Procurement Audit Test

procurement Audit and risk management

Procurement Audit Test

Tests of control are tests to obtain audit evidence about the effective operation of the accounting and internal control systems, that is, that properly designed controls identified in the preliminary assessment of control risk exist in fact and have operated effectively throughout the relevant period.

Types of Procurement Audit Tests

Substantive procedures are tests to obtain audit evidence to detect material misstatements in the financial statements. They are generally of two types:

  • Analytical procedures
  • Tests of detail of transactions, account balances and disclosures

The types of substantive tests carried out to obtain evidence about various financial statement assertions are outlined in the table below.

Audit assertion Type of assertion Typical audit tests
Completeness Classes of transactions

Account balances Presentation and disclosure

(a)        Review of post year- end items

(b)       Cut-off testing

(c)  Analytical review

(d)  Confirmations

(e)  Reconciliations to control accounts

Rights and Obligations Account balances Presentation and disclosure (a)  Reviewing invoices for proof that item belongs to the company

(b)     Confirmations       with third parties

Valuation and Allocation Account balances Presentation and disclosure (a)  Matching amounts to invoices

(b)  Recalculation

(c)   Confirming accounting policy consistent and reasonable

(d)   Review of post year- end payments and invoices

(e)  Expert valuation

Existence Account balances (a)  Physical verification

(b)  Third party confirmations

(c)  Cut-off testing

Occurrence Classes of transactions Presentation and disclosure (a)     Inspection of supporting documentation

(b)         Confirmation        from directors that transactions relate to business

(c)       Inspection of items


Accuracy Classes of transactions Presentation and disclosure (a)  Recalculation    of correct amounts

(b)  Third      party confirmation

(c)    Analytical review

Source: BPP. (2009). Auditing Assurance, ACCA study text

Directional testing
A general assumption that audit firm have is that companies overstate assets and understate liabilities. It also has to do with double entry system e.g. creditors and purchases. If one is correct then most likely the other is correct also.

The techniques used are:

  • Review payments after balance sheet date and matching them against related invoices specifically noting dates on invoices to ensure that the invoice was accounted for in the correct accounting period.
  • Cut-off tests which involve selecting goods, received notes raised before the year-end and ensuring that the related invoices have been included in the purchases daybook before year-end as well as individual creditors’ accounts. If no invoices have been received to match those goods received notes than a reasonable liability should have been setup.
  • Comparison of the present list of creditors with the previous year’s list and investigations being carried out on those creditors on the list of the previous year missing from current year’s list to confirm that they are properly excluded through settlement during the year under review.
  • Reviewing reconciliation of creditors’ statements with the creditors’ individual ledger accounts ensuring that any reconciling items are valid and genuine.
  • Reviewing lending contracts or agreements for breach of contract accusations to determine where claims would be made against the company.
  • Reviewing correspondence with professional advisers g. lawyers for claims that they may have made against the company but not recorded.

Application of Procurement Audit Tests in Procurement and Inventory Systems

The tests of controls in the purchases system will be based around:

  1. Buying (authorization)
  2. Goods inwards (custody)
  3. Procurement (recording)

Source: BPP. (2009). Auditing Assurance, ACCA study text


Control objectives, controls and tests of controls

Assertion Control objectives Controls Tests of controls
Occurrence and existence Recorded purchases represent goods and services received. ·         Authorization procedures and policies in place for ordering goods and services

·         Segregation of duties.

·         Purchase orders raised for each purchase and authorized by


·         Inspect policies and procedures and inquire about them.

·         Observe and evaluate segregation of duties.

·         Examine a sample of purchase orders to ensure they have been appropriately authorised.

·         Review the delegated list of authority for



senior personnel.

·         Approved purchase order for each receipt of goods.

·         Staff receiving goods checks them to the purchase order.

·         Stores clerks sign for goods received.

·         Purchase orders and GRNs are matched with the suppliers’


·         For a sample of orders, examine the goods received note (GRN) and match it to the order.

·         Observe receipt of goods by staff to confirm whether the check is done.

·         Inspect a sample to confirm whether stores staff undertake this check.

·         Examine supporting documentation for a sample of invoices

Completeness All purchase transactions that occurred have been recorded. ·         Purchase orders and GRNs are matched with the suppliers’ invoices.

·         Periodic procurement for prenumbered GRNs and purchase orders.

·         Independent check of amount recorded in the purchase


·         Examine supporting documentation for a sample of invoices.

·         Review entity’s procedures for procurement for prenumbered documents.

·         Examine application controls.

·         Examine documentation for evidence of this check

Rights and Obligations Recorded purchases represent the liabilities of the entity. Purchase           orders and

GRNs are matched with

the               suppliers’


·         Examine supporting documentation for a sample of invoices.


Accuracy, classification and valuation Purchase transactions are correctly recorded in the procurement system. ·         Purchase orders and GRNs are matched with the suppliers’ invoices.

·         Mathematical accuracy of the supplier’s invoice                              is verified.

·         Amount posted to general ledger is reconciled to the purchases ledger.

·         Chart                   of accounts             in


·         Examine supporting documentation for a sample of invoices.

·         Recalculate the mathematical accuracy of a sample of suppliers’ invoices.

·         Review reconciliations for evidence of this check.

·         Review purchases journal and general ledger for reasonableness.

Cut-off Purchase transactions are recorded in the correct procurement period. ·         All goods received reports forwarded to accounts payable department daily.

·         Procedures in place that require recording of purchases as soon as possible after goods/services


· Compare dates on reports to dates on relevant vouchers.

· Compare dates on vouchers with dates they were recorded in the purchases journal

Source: BPP. (2009). Auditing Assurance, ACCA study text


Planning Tests for Procurement Activity

  • Compare purchase order prices with vendor catalogs. Variances of significant differences should be investigated.
  • Sort payment file by vendor number and amount. These should be investigated to determine if there are duplicate payments for the same invoice
  • Spot check receiving. Periodically, examine products being received by the company. This verifies the items received have been ordered, and are consistent with what a normal business orders.
  • Probe for favored vendors. Purchase order file sorted by vendor number. The frequency of vendor orders should be accumulated and ranked. Vendors receiving large amounts of orders should be investigated to determine that price and service offered is competitive with other vendors
  • Validate adequate segregation duties. Document the duties of individuals and analyze the results to make sure adequate segregation exists.
  • Compliance to procedures. Select a random number of purchase orders to verify that all of the appropriate procedures were complied with in processing and recording the purchase order.
  • Verify that the requestor has proper authorization to order the products.
  • Check the vendor invoice for the following: Clerical accuracy, Proper dates, Propriety of account distribution, Appropriateness of purchases.
  • End-of-month liability analysis. Items entered as liabilities immediately following the end of the accounting period should be examined to determine whether they have been recorded in the proper accounting period.
  • Purchase needs audit. Objective is to determine whether the item purchased already exists in the company and could be used without repurchasing

Question Purchase controls

GDC, a limited liability company, operates a computerized purchase system. Invoices and credit notes are posted to the purchases ledger by the purchases ledger department. The computer subsequently raises a cheque when the invoice has to be paid.


List the controls that should be in operation:

  • Over the addition, amendment and deletion of suppliers, ensuring that the standing data only includes suppliers from the company’s list of authorised suppliers supplier.
  • Over purchase invoices and credit notes, to ensure only authorised purchase invoices and credit notes are posted to the purchase ledger


  • Controls over the standing data file containing suppliers’ details will include the following.
  • All amendments/additions/deletions to the data should be authorised by a responsible A standard form should be used for such changes.
  • The amendment forms should be input in batches (with different types of change in different batches), sequentially numbered and recorded in a batch control book so that any gaps in the batch numbers can be investigated. The output produced by the computer should be checked to the input.
  • A listing of all such adjustments should automatically be produced by the computer and reviewed by a responsible official, who should also check authorization.
  • A listing of suppliers’ accounts on which there has been no movement for a specified period should be produced to allow decisions to be made about possible deletions, thus ensuring that the standing data is current. The buying department manager might also recommend account closures on a periodic basis.
  • Users should be controlled by use of passwords. This can also be used as a method of controlling those who can amend data.
  • Periodic listings of standing data should be produced in order to verify details (for example addresses) with suppliers’ documents (invoices/ statements).

(b) The input of authorized purchase invoices and credit notes should be controlled in the following ways.

  • Authorization should be evidenced by the signature of the responsible official such as the Chief Accountant. In addition, the invoice or credit note should show initials to demonstrate that the details have been agreed: to a signed GRN; to a purchase order; to a price list; for additions and extensions.
  • There should be adequate segregation of responsibilities between the posting function, inventory custody and receipt, payment of suppliers and changes to standing data.
  • Input should be restricted by use of passwords linked to the relevant site number.
  • A batch control book should be maintained, recording batches in number sequence. Invoices should be input in batches using pre-numbered batch control sheets. The manually produced invoice total on the batch control sheet should be agreed to the computer generated total. Credit notes and invoices should be input in separate batches to avoid one being posted as the other.
  • A program should check calculation of sales tax at standard rate and total of invoice. Nonstandard sales tax rates should be highlighted.

The Inventory System

Inventory controls are designed to ensure safe custody. Such controls include restriction of access, documentation and authorization of movements, regular independent inventory counting and review of inventory condition.

The inventory system can be very important in an audit because of the high value of inventory or the complexity of its audit. It is closely connected with the sales and purchases systems covered in the previous sections.

There are three possible approaches to the audit of inventory and the approach chosen depends on the control in system in place over inventory.

  • If the entity has a perpetual inventory system in place where inventory is counted continuously throughout the year, and therefore a year-end count is not undertaken, a controls-based approach can be taken if control risk has been assessed as low.
  • If an inventory count is to be undertaken near the year-end and adjusted by perpetual inventory records for the year-end value, this approach also requires control risk to be assessed as low.
  • If inventory quantities will be determined by an inventory count at the year- end date, a substantive approach is taken and no reliance is placed on controls. Control objectives, controls and tests of controls

Most of the controls testing relating to inventory has been covered in the purchase and sales testing outlined in sections 1 and 2. Auditors will primarily be concerned at this stage with ensuring that the business keeps track of inventory.

Assertion Control


Controls Tests of controls
Occurrence and existence All inventory movements are authorized and recorded. ·         Prenumbered documentation such as GDNs and GRNs in use.

·         Reconciliations of inventory records with general ledger.

·         Segregation of duties

·         Review documentation in use.

·         Review a sample of reconciliations to confirm they are performed and then reviewed by an independent person.

·         Observe and evaluate proper segregation of



Completeness All purchases and sales of inventory have been recorded

in the procurement system.

·         Procedures in place to include inventory held at third parties and exclude inventory held on consignment for third parties.

·         Reconciliations of procurement records with physical


·         Review entity’s procedures relating to consignment inventory.

·         Review reconciliations performed and whether reviewed by independent person.

Rights and Obligations ·         Inventory records         only include       items that belong to the entity. ·         Procedures in place to include inventory held at third parties and exclude inventory held

on consignment for

third parties.

·         Review entity’s procedures relating to consignment inventory.
Accuracy, classification and valuation Inventory quantities have been accurately determined. ·         Periodic or annual comparison of inventory with amounts

shown in continuous (perpetual) inventory records.

·         Review and test entity’s procedures for taking physical inventory.

·         Standard costs reviewed by management.

·         Review of cost accumulation and variance reports.

·         Review and test entity’s procedures for developing standard costs.

·         Inspect variance

reports produced.


Cut-off All purchases and sales of inventory are recorded in the correct procurement period. ·         All dispatch documents processed daily to record the dispatch of finished goods.

·         All goods inwards reports processed daily to record the receipt of inventory.

·         Reconciliations of inventory records with

general ledger.

·         Inspect documentation to confirm daily processing.

·         Inspect documentation to confirm daily processing.

·         Review reconciliations performed.

Source: BPP. (2009). Auditing Assurance, ACCA study text

Audit of Inventory

Stock includes

  • Finished goods held for sales in the ordinary course of business
  • Work in progress
  • Raw materials

Stock comprises a significant portion of the company’s assets and hence has a material effect on the presentation of the financial statements.

Audit objectives

  1. Ascertain the existence of stock.
  2. Ascertain that stock is appropriately valued at lower of cost and net realizable value. Adequate provisions are created for dead and slow moving stock.
  3. Verify the completeness and accuracy of the stock balance.
  4. Verify that stock is appropriately presented and disclosed in the financial statements.

Problem encountered in the verification of stock

  • The amounts involved are invariably material.
  • Stock has a one for one impact on the reported profits i.e. an increase in stock increase the reported profit. It is therefore open to distortion by management.
  • Stock does not derive from the normal double entry system; it is arrived at by stock taking carried out at the year-end.
  • Stocks are portable and valuable opening themselves to pilferage and deterioration either intentional or accidental.
  • The number of items involved is usually numerous creating verification problems as far as existence and condition is concerned.
  • Although stocks are valued at the lower of cost and net realizable value, what constitutes cast can vary from one management to another and the basis of determining that cost can be subject to so many different methods all resulting in different values for the same items.
  • It is an area that is susceptible to manipulation by management provision for obsolescence, slow moving and damaged stocks is a question of judgment therefore it vis easy for the auditor to disagree with management.
  • stock is normally made up of different items e.g. work in progress, raw materials all these can be valued on a different basis and amalgamated and described as stocks.
  • Stock may be overstated by inclusion of goods sold but not dispatched to customers.

Audit of stock Cost

This involves determining the method adopted by the organization in costing stocks. The auditor should then check the acceptability and appropriateness of the adopted policies.

The rest of the exercise is to test that the adopted exercise if correctly applied.


Stock should be valued at lower of cost and net realizable value where net realizable value is defined as the amount that could be realized on the open market in the ordinary cause of business less the cost of putting them into a saleable condition and less the cost of sales.

It is up to the auditor to ensure that the net realizable value is properly calculated and is in accordance with the accounting standards.

Stocks should be reduced by a provision for obsolete or damaged and slow moving stock. This provision should not be excessive or inadequate. The auditor is guided by the factors such as age of stock, condition of stock, its turnover, technological advances in the industry, nature of stock (perishable or not), prevailing economic conditions etc. these guide him on judging the adequacy of provision for slow moving, obsolete or damaged stock.


The auditor must obtain adequate independent evidence that the stocks concerned are in existence. On several occasions auditors have certified accounts as giving a true and fair view when the stocks concerned were non- existent. The unfavorable decisions against the auditor have resulted in the profession making it obligatory that where stocks are of a significant figure in the accounts the auditor attending to observe the stock take.

It is not the auditor’s duty to take stock

He must however satisfy himself as to the validity of the amount attributed to stocks in the accounts that are the subject of his audit. The auditor should examine the internal control in order to determine the nature and extent of audit steps. Where stock is held at a number of locations the selection of the location to be visited should be planned so as to cover all significant locations over a period of years. When stock is based on records these must be substantiated by continuous or periodical physical stock takes. The records must be up to date.

Stock Taking Exercise

It is the responsibility of management to ensure that the amount at which stocks are shown in the financial statements represents stocks physically in existence. The auditor should obtain evidence in order to enable him to draw conclusions about the validity of amounts attributable to stocks. Where stocks are material in the financial statements the auditor should attend the stock take. The auditor must be present during the stock take mot necessarily to count stock but to witness and observe the way stock taking is done to obtain assurance on the existence and value of stock in trade.

Reasons why procurement auditor need to attend a stock-take of the procurement entity that he audits

  • Verify that the stock take exercise is carried out per the stock instructions. This will assure the auditor that the exercise can be relied upon to provide complete and accurate figures of the stock balance;
  • To verify the physical existence of the stock;
  • To inspect the general condition of the stock, this will assist in concluding whether the stock is correctly valued.

Note that the auditor does not attend the stock take to count stock but to observe how the exercise is being carried out.

The procedures to be followed during the count vary according to the size and circumstances of the business, nature of its stock and its stock records. Define instructions preferably in writing should be issued in all cases for the guidance of those who will be engaged in the actual stock taking. The instructions should contain:

  1. Identification of the sock items and their ownership
  2. Counting, weighing or measuring
  3. Reporting of stocks which are damaged or defective. The following issues should be addressed:
    • Stock taking should be well planned and carried out systematically by persons who are fully informed of the duties involved.
    • These persons should be familiar with the stock but supervisors should  be from different departments. Counting should be done by at least two people, one to count and the other to check and record what has been counted.
    • Stocks should be marked to facilitate counting. The whole stock taking area should be divided into sections for control purposes and avoids double counting.
    • Ensure that properly qualified personnel are available where specialized knowledge is necessary to identify, quality and quantity of stock.

Auditors Duties

The procedures to be carried out by the auditor when attending stock taking are divided into:

  • Duties before stock take.
  • Duties during stock take.
  • Duties after stock take.

Duties before stocktaking

The auditor should:

  • Study of the client’s stock taking instructions and recommend for changes or improvements if the auditor consider them inadequate.
  • Familiarization with the location of the stocks and the opportunity to plan for the work to be undertaken.
  • Familiarization with the nature and volume of stocks and especially with high value items.
  • Review of previous year’s working papers and discussions with the managers of any significant changes from the previous year.
  • Consideration of the location of stocks and likely points of difficulty e.g. cut off.
  • Consideration of any involvement of the internal audit department and the extent of reliance to be placed upon their work.
  • Arranging to obtain from third parties confirmation of stocks held by them.
  • Establishing whether expert advice may be needed.


Duties during the stock take

  • The main task is to ascertain whether the client’s employees are carrying out their instructions properly so as to provide reasonable assurance that the stock take was accurate and not necessarily to count stock. He will do this by testing efficiency of the counting by counting selected items.
  • He should make notes for follow up purposes of items counted in his presence, details of damaged, obsolete or slow moving items.
  • Details of items for cut off purposes should be noted.
  • He should find out the methods of identifying slow moving, obsolete or damaged stock.
  • Record fully the work done and his impression on the stock take exercise.
  • He must form a conclusion as to whether the stock take can be relied on.
  • Get photocopies of rough stock sheets.
  • Get details of the sequence of the stock sheets.
  • Pay special attention to high value items.
  • If the auditor is not satisfied about the way stock taking was conducted, he should inform management and may request a recount.

Note that

The auditor should conclude whether stock taking was properly carried out and can be relied upon for determining the existence of stock. He should also try to gain from his observations an overall impression of the levels and values of stocks held so as he may judge whether the value of stock appearing in the financial statements is reasonable.

Duties after the stock take

This is mainly a follow up exercise and it involves:

  • Checking the cut off with the details of last numbers of stock movement forms and goods inwards and goods outward notes during the year and after the yearend.
  • Ensuring that the final stock checks have been properly prepared from the count records.
  • He must particularly check that all the count sheets issued were returned.
  • Check the     final     stock      sheets      for     pricing,      extensions,      casting, summarization and the necessary improvement.
  • The auditor should ensure that the stock records have been adjusted to amounts physically counted and that all reported differences have been investigated.
  • Follow up any notes made in the attendance. Inform the management of any problems in the stock taking exercise so that they can act accordingly.

Non-attendance at stock takes

If the auditor is unable to attend a stock take either, because he has numerous clients with similar year ends or stock is located in remote locations, the auditor must still certify himself on the stock take. The auditor can in such cases:

  1. Arrange for stock take to be done earlier.
  2. Appoint as agent.
  3. Examine perpetual inventory records more

Obtain representations from management on the existence, completeness and valuation of stock.

The audit tests that the procurement auditor would apply to establish the physical qualities of stock and their ownership

During the stocktaking, the main task is to ensure that the clients staff are carrying out their duties effectively. The auditor should:

  1. Make two-way test counts from stores floor to stock sheets, and from stock sheets to stores floor.
  2. Make notes of items counted, damaged stock, instances where the stock taking procedures are not being followed.
  3. Examine and test control over the stock sheets. The client should keep  a stock sheet register.
  4. Examine cut off procedures. The auditor should examine the link between purchases records and stocks, and between sales records and stocks, to ensure that there is complete accord between stock and the financial records of purchases and sales, debtors and creditors. These are known as cut-off procedures. Procedures the auditor would carry out to ensure correct cut off include:
    • During stock-take attendance note the serial numbers of the last sales invoice, dispatch note and goods received note generated before the stock-take.
    • After the stock-take, check the year end dispatch notes to sales invoices and the sales day book and vice versa to ensure that dispatches and the related invoice both fall before year end.
    • Similarly, for purchases, ensure year-end goods receipts notes and related purchase invoices are correctly treated in the current period.
    • Take a sample of goods received and goods dispatched just after the year end and ensure that the related stock was not included in the count in the case of goods received, that it was included in the goods

5. Pay particular attention to goods held on behalf of third parties e.g. goods on consignment.

6. Reach a conclusion as to whether or not the stock taking was satisfactory and hence provides reliable evidence supporting the final stock figure.

7. To establish the physical quantities of stock, the auditor should attend the stock-take and observe how the clients’ employees are counting stocks particularly: –

  • Are the client employees carrying out the work allotted to them properly and are they following the stock-take instructions?
  • Does the stock appear to be recorded correctly on the stock sheets both as to description and quantity?
  • Are all slow moving, obsolete and substandard stocks properly identified


How a procurement auditor satisfy himself that the procedures adopted by the management with regard to stocks have been applied throughout the financial period

In an attempt to satisfy himself that the management procedures as regards stocks have been properly applied throughout the period, the auditor will carry out tests of control which include: –

  • Observe physical security of stocks and environment in which they are held.
  • Test procedures for recording of stock movements in and out of stock.
  • Test authorization for adjustments to stock records.
  • Test authorization for write off or scrapping of stocks
  • Test controls over recording of stock movements i.e. the use made of authorized goods received and dispatch notes.
  • Inspect reconciliation of stock counts to stock records.
  • Check sequences of dispatch notes and goods received notes for completeness.

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