11-6 What control activities typically ensure that the occurrence,

authorization and completeness assertions are met for a purchase

transaction? What tests of control are performed for each of these
assertions?
Assertions

Control Activities

Tests of Controls

Occurrence

Segregation of duties

Observe and
evaluate proper
segregation of
duties.

Purchase not
recorded without
approved purchase
order and receiving
report

Accounting for
numerical sequences
of receiving reports
and vouchers

Cancellation
documents

Authorization

Test of a sample of
vouchers for the
presence of an
authorized purchase
order and receiving
report; if IT
application, examine
application controls.

Review and test

clients procedures
for accounting for
numerical sequence
of receiving reports
and vouchers; if IT
application, examine
of application controls.

Approval of
acquisitions
consistent with the
clients authorization

Examine paid
vouchers and
supporting
documents for
indication of
cancellation.

Review clients
monetary limits
authorization for

monetary limits

acquisitions.

Approved purchase
requisitions and
purchase orders

Examine purchase
requisitions or
purchase orders for
proper approval; if IT
is used for automatic
ordering,
examination of
application controls.

Competitive bidding
procedures followed

Review clients
competitive bidding
procedures.
Completeness

Accounting for
numerical sequences
of receiving reports
and vouchers

Receiving
report
matched to vendor
invoices and entered
in purchases journal

Review and test

clients procedures
for accounting for
numerical sequence
of receiving reports
and vouchers; if IT
application, examine
application controls.
Trace a sample of
receiving reports to
their respective
vendor invoices and
vouchers.
Trace a sample of
vouchers to the
purchases journal.

11-12 What are some of the typical procedures that might be

applied to the audit of the income tax expense and related accounts
by an auditor and/or tax expert?

11-15
Kida Companys major internal control weaknesses are:
Purchasing:

The buyer does not verify that the department heads request
is within budget limitations.
No procedures have been established to ensure that the best
price is obtained.
Large- euro requisitions should be ordered after receiving
quotes and/or sealed bids.
Prior to placing an order, the buyer does not determine the
adequacy of the vendors past record as a supplier to Kida.

Receiving:
Receiving clerk does not make blind counts for all special
equipment or at least for large- euro items.
Written notice of equipment received is not sent to the
purchasing department.
Written notice of equipment received is not sent to accounts
payable department.
Accounts Payable:
The mathematical accuracy of the invoice is not recomputed.
Invoice quantity is not compared with a report of quantity
received.
Notification of the acceptability of the equipment from the
requisitioning department is not obtained before the payable
is recorded.
No alphabetic file of vendors from which purchases are made
is maintained.
Treasurer:
Documentation supporting the cheques is not sent by the
accounts payable Department to the cashier in order for the
cashier or treasurer to be assured that the cheque is for
properly authorized and received equipment.
All documentation to support a cheque is not canceled by the
cheque signer and returned to the accounts payable
department.
The cashier alone has custody of the key, the signature plate,
and record of usage.
The controller is authorized to sign cheques.
11-17
The substantive audit procedures Coltrane should apply to
Jangs trade accounts payable balances include the
following:
Foot the schedule of the trade accounts payable.

Agree the total of the schedule to the general ledger trial

balance
Compare a sample of individual account balances from the
schedule with the accounts payable subsidiary ledger.
Compare a sample of individual account balances from the
accounts payable subsidiary ledger with the schedule.
Investigate and discuss with management any old or disputed
payables.
Investigate debit balances and, if significant, consider
requesting positive confirmations and propose reclassification
of the amounts.
Review the minutes of the board of directors meetings and
any written agreements and inquire of key employees as to
whether any assets are pledged to collateralize payables.
Perform cutoff tests.
Perform analytical procedures.
Confirm or verify recorded accounts payable balances by:
Reviewing the voucher register or subsidiary accounts payable
ledger and consider confirming payables for a sample of
vendors.
Requesting a sample of vendors to provide statements of
account balances as of the date selected.
Investigating and reconciling differences discovered during the
confirmation procedures.
Testing a sample of unconfirmed balances by examining the
related vouchers, invoices, purchase orders, and receiving
reports.
Perform a search for unrecorded liabilities by:
Examining files of receiving reports unmatched with vendors
invoices and searching for items received before the balance
sheet date but not yet billed or on the schedule.
Inspecting files of unprocessed invoices, purchase orders, and
vendors statements.
Reviewing support for the cash disbursements journal, the
voucher register, or canceled cheques for disbursements after
the balance sheet date to identify transactions that should
have been recorded at the balance sheet date but were not.
Inquiring of key employees about additional sources of
unprocessed invoices or other trade payables.

a) Inherent risk trade payables

In my audit of trade payables I would regard completeness as

presenting the greatest level of inherent risk for the following
reasons:

Management has an incentive to understate purchases and

thus payables in order to improve profits. This applies not only
to senior management but to line managers who are close to
budgetary limits on certain expenditures and are under
pressure to withhold recording of suppliers invoices until after
the year-end.
Senior management may be under pressure to understate
payables in order to improve the companys apparent liquidity.
This would be the case if the company were seeking to raise
additional finance or to renaew existing borrowing
agreements. The more liquid the statement of financial
position shows the company to be the more favourable the
terms are likely to be.
Principal control procedures placed in operation by the
company relate to the occurrence assertion in order to
prevent improper purchasing by employees or overpayments
to suppliers.
The primary source of information initiating recognition of a
liability is the suppliers invoice. During the year the company
has no incentive to accelerate the receipt of suppliers
invoices. This means that, as at the end of the reporting
period, there could be outstanding claims not yet invoiced by
suppliers which the entity has no formalised procedures for
identifying promptly.
Valuation is rarely a problem except in complex contractual
situations where the amount due is contingent upon some
future event such as a volume discount dependent on total
purchases at some future date exceeding some agreed
amount.

b) Accounts payable circularisation

In my audit of Oatley I would not normally undertake a payables
circularization for the following reasons.

For payables, much of the documentary evidence available is

in the form of third party sourced suppliers invoices and
statements, in contrast to accounts receivable for which most
of the available documentation is entity prepared.
Examination of documentary evidence is usually a cheaper
form of substantive evidence than external confirmation.

Although examination of third party sourced documentary

evidence is less reliable than external confirmations received
directly by the auditor, it usually provides sufficient evidence

I would, however, consider an accounts payable circularisation in

the following situation:

A substantial proportion of the companys suppliers does not

issue monthly statements.
Statements from suppliers with whom the company does
substantial business are unexpectedly unavailable for the last
month of the year.
Only fax or photocopies of statements are available whose
authenticity is doubtful.
I have reasons to suspect that the company, or a member of
the companys staff, may be deliberately understating
liabilities and there is a possibility that some of the suppliers
statements may be forgeries given the ease of replicating
documents with modern scanning and desk top publishing
technology. Assessment of control risk as slightly less than
high, the limited segregation of duties, and the failure to
routinely reconcile all statements with the accounts payable
ledger mean that this is not necessarily a remote possibility.
c) Substantive procedures applicable to production
payables
Initial procedures
Obtain a list of such accounts payable and test its accuracy by
testing it to and from the computer records and adding it and
agreeing it to the control account. (If production payables are not
segregated from other payables this procedure will apply to all
payables.)

Analytical procedures

Perform analytical procedures on accounts payable and compare the

results with expectations:
Compare current years balance with previous years
Compare the average age of payables with previous years
Compare gross profit with previous year and industry
average.
Tests of details of transactions
Ascertain cut-off data for goods received notes (GRNs)
(probably obtained during attendance at the physical
inventory count).
Check cut-off by obtaining GRNs for two weeks prior to the
year end and:

Checking their numerical continuity

Tracing GRNs to the purchases recorded before 31
October or the accrual journal entry.
For a smaller sample I would verify the existence of
recorded purchases prior to the year end by vouching a
sample of purchases and purchase accruals to GRNs in the
sequence issued prior to the year end.
For a sample of the closing accruals I would verify the
amount of the accrual by vouching the amount to a
subsequently received suppliers invoice

Tests of details of balances

Select a sample of accounts payable using criteria such as:
All suppliers from whom the entity bought more than 1%
of its purchases during the year;
A random sample of all other suppliers including nil and
credit balances;
For each supplier in the sample I would compare the
balance with the suppliers statement and investigate
differences.
If any suppliers statements were unavailable I would
consider confirming the balance directly with the supplier

(d) Verifying the completeness of non production payables

Detection risk over the completeness assertion must be set as low
because of the assessment of control risk as only just less than high
and from problems identified in obtaining the understanding of the
accounting system in that:

There are no goods received notes to determine the date of

receipt of the goods
Invoices are not recorded until after approval by the
department manager which could cause considerable delay
and even a failure to record liability for invoices mislaid or
even lost before being recorded
Suppliers statements are not reconciled which would
otherwise detect most delayed or missing invoices