purchase orders, and vendor confirmations to verify the occurrence of transactions.

2. Completeness

• Case: Ensure all purchases made during the period are recorded in the financial statements.

• Documentation: Outline tests such as reconciliation of vendor statements to the purchases ledger and searching for unrecorded liabilities to assess the completeness of recorded purchases.

3. Accuracy

• Case: Confirm that purchase transactions are recorded at the correct amounts and terms agreed with suppliers.

• Documentation: Summarize the examination of invoice details, contractual terms, and calculations of discounts or other terms to verify the accuracy of purchase amounts recorded.

4. Cutoff

• Case: Assess whether purchases are recorded in the correct accounting period, especially near the reporting date.

• Documentation: Document the review of purchase transactions around the period-end, examining shipping documents, invoices, and receipt dates to ensure proper cutoff.

5. Classification

• Case: Evaluate whether purchases are correctly classified in the financial statements according to their nature and purpose.

• Documentation: Describe the analysis of a sample of purchase transactions to verify correct classification in expense categories or asset acquisitions as applicable.

6. Rights and Obligations

• Case: Verify the company’s rights to the goods and services acquired and obligations for payment.

• Documentation: Note the review of legal documents, contracts, or agreements supporting the company’s rights to acquired assets and the terms of payment to confirm obligations.

7. Assessment of Internal Controls over Purchases

• Case: Evaluate the design and operating effectiveness of internal controls over the purchasing process, including authorization, receipt of goods, and payment.

• Documentation: Document the assessment of internal controls, identifying key controls tested, any deficiencies found, and their implications for the audit approach.

8. Inquiries and Observations

• Case: Perform inquiries with procurement and accounts payable staff and observe the receiving processes to gain insights into the purchasing operations and control environment.

• Documentation: Summarize insights gained from inquiries and observations, including any areas requiring further investigation or adjustments to the audit approach.

9. Communication with Management and Those Charged with Governance

• Case: Discuss significant findings from the audit of purchases with management and those charged with governance, especially any issues impacting the financial statements.

• Documentation: Prepare a summary of communications regarding significant audit findings related to purchases, including management’s responses and any corrective actions taken.

Conclusion

Auditing purchases across all relevant assertions is essential for ensuring that ABC Manufacturing Company’s financial statements accurately reflect the cost of goods and services acquired. By meticulously documenting audit procedures and findings related to each assertion, auditors provide a basis for their opinion on the financial statements. This comprehensive approach helps stakeholders rely on the reported financial information for making informed decisions.