AUDITING

PURCHASES
Prof. Dr Safdar A. Butt

Scope of Trading Activities

Purchases

Purchases Returns, or Returns Outwards

Sales

Trade creditors

Trade debtors

Sales Returns, or Returns Inwards

Internal Control on Purchases:

Objectives

Right goods, at right price, in right

quantity, in good condition, at right time.
Due approvals for placing an order,
accepting the goods and paying for them.
Only due amount is paid, availing due
credit period, and due discounts.
Correct record of orders, receipt, return,
and payment of goods.
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Internal Control Measures:

Ordering Procedure

Separate Buying Department

Steps in placing an order:

Requisition
Quotation / Tenders for larger orders
Order / LPO or IO

Pre-set authority limit for requisition and

order
Maintaining a file of regular suppliers
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Internal Control Measures:

Receipt of Goods Procedure

Documentation

Goods Received Register

Goods Inwards or Received Note

Suppliers Delivery Note
Comparison with order and subsequent
invoice

Inspection

Inspection note
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Internal Control Measures:

Approval of Invoices Procedure

Receipt of invoices at a central place.

Checking the invoice: comparison with
Order issued, Goods Received Note and
Inspection Report.
Signature of the person who checks it and
the person who approves it.
Duly checked invoice with copies of all
supporting documents sent to Accounts.
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Internal Control Measures:

Others Controls on Purchases

All documents should be pre-numbered.

Frequent checks on sequential accuracy of
various documents
Division of duties to ensure that no one
person or department undertakes all or
most aspects of purchasing process.
Budgetary controls.
Stock Coding for all items.
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Internal Control Measures:

Purchases Returns

Formal documentation:

Goods Returned Note

Short Delivery Notification

Credit Note from supplier should be

compared with above notes.
Follow up on all outstanding goods
returned notes / short delivery notes to
ensure timely receipt of credit notes.
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Internal Control Questionnaires

Ordering
Receipt of Goods
Return of Goods
Approval of Invoices
Creditors

ICQ Ordering (1)

Is there a separate Buying Dept?

Is written Purchase Requisition made for each
order?
Who approves Purchase Requisitions?
What are their respective authority limits?
Are all purchase orders given in writing? On prenumbered form?
Who authorizes purchase order?
What are their authority limits?
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ICQ Ordering (2)

Are unused order books kept securely? By who?

Is copy of all orders sent to accounts department?
Is a record maintained to ensure that all outstanding
orders are noticed?
In what form?
By who?
Is there is a system of tendering, or inviting
quotations for all major purchases?

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ICQ Receipt of Goods

Are goods inspected before receipt in stores?

Is a formal inspection report issued?
Is Goods Received Note issued for each receipt?
Is Goods Inwards Book maintained on basis of GRN?
Are all GRNs referenced to order number / invoices?
Is copy of GRN sent to Accounts Dept?
Are all GRNs issued on pre-printed, pre-numbered
forms?
Are unused GRN books kept securely? By who?
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ICQ Return of Goods

Is Goods Return Sheet (GRS) prepared for all

returns?
Who prepares it, who signs it?
Is confirmation sought from supplier? In what form?
Is copy of all GRS sent to Accounts Dept?
Are GRSs referenced to GRN, suppliers invoices and
credit notes?
How is receipt of credit note ensured?
By who?
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ICQ Approval of Invoices

Are invoices compared with LPS and GRN?

By who? Is it evidenced on invoices by Signature?
Are invoices checked for arithmetical accuracy?
By whom? Is he independent of buying and paying
function?
Who authorizes payment of invoice?
In what form is authority given?
Are there any limits of authority for approval?
When a cheque is prepared, what mark is made on
invoice and related notes to show it has been paid?
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Auditing Purchases & Returns

Test check and trace a number of:

Requisition notes right upto payment, ensuring that

all related documents are there and match each
other.
Payments to creditors right back to requisition notes.

in the process also verifying arithmetical

accuracy and due authorization at each stage.
Check in depth all major purchases.
Verify numerical sequence of all documents, and
investigate missing numbers.
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Auditing Purchases & Returns 2

Investigate where:

Goods have been received but invoice is still

awaited
Goods have been ordered but not yet
received
Invoices have been received but not yet paid.
Goods have been returned, or short received,
but credit note is still awaited.

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Auditing Purchases & Returns 3

In respect of selected invoices:

Re-compute gross and net amounts.

Trace them to purchases book, appropriate
nominal account in general ledger, and
suppliers account in purchase ledger.
Verify if due credit has been received for
returned / short delivered goods.
Check if approval for order and payment are
within prescribed limits.
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Audit of Creditors

Get a schedule of creditors and

Check its arithmetical accuracy

Verify individual balances from ledger

Audit in depth selected creditors

accounts.
Direct confirmation should be sought
where suppliers statements are not
available.
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Thank you
Dr Safdar A Butt

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