A.

ASSERTIONS USED BY THE AUDITOR IN PURCHASE AND

PAYMENT CYCLE
1. Classes of purchases transactions
2. Classes of cash payments transactions
3. Accounts payable balances

Classes of purchases transactions

Assertions Descriptions

1.   Occurrence Recorded purchases are for goods and

services received/provided.

2.   Completeness All existing purchase transactions are recorded.

3.   Accuracy Recorded purchases are correctly recorded for the amount

of goods/services received.

4.   Cut-off Purchases are recorded at the correct dates/periods.

5.   Classification Purchases transactions are properly classified.

Classes of cash payments transactions

Assertions Descriptions

1.   Occurrence Recorded cash payments are for goods/services actually

received.

2.   Completeness All existing cash payments are recorded

3.   Accuracy Cash payments to suppliers are recorded at the amount paid.

4.   Cut-off Cash payments are recorded at the correct dates/periods.

5.   Classification Cash payments transactions are properly classified.

Accounts payable balances

Descriptions
Assertions
1.   Existence Recorded accounts payable in the accounts payable ledger
exist.

2.   Rights and The company has an obligation to pay the liability included
obligations in accounts payable.

3.   Completeness Existing accounts payable are included in the accounts

payable list.
4.   Valuation and Accounts payable are included in the financial statements
allocation at appropriate amounts.

5.   Presentation and All disclosed events, transactions, and other matters relating to
disclosures accounts payable have occurred and pertain to the entity
are properly disclosed and presented in the financial
statements.

B. INTERNAL CONTROLS AND TEST OF CONTROLS

Internal controls for purchase and payment cycle is mainly concerned about the following aspects:
(a)        Proper authorization of purchases.
(b)        Separation of asset custody from other functions.
(c)        Timely recording and independent checking of purchase and payment transactions.
(d)        Proper authority of payments.

Examples of internal control procedures and test of control for purchase and payment cycle are as
follows:

Classes of purchase transactions

Assertions Internal Control Procedures Test of control

1.   Occurrence  Purchases are approved at the  Examine proper

appropriate level. approvals for purchase
 Internal verification of relevant requisitions, purchase order,
documents such as purchase and goods received notes.
requisitions, purchase orders,  Examine the indications of
suppliers’ invoices, and goods internal verification for
received notes. these documents.

2.   Completeness  Purchase requisition, purchase  Account for the numerical

order, receiving report and sequence purchase order
vouchers are prenumbered and and goods received notes.
accounted for.  Trace samples of goods
received notes to the
related suppliers’
invoices and entries in the
purchase journal.

 
 

3.   Accuracy  Approved prices, terms, and  Examine proper

discounts. approval for purchase
 Internal verification of requisition and purchase
calculations and amount of order.
 suppliers’ invoices.  Examine indications of
internal verification for
recording purchase
transactions.

4.   Cut-off  Policies and procedures requiring  Compare the

the recording transactions as dates on goods received
soon as possible after goods notes and entries
and services have been received. on purchase journal.
 Review documents
for unrecorded suppliers’
invoices exist.

5.   Classification  Use of an appropriate chart of  Examine

accounts and have internal procedure manual, chart of
verification of classification. accounts and internal
verification for proper
classification of purchase
transactions.

Classes of cash payment transactions

Assertions Internal Control Procedures Tests of controls

1.   Occurrence  Adequate segregation of  Observe segregation of

duties between handling duties and independent
cash and maintaining accounts reconciliation of bank
payable record. balances.
 Examination and approval of
supporting documents
before cheque signing.

2.   Completeness  Cheques are prenumbered and  Account for sequence of

accounted for. cheques and examine
 Bank reconciliation is prepared bank reconciliation.
by staff not involved in recording
cash payments and custody of
assets.

3.   Accuracy  Regular preparation and  Review periodic bank

review of bank reconciliation prepared by
reconciliation prepared by independent person and
independent person. examine evidence
for internal verification.

4.   Cut-off  Procedure requiring recording  Examine evidence

of cash payments after the for unrecorded
cheque has been signed. payments and review of
 bank reconciliation.

5.   Classification  Use of adequate chart of  Trace cash payments to

accounts and have internal cash payment
verification of proper codes. journal for proper
classifications and review
cash payment journal for
unusual items.

Accounts payable balances

Internal Control Procedures Tests of controls

Assertions
1.   Existence  Recorded accounts payable  Select samples from
is supported by suppliers’ creditors list and
invoices and goods received send creditors’
notes. confirmation.

2.   Rights and  Recorded accounts payable  Review bank

obligations is supported by suppliers’ statements for
invoices and goods received any unrecorded cheques
notes. payments.

3.   Completeness  Purchase orders, receiving reports  Trace samples of goods

and vouchers received notes to the
are prenumbered and accounted related suppliers’ invoices
for. and entries in the purchase
journal and in creditors’
ledger.

4.   Valuation and  Proper policies and  Examine evidence of

allocation procedures to ensure accounts approval of unusual trade
payable are recorded at fair terms and discounts.
value.

5.   Presentation  The accounts payable balance  Review evidence

and disclosures is disclosed and presented fairly of internal
at appropriate amounts. review for proper
disclosure of those related
party transactions.

C. SUBSTANTIVE PROCEDURES FOR PURCHASES AND PAYMENTS

TRANSACTIONS
Analytical procedures
EXAMPLES OF THE ANALYTICAL PROCEDURES FOR PURCHASES AND CASH
PAYMENTS
  (a)        Compare purchases expenses with budgeted amount.
(b)        Compare purchases expenses with prior year.
(c)        Compare individual accounts payable with previous year.
(d)        Calculate ratios of purchases to account payable and compare with last
year.

  Substantive procedures – purchases transactions

Examples of substantive tests for purchases transactions are as follows:

Assertions Substantive procedures

1.   Occurrence  Trace from cash payment journal to bank statement.

2.   Completeness  Trace goods received notes/ suppliers’ invoices to

entries in purchases journal and accounts payable
ledger.

3.   Accuracy  Trace from cash payment journal to suppliers’

invoices and to bank statement.

4.   Timing  Compare dates of cheque stubs listing and related

entries in cash payment journal.

5.   Classification  Examine documents supporting cash payments for

proper classification.

Tests of Details of Accounts Payable

Analytical procedures

EXAMPLES OF THE ANALYTICAL PROCEDURES FOR ACCOUNTS PAYABLE

  (a)        Scrutinize list of accounts payable for unusual items.

(b)        Calculate the trade payables payment period and compare with that of last
year.
(c)        Calculate ratio of accounts payable to current liabilities and compare with
that of last year.
(d)        Compare amounts owed to individual suppliers per current year’s list with
that of last year.
(e)        Compare current year’s balances in accounts payable with last year’s
balances.

Tests of details of accounts payable balances

 Substantive procedures
Audit Objectives
1.   Existence  Circularise a sample of trade payables to confirm the balance
at the end of the year.
 Compare the balances with suppliers’ statements.
 Check suppliers’ invoices and goods received notes.

2.   Rights and  Circularise a sample of trade payables to confirm the balance at
obligations the end of the year.
 Compare the balances with suppliers’ statements.
 Check suppliers’ invoices and goods received notes.

3.   Completeness  Investigate any supplier names that were shown on last year’s
payables listing but do not have a balance showing in this
year’s list of balances.
 Review after date invoices and payments and ensure they
have been provided for at the year-end as appropriate.
 Select a sample of goods received notes immediately prior
to the year end and included in year-end payables, and
ensure that the goods are included in year-end inventories.

4.   Valuation and  Obtain a list of the individual balances from the payables
allocation ledger, check the cast and agree the total to the trade
payables figure in the draft financial statements.
 Ensure that balances have been correctly extracted from
the payables ledger.
 Obtain a list of debit balances in the payables ledger
and obtain explanations from management.
 Agree brought forward figures to last year’s audit file.

5.   Presentation and  Review the financial statements to make sure that proper
disclosures segregation has been done for interest bearing
liabilities, current or long-term liabilities, and whether
additional information has to be disclosed as note to the
accounts, e.g. related party disclosures.

Out-of-liability tests for accounts payable

The following table shows the audit procedures to uncover unrecorded accounts payable in the
financial statements.

Procedures Purposes
Examine underlying documentation  The purpose is to uncover payments made in
for payments subsequent to year the subsequent accounting period that
end date represent liabilities at the balance sheet date.
 Select some payments made during the first
few weeks after the year end and, for
example, trace them to the accounts payable
list to make sure that they have been included as
a liability if they are of current period obligations.

Examine underlying documentation  It is to find out the reasons for unpaid

for invoices not paid within several obligations to determine whether the liability
weeks after year-end. should belong to the period under audit. If not,
the balance will be overstated.

Trace goods receiving notes issued  It is a test for unrecorded obligations to make

before and after year-end to related sure that all goods received before the end of the
vendors’ invoices and accounting accounting period are included in accounts
records. payable.

Trace vendors’ statements to the  It is a form of external audit evidence to ensure

balances on the creditors’ list. any balance indicated on the vendor’s statement
dated after balance sheet date has been included
as a liability in the financial statements of the
period under audit.

Send confirmation to trade creditor  The purpose is to uncover any omitted liability
with which client has done business or misstated balance relating to active creditors
during the period under audit. which balance however does not appear on the
creditors list of client (i.e. zero balance with
client).

D. RELATIVE RELIABILITY OF INVOICES, STATEMENTS AND

CONFIRMATION
5.1       When assessing whether sufficient appropriate audit evidence has been collected for
verifying accounts payable, it is essential that the auditor understand the relative reliability of the
primary types of evidence including suppliers’ invoices, suppliers’ statements, and creditors’
confirmation.
5.2       To compare the relative reliability of invoices, statements and confirmations; the following
aspects should be considered.
5.3       Determinants of reliability of audit evidence
(Jun 10)
5.3.1    HKSA 500 states that audit evidence is more reliable when it is:
(a)        obtained from independent sources outside the entity.
(b)        in documentary form.
(c)        original documents rather than photocopies or facsimiles.
(d)        obtained directly by the auditor rather than audit evidence obtained indirectly or by
inference.
5.3.2    Suppliers’ invoices, suppliers’ statements and creditors’ confirmation meet the first three
criteria listed above.
5.3.3    Only creditors’ confirmation can meet the fourth criteria. Creditors’ confirmation can be
viewed as more reliable than the other two.