Before you can test a client's internal controls, you must first know what internal controls are in place. The auditor can identify the internal controls by asking the client's employees to complete a questionnaire and walking through the purchasing process.

The walkthrough includes tracking a purchase from the initial requisition through updating accounts payable records and the general ledger.

The auditor should also consider controls at the corporate level. 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 supplier information?
• Does management set dollar limits for purchases by employees at different levels?
• Does management closely monitor arrears?

In addition to considering controls at the entity level, the auditor should also identify the internal controls that relate to each management assertion.

For example, a triple check of a purchase order, a goods receipt and a supplier invoice provides evidence of the occurrence of a purchasing transaction and the existence of accounts payable.
• Review of the data on these documents provides evidence for the cutoff claim
• The use of pre-numbered documents provides evidence for the claim of completeness
• Comparing these documents ensures that the right type of goods and the right quantity of goods were purchased at the right price and under the right trading conditions. This provides evidence of the authorization and accuracy of the statements

The separation of duties also represents a very important internal control for the purchasing process.

Maintaining asset and blank forms is also critical to prevent employee fraud.

0:00 Introduction
0:20 Complete solution
1:15 Entity-level controls
2:47 Internal controls related to management statements
5:04 Separation of duties
5:49 Examples of segregation of duties
7:49 Safekeeping of assets and blank forms
9:24 Internal controls for purchase transactions
13:02 Internal controls for cash payments
13:36 Internal controls for accounts payable
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