One key area where an auditor may want to focus on for their walkthroughs is the purchase process. This is done to ensure that there are sufficient controls around the purchase processes within the business and this will normally involve sitting down with the purchase ledger team.
We have recently discussed what an audit walkthrough is and why an auditor may want to carry out a walkthrough in the process of an audit. You can see this full explanation of audit walkthroughs here.
So what are the steps to carrying out a good purchase walkthrough?
Step 1: Placing an Order
The first step to any purchase being made within a business is the placing of an order with the supplier.
The first control to understand here is who is allowed to place an order?
In most businesses, only certain people are allowed to request an order from a supplier and normally all purchase requests will have to be approved.
For example, if a member of the recruitment team wishes to order 100 branded pens for an upcoming careers fair, they may first have to go to their manager with this request and have the manager approve it to ensure that it is a legitimate and necessary purchase. Once approved, this request will be passed onto a member of the purchases team who is allowed to raise orders with suppliers and the pens will be purchased.
In summary, the first questions for a purchase walkthrough should be:
- Who is able to approve orders? (i.e. do managers have to sign off before an order can be processed)
- Who can raise orders with suppliers? (is this just the purchases team or can other employees do this?)
Step 2: Receipt of Goods
There should also be controls in place for when goods are received from the supplier. A good purchase walkthrough will identify these.
The types of goods that are received will vary (quite significantly) depending on the type of business that is being audited. Therefore, the below questions will be given in a general format and can be tailored to suit the type of business being audited.
The first thing to understand is what happens when the goods are received. We would expect a member of the warehouse team to sign for the goods on a delivery note but we can go a step further and ask if someone checks the goods before signing for them.
If a delivery of 50 boxes comes in, does the person signing for the goods check that there are 50 boxes before doing so?
Once the goods have been received, we would expect an invoice to follow (if an invoice has not already been received). The first question to ask here is if an invoice matching process is in place (where the goods on the invoice are matched to the purchase order raised). Secondly, who enters the invoice into the system?
We would expect that only a few people in the finance team have the job of entering the invoice on the system and most likely they will be members of the purchase ledger team.
From here, we must understand how the invoice gets recognized on the system. Once the invoice details have been entered, does this automatically get posted to the trade payables subsidiary ledger?
In summary, the questions to be asked regarding the receipt of goods are as follows:
- Are the goods checked once they are received and once checked, do they get signed for.
- Is evidence kept that the goods were received and signed for?
- Are invoices matched to the original purchase orders?
- Who enters invoices on to the accounting system and how does the system recognize invoices?
Step 3: Payments made to Suppliers
The final step that all credit purchases should end in, is the payment being made to the supplier.
Although this seems like the easiest step, there should be really tight controls around the payment process as this is the only are of purchases where actual payments are involved and therefore is the most susceptible area to fraud.
It is common for payments to only be made at set intervals. For example, a business may choose to pay all of its suppliers in one bulk payment each week. This makes the process much more streamlined as there is only one payment to make per week.
Naturally, it follows that this payment will be of a significant value and therefore we would expect it to have to be checked and approved before being paid out of the bank. We need to understand who calculates the payment amount, who checks that calculation and ultimately, who makes the payment through the bank.
The payment should normally be processed by someone in a senior positions and if it is of a significant value, we may expect this to be approved by another senior employee for further security.
So the questions to be asked here are:
- How often are payments made to suppliers?
- Are they done separately or in bulk payments?
- Who calculates the payment amount?
- Who checks the calculations for the payment?
- Who is authorized to make the bank payment – is this just one person or do multiple people have to approve this?
Summary
To summarize all of the above points, below you will find a list of all the main questions required to carry out a purchase walkthrough.
The steps/questions for a purchase walkthrough are as follows:
- Who is able to approve orders? (i.e. do managers have to sign off before an order can be processed)
- Who can raise orders with suppliers? (is this just the purchases team or can other employees do this?)
- Are the goods checked once they are received and once checked, do they get signed for?
- Is evidence kept that the goods were received and signed for?
- Are invoices matched to the original purchase orders?
- Who enters invoices on to the accounting system and how does the system recognize invoices?
- How often are payments made to suppliers?
- Are they done separately or in bulk payments?
- Who calculates the payment amount?
- Who checks the calculations for the payment?
- Who is authorized to make the bank payment – is this just one person or do multiple people have to approve this?
The above steps are a solid foundation for a good quality purchase walkthrough. Of course, a purchase walkthrough needs to be tailored for your particular audit client (if your client provides services rather than manufactures goods, they may have very few goods coming into the business so checks on deliveries may not be necessary)
