Audit Procedures For Purchasing
Purchasing is a critical activity for businesses, as it enables the acquisition of goods and services in a timely and cost-efficient manner.
It involves the organized acquisition of goods and services on behalf of the buying entity.
To ensure that needed items are obtained in a timely manner and at a reasonable cost, a purchasing department is necessary, especially in manufacturing businesses where large amounts of raw materials and components are required on a recurring basis.
All purchases are subject to audit procedures to ensure that the organization is getting the best value for its money and that the process is being conducted in a legal and ethical manner.
Audit risk
The risks associated with inadequate purchasing controls can be costly for the organization and should be closely monitored. Audit procedures have been developed to assess the effectiveness of purchasing controls and to identify areas of risk. These procedures are designed to ensure that the purchasing process is compliant with organizational policies and procedures, and that there is effective price verification, sound decision-making, and accurate record-keeping.
Auditors will review purchasing documents such as purchase orders, contracts, invoices, and vendor statements to ensure that they are accurate and complete. They will also assess the internal control environment to identify any weaknesses that could lead to unauthorized purchases, fraud, or overpayments. The auditor will also review the organization’s policies and procedures to ensure that they are being followed.
Auditors must also consider the risks associated with obsolete inventory, unreasonable prices, and non-compliance with procurement policies. These risks can have a significant impact on an organization’s financial health and must be identified and mitigated to ensure that the organization is protected. Audit procedures must be implemented consistently to ensure that appropriate purchasing controls are in place and that the organization is taking the necessary steps to mitigate these risks.
Internal Control
To ensure effective management of the purchasing process, internal control systems must be implemented and regularly monitored.
Internal controls are the policies and procedures that a business or organization puts in place to help manage its operations and financial activities. These controls are designed to help reduce the risk of mismanagement, fraud, or error.
This includes establishing procedures for approving and tracking purchases, segregating duties, and ensuring compliance with laws and regulations.
An effective internal control system should include the following components: written policies and procedures, regular monitoring, qualified personnel, and clearly defined responsibilities.
The policies and procedures should be designed to ensure that all purchases are properly authorized, documented, and tracked. Management should ensure that the system is regularly monitored to ensure that it is operating efficiently and that any problems are quickly identified and addressed.
Qualified personnel should be responsible for overseeing the internal control system. Finally, there should be clearly defined responsibilities for each department and individual related to the purchasing process.
Internal control systems are essential for effective management of the purchasing process. When implemented and maintained properly, they can help reduce the risk of mismanagement, fraud, and error. They can also help ensure that purchases are properly authorized, documented, and tracked.
Audit Assertiion
An audit assertion is an assertion made by an auditor to evaluate the accuracy of the financial statements and to ensure that the purchasing process is being managed effectively. There are several assertions that are typically used in auditing purchasing transactions, including the following:
| Assertion | Description | Example |
|---|---|---|
| Existence | A purchase exists and is accurately recorded | A purchase of raw material is accurately recorded. |
| Authorization | A purchase is authorized and made under procurement policies and procedures | A purchase is made with the authorization of the board of directors. |
| Accuracy | Purchases are recorded at the correct amounts and properly supported | A purchase is recorded for the correct amount with all supporting documents. |
| Classification | Purchases are classified and recorded in the appropriate accounts | A purchase is recorded in the correct asset account. |
| Timing | Purchases are recorded in the correct accounting period | A purchase is recorded in the period in which it was made. |
| Valuation | Purchases are recorded at their correct value and appropriately valued based on purchase agreements | A purchase is recorded at its fair market value as specified in the purchase agreement. |
Audit assertions are important for ensuring that purchases are properly recorded in the financial statements and that the purchasing process is managed effectively. Auditors use these assertions to evaluate the accuracy and reliability of financial statements related to purchasing transactions.
Audit Procedure
Investigating the accuracy of financial statements related to purchasing transactions requires a detailed audit procedure.
The first step in this process is to review contracts and agreements related to the purchasing process. This helps to ensure that the company is in compliance with all applicable policies, procedures, and regulatory requirements.
The next step is to examine purchase orders for approval, authorization, and accuracy. This helps to ensure that the necessary approvals have been obtained and that the purchase order information is correct.
Finally, invoices should be examined to ensure that they match the terms of the purchase order and are accurately recorded. It is also important to observe physical inventory to ensure that it matches with the financial records and that proper accounting is being done.
Vendor records should also be examined for accuracy, completeness, and up-to-date information. Lastly, payment cycles for purchasing transactions should be analyzed for reasonability and to ensure compliance with applicable industry standards.
All of these steps should be followed to ensure the accuracy of financial statements and the compliance of the company’s purchasing process.
Conclusion
The purchasing process is an essential part of an organization’s operations and should be subject to strict audit procedures.
Auditing purchasing processes helps to ensure that the organization is getting the best value for their money and that there is a sufficient level of internal control.
Auditing the purchasing process involves assessing the assertion that the purchasing activities are being carried out in accordance with prescribed policies.
In order to ensure the effectiveness of audit procedures, organizations should review their internal controls and review their purchasing processes on a regular basis.
This will help to ensure that the purchasing process is being carried out in an efficient and cost-effective manner and that any risks associated with the process are minimized.