How to Evaluate Internal Controls for the Purchasing Process

Before you can test a client’s internal controls you first need to know which internal controls are in place. The auditor can identify the internal controls by asking the client’s employees to complete a questionnaire and by doing a walkthrough of the purchasing process.
The walkthrough would involve following a purchase from the initial requisition all the way through to updating the accounts payable records and the general ledger.
The auditor should also be sure to consider entity-level controls. For example:
• Does the audit committee play an active role?
• Does management have written policies and procedures for authorizing purchases?
• Does management require authorized signatures for purchase requisitions and purchase orders?
• Does management ensure that only authorized persons can make changes to vendor information?
• Does management set dollar limits for purchases by different levels of employees?
• Does management closely monitor days payable outstanding?
In addition to considering entity-level controls, the auditor should also identify the internal controls pertaining to each management assertion.
For example, a 3-way match of a purchase order, receiving report, and vendor invoice provides evidence about the occurrence of a purchase transaction and the existence of accounts payable.
• Verifying the dates on these documents provides evidence about the cutoff assertion
• The use of prenumbered documents provides evidence about the completeness assertion
• Comparing these documents ensures that the correct type of goods and the correct quantity of goods have been purchased and at the correct price and terms of trade. This provides evidence about the authorization and accuracy assertions
Segregation of duties is also a very important internal control for the purchasing process.
Custody of assets and blank forms is also critical to prevent employee fraud.
0:00 Introduction
0:20 Walkthrough
1:15 Entity-level controls
2:47 Internal controls related to management assertions
5:04 Segregation of duties
5:49 Examples of segregating duties
7:49 Custody of assets and blank forms
9:24 Internal controls for purchase transactions
13:02 Internal controls for cash disbursements
13:36 Internal controls for accounts payable
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