AUDIT
Step 1 Requisition is received.
1. Risk: Requisition is received for goods that are not required for business purposes.
Control objective: Requisition should only be received for goods that are necessary for business
purposes.
Internal control: Only those requisitions are processed that are approved by an authorized
person.
2. Risk: Requisition is raised for goods that are already available in the inventory.
Control Objective: Requisitions should be processed only for goods not available in inventory.
Internal control: Requisitions should be processed after checking the inventory.
TOC:
1. Inspection: The requisitions must be inspected to find if the goods are actually required
for business purposes and goods are not available in inventory.
2. Enquiry: Enquiring the purchase department if correct requisitions are received and
orders are placed against correct requisitions.
3. Observation: observing the inventory to find out if no orders are placed for goods
already in inventory.
Step 2 Order is placed.
1. Risk: Order is placed to an expensive supplier who provides poor quality goods.
Control Objective: Order should be placed to a reliable supplier.
Internal control: Orders should be placed to suppliers that are in the approved supplier list.
2. Risk: Order may not be placed.
Control objective: order should be placed against every requisition.
Internal controls:
1. Attach copies of Purchase Order (PO) with each requisition. The requisitions against
which no PO copies are attached, are those for which order has not be placed.
2. Requisitions should be sequentially numbered. A sequence check can be performed to
identify missing requisitions.
TOC
1. Inspection: Inspecting the approved supplier list to find if the order is placed to correct
supplier. Inspection of the POs attached to requisitions and their numbering.
2. Enquiry: Enquiring the purchase department if they have placed orders to correct
suppliers and no requisition is skipped.
3. Re-performance: Performing the sequential check of requisitions.
Stage 3: Goods are received
1. Risk: Damaged goods or wrong goods might be received.
Control Objective: Damaged goods or wrong goods should not be accepted.
Internal Control:
1. Goods should be checked thoroughly before receiving to avoid faulty goods.
2. Compare the purchase order against the goods upon receiving to make sure the right
goods are delivered.
TOC:
1. Observation: observe whether the employee receiving the goods is checking them
physically or not. Also ensure that received goods are compared against the purchase
order.
2. Risk: Goods might get stolen after they are received.
Control Objective: Goods should be kept safe after they are received.
Internal Control:
1. No more than 2 people should be authorized to receive goods and the supplier should be
made aware of this.
2. Received goods should be immediately recorded in inventory.
TOC:
1. Observation: observe, that when receiving the goods, only 1 or 2 people, who have the
authorization are interacting with the supplier. Also observe that the goods are counted
and recorded as soon as they are received as the management claims.
2. Inspection: check old inventory records to see if they were updated the day the order was
received, by coinciding the dates from the records and the delivery confirmation
document.
Stage 4: Invoice Received
1. Risk: Invoice for goods that were never ordered.
Control Objective: Only record invoices for goods that are ordered.
Internal Control: Record only those invoices that have a Good received note (GRN) with them.
TOC
1. Inspection: Clearly look through the GRN and invoice to confirm it has the same
purchases that were ordered and vice versa compare the invoice to GRN to ensure that
the invoice does not mention any additional items.
2. Enquiry: The auditor must enquire the involved parties like supplier about any
misstatement in GRN or invoice.
3. Re-performance: Auditor can perform a confirmation test to see if the goods listed in the
invoice are found in the current assets accounts.
2. Risk Invoice received with errors
Control Objective Correct Invoices should be recorded.
Internal Control
1. All invoices should be compared to Goods received notes or GRN to verify the number
of items received and recorded.
2. Prices of items must be confirmed from the quotation or agreement with the supplier.
3. Total amount should be recalculated in case of any mathematical errors.
TOC
1. Inspection: Auditor can inspect the invoices and Goods received notes. They can also
look at the price of items from the agreement and quotations.
2. Third party confirmation: Auditors can talk to the supplier or any third parties involved
to discuss the price of items and if those invoices are correctly recorded in their database.
3. Re-performance: Auditor can re-perform all the steps taken by internal control to check
if it is done correctly.
4. Observation: The auditor can observe the internal auditors performing the internal
controls to ensure the internal controls are performed and the procedures are correct.
Stage 5: Recording a Transaction
1.Risk Purchase might be recorded at an incorrect amount
Control Objective Purchase should be accurately recorded.
Internal control
1. After recording amount should be reconfirmed with the related invoice.
2. Batch controls: The system will notify the clerk inputting the data of how many invoices
has been input. This will be checked to the physical number of invoices and will highlight
if too many or too few invoices have been entered. This ensures accuracy of the
purchases and payable figures in the accounting records enabling invoices to be paid on
time reducing the risk of disputes with suppliers.
TOC:
1. Inspect a sample of batch control sheets for evidence of completion and agreement to the
batch system report.
2.Risk Invoice might remain unrecorded.
Control Objective All the purchases should be completely recorded.
Internal Control
1. Recorded invoices should be marked or stamped it will help to identify those invoices
which are not recorded and will prevent double recording.
2. Invoice stamped as recorded and checks to ensure all invoices are recorded. Prevents
under or overstatement of trade payables reducing the risk of disputes with or late
payments to suppliers.
TOC Select a sample of invoices recorded on the system and inspect them to ensure they are
marked as recorded.
3.Risk Payable might be recorded in wrong supplier account.
Control Objective: Payable should be recorded in correct supplier account.
Internal Control
1. Monthly supplier statement should be sent to the suppliers.
2. Supplier statement reconciliations enables mis-recorded purchases, payments, and
liabilities to be identified and corrected. This reduces the risk of disputes with suppliers
and ensures accuracy of the accounting system relating to purchases and payables.
3. Payable ledger control account should be prepared, and its reconciliation should be
performed.
4. Control account reconciliation ensures that credits and payments recorded in individual
supplier ledgers have also been recorded in the accounts and vice versa. Also, segregation
of duties monitors performance of controls and ensures accuracy of the accounting
system in relation to purchases and payables.
TOC
1. For sample of suppliers, inspect the monthly supplier statements received for evidence of
the reconciliation being performed. Reperform the reconciliation to confirm it has been
reconciled correctly to test the effectiveness of the control.
2. Inspect the purchase ledger reconciliations for evidence of performance and review on a
monthly basis. Reperform the reconciliation to ensure it has been carried out effectively.
Stage 6: Cash is paid.
Risk Cash might not be paid or paid twice.
Control Objective Cash should be paid against every invoice and no payment should be done
twice.
Internal Control
1. Once invoice is paid it should be stamped to avoid double payment or nonpayment.
2. Invoices are stamped as “paid” and filed separately from invoices not yet paid; this
prevents invoices being paid twice which could result in a loss for the company and
unnecessary cash outflow.
3. Purchases are made by the cashier’s office and recorded by the purchase ledger team:
segregation of duties prevents fraud which could result in loss for the company.
TOC
1. Inspect the file of paid invoices and ensure kept separate from invoices not yet paid.
Inspect them stamped as “paid”.
2. Observe the process of payments from the cashier’s office to ensure segregation of duties
is in place.