Function and control activities: Purchase returns and allowances

To reduce the risk of mistatement: All purchase return should be authorized by vendor Goods should be return only with a proper purchase return authorization, and an independent count of goods returned should be recorded on shipping document such as packing slips and bills of lading

 The computer should match debit memo information with the authorization for purchase return and the shipping documents The computer generates a report of all authorized purchase returns that have not been shipped or have no resulted in debit memo

*there should be adequate segregation of duties

between obtaining authorization for purchase returns, shipping goods, and recording debit memos

Other control in expenditure cycle

The primary account balance in the expenditure cycle is A/P. If good control exist over purchases, cash disbursement, and purchase adjustments, A/P should also be controlled. Many auditors plan to test controls in the purchases cycle because of the high volume of routine transaction in this cycle.

If the auditors plan to assess control risk as low for expenditure cycle assertions, they usually have to: 1. Test effectiveness of general controls 2. Use computer assisted audit technique (CAATs) to evaluate the effectiveness of programmed controls 3. The test of procedures to follow up on exceptionsidentified by programmed controls.

Substantive test of accounts payable balances

Existence and Occurrence Inherent risk is assessed at high level because of the potential for employee fraud and missappropriation of assets. Completeness Inherent risk for the completeness assertion is set at maximum because of the risk of unrecorded liabilities. Analytical procedures risk set at high. Test of detail risk set at low. (IC: daily follow up on items received that had not resulted in vouchers)

Rights and obligation often controlled at the transaction level by ensuring that only the obligations of the entity are recorded in the books of original entry as payable. Analytical procedures are a fairly blunt tool for auditing this objective. Valuation or Allocation inherent risk set at high because the high volume of transactions that flow through A/P. controls over valuation or allocation assertion involve the control over valuation of: purchase, cash disbursement and purchase adjustment.

Presentation and Disclosure the greatest risk is the risk of missclassification of expenses as capital assets. Inherent risk set at minimum.

Designing substantive test

1. Initial procedures
understand the significance of the purchase cycle to the entity eprovides a context for important risk assessment.