PURCHASE AND

DISBURSEMENT
Understanding of Internal Control, Test of Controls
and Substantive Procedures of Related
Accounts
 Purchase and
Disbursement Cycle
Business Process
 Decides
Requesting Purchase Purchasing
Request Requisition Form Department
quantity and
Department supplier

Vendor Purchase
Order

A/P Subsidiary Ledger/ Vendor’s Receiving

Purchase Journal/ General
Ledger
Invoice Goods Department

Receiving
A/P Department Report

Purchase Order

Three-way Receiving Report

matching Vendor’s Invoice

 Stamp Purchase Order
PROCESS
PROCESS OF
OF PAYMENT
PAYMENT “PAID” Receiving Report

Vendor’s Invoice

A/P Subsidiary Ledger/ A/P Request for

Purchase Journal/ General
Department Payment
Ledger

Collection
Receipt
Vendor Remittance Advice
Disbursement/
Check voucher Treasury

Check payment

Collection Receipt
 Internal Control – Purchase and
Disbursement Cycle
Purchase and Disbursement Process Department

1. Purchase requisition preparation Any (user)

2. Preparation of purchase order Purchasing

3. Receipt of goods Receiving

4. Processing of invoice Accounts payable

5. Processing of payment General accounting, treasury

 Major Controls
PURCHASES
1. Prenumbered purchase orders used
2. Separate purchasing department that makes purchases
3. Have a list of authorized suppliers
4. Purchasing personnel independent of receiving and recordkeeping
3. Suppliers’ monthly statements compared with recorded payables
 Major Controls
ACCOUNTS PAYABLE
1. Accounts payable personnel independent of
purchasing, receiving and disbursements
2. Clerical accuracy of vendors’ invoices tested
3. Purchase order, receiving report and vendor’s invoice
matched
 Major Controls
CASH DISBURSEMENTS
1. Prenumbered checks with a mechanical check protector used
2. Two signatures on large check amounts
3. Checks signed only with appropriate support (purchase order, receiving report,
vendor’s invoice). Treasurer signs checks and mail them
4. Support for checks cancelled after payment
5. Voided checks mutilated, retained, and accounted for
6. Bank reconciliations prepared by individual independent of cash disbursements
recordkeeping
7. Physical control of unused checks
 Major Controls

INVENTORY AND PRODUCTION

1. Perpetual inventory records for large items
2. Prenumbered receiving reports prepared when inventory received; receiving
reports account for
3. Adequate standard cost system to cost inventory items
4. Physical control against theft
5. Written inventory requisitions used
6. Proper authorization of purchases and use of prenumbered purchase orders
 Major Controls

INVENTORY AND PRODUCTION

6. Authority and responsibility for controlling the inventories should be centralized
management and in one person
7. There should be careful selection of inventory personnel and intensive training
of such personnel in policies, objectives and system of inventory control
8. Quantitative controls through perpetual inventory records; book quantities
verified with physical counts at least once a year and differences being
investigated, promptly adjusted and reported to higher authority should be
implemented
 Substantive Audit Procedures

PURCHASES

● Completeness: Purchase that occurred are recorded

Procedure: Trace a sequence of receiving reports to entries in the voucher register. Test cut-
off. Account for a sequence of entries in the voucher register.

● Occurrence: Recorded purchases are for items that were acquired

Procedure: Examine underlying documents for authenticity and reasonableness. Scan voucher
register for large or unusual items. Trace inventory purchased to perpetual records. Scan
voucher register for duplicate payments.
 Substantive Audit Procedures

PURCHASES

● Classification: Purchase transactions have been recorded in the proper accounts

Procedure: For a sample of entries in the purchase journal, verify the accuracy of account
coding

● Accuracy (Valuation): Purchases are recorded at proper amounts

Procedure: Recompute invoices and compare invoice price to purchase order

 Substantive Audit Procedures

PRODUCTION

● Completeness: All production transactions that occurred are recorded

Procedure: Account for a sequence of production reports

● Occurrence: Recorded production transactions occurred

Procedure: For selected transactions, examine signed materials requisitions, approved labor
tickets and allocation of overhead
 Substantive Audit Procedures

PRODUCTION

● Classification: Production transactions have been recorded in the proper accounts

Procedure: For a sample of entries, verify the accuracy of account coding

● Accuracy (Valuation): Production transactions are recorded at proper amounts

● Procedure: Test cost records by tracing to underlying documents, such as bill of materials, labor
tickets, authorized labor rates, and standard overhead rates. Review variances.
 Substantive Audit Procedures

INVENTORY BALANCES

● Existence: Recorded inventory exist

Procedure:
1. Before the client takes the physical inventory, review and approve the client’s written
plan for taking it
2. Observe the client personnel physically counting inventory
3. Confirm inventories on consignment and held in public warehouses
 Substantive Audit Procedures
INVENTORY BALANCES

● Completeness: All inventory of the entity recorded

Procedure:
1. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and
reconcile the tags to the listing
2. For selected items, trace from tags to listing
3. Perform cut-off procedures. Obtain the receiving report number for the last shipment
received prior to year-end and determine that the item is included in inventory. Also,
identify the last shipping document and determine, based on shipping terms, whether the
item was properly recorded in sales or inventory
4. Perform analytical procedures
 Substantive Audit Procedures
INVENTORY BALANCES

● Rights and obligations: Inventory is owned by the entity

Procedure: Determine that consigned inventory has been excluded from inventory and that
inventory pledged has been properly disclosed. Examine confirmations from financials
institutions and read minutes of the board of directors’ meetings.

● Valuation and allocation: Recorded inventory is valued in accordance with GAAP

Procedure:
1. Considering the method the client uses for inventory valuation, examine invoices for
inventory on hand or trace prior year’s inventory listing to verify cost
 Substantive Audit Procedures
INVENTORY BALANCES

● Valuation and allocation: Recorded inventory is valued in accordance with GAAP

Procedure:
2. For selected items, determine net realizable value (NRV) of the inventory and apply the
lower of cost or NRV.
3. Verify computations in the inventory listing
4. Review the obsolescence in the inventory by:
a. Being alert while observing inventory being taken for damaged, slow- moving, or
scrap inventory
b. Scanning perpetual records for slow-moving items and discussing their valuation
with client.
 Substantive Audit Procedures
INVENTORY BALANCES

● Presentation and disclosure: Inventory is classified and disclosed in accordance with

GAAP

Procedure: Determine whether accounts are classified and disclosed in the financial
statements in accordance with GAAP
 Substantive Audit Procedures
ACCOUNTS PAYABLE

● Existence: Recorded liabilities exist

Procedure:
1. Obtain from the client a listing of accounts payable as of year-end and reconcile to the
general ledger
2. Vouch recorded liabilities to the suppliers’ statements
3. Confirm recorded liabilities directly with suppliers and creditors. Investigate differences
in liabilities reported in the confirmations with the recorded book amounts
 Substantive Audit Procedures
ACCOUNTS PAYABLE

● Completeness: All liabilities are recorded

Procedure:
1. Perform purchases cut-off examination
2. Test for unrecorded liabilities
3. Perform analytical procedures

● Rights and obligations: Liabilities are owed by the entity

Procedure:
1. Confirm recorded liabilities directly with suppliers and creditors
2. Review documentation in client’s files
3. Examine subsequent payments to credits
 Substantive Audit Procedures

ACCOUNTS PAYABLE

● Valuation and allocation: Liabilities are valued in accordance with GAAP

Procedure: Vouch accounts payable schedule

● Presentation and disclosure: Liabilities are classified and disclosed in accordance with
GAAP

Procedure: Review financial statements and perform analytical procedures to determine

whether accounts are classified and disclosed in the financial statements in accordance with
GAAP.
Personnel and Payroll Cycle
Business Process
 Match clock
Clock cards Time and job
Employee Supervisor cards and
time tickets summary
Job time
tickets

Signed payroll Unsigned Payroll

checks
Treasurer payroll checks
accounting

Summary
Distribute
payroll Paymaster payroll Payroll Journal

Accounting
General Ledger
Department
 Internal Control – Personnel and Payroll Cycle

Personnel and Payroll Cycle Department

1. Hiring of employees Any (initiation)

Human Resources (Recruitment)
2. Supervising employees Any

3. Timekeeping Timekeeper

4. Payroll processing and recording Payroll accounting (preparation)

General accounting (recording)
5. Disbursement Treasury
 Major Controls
PERSONNEL AND PAYROLL
1. Segregate: Timekeeping; Payroll Preparation; Personnel;
Paycheck Distribution
2. Time clocks used where possible
3. Job time tickets reconciled to time clock cards
4. Time clock cards approved by supervisors (overtime and regular
hours)
5. Treasurer signs paychecks
 Major Controls
PERSONNEL AND PAYROLL
6. Unclaimed paychecks controlled by someone otherwise
independent of the payroll function (locked up and eventually
destroyed if not claimed). In cases in which employees are paid cash
(as opposed to checks) unclaimed pay should be deposited into a
special bank account
7. Personnel department promptly sends termination notices to the
payroll department
 Substantive Audit Procedures
PERSONNEL AND PAYROLL

● Valuation: Ensure that employees are paid at right amount

Procedure:
1. Select a sample of employees and reperform calculations of gross and net pay
2. Obtain print out employee wage rates and compare to HR records

● Completeness: All unpaid payroll transactions for the year are recorded as payable
Procedure:
1. Upon understanding the payroll cut-off of the client, recalculate the payroll amounts to be
accrued and trace it to the balance sheet.
 Substantive Audit Procedures

PERSONNEL AND PAYROLL

● Occurrence: Payroll recorded represent actual work done by legitimate employees

Procedure:
1. For a sample of employees from the payroll, agree hours paid to individual clock cards
2. Match payroll list with HR employee master list

● Completeness

Procedure: For a sample of entries in the sales journal, compare sales invoice copy, customer
order, and sales invoices
End.
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