## Audit of Purchases: Occurrence & Control Testing
### The Purchase Cycle — Know the Flow First
```
Purchase Requisition
↓
Purchase Order (to supplier)
↓
Invoice Received from Supplier
↓
Goods Received at Factory Gate → Gate Entry Register
↓
Goods Receipt Note (GRN) Prepared
↓
Invoice Payment Approval
↓
Payment
```
Understanding this flow is the foundation of purchase audit.
---
### Step 1 – Identify Control Points (General)
- Is there segregation of duties between ordering, receiving, and payment?
- Are competitive quotes obtained before large orders?
- Is there an authorised vendor list?
### Step 2 – Test of Controls
- Test whether identified controls operate effectively.
- E.g. verify purchase orders are always approved before goods are ordered.
### Step 3 – Select Random Sample & Examine Documents
- Select a random sample of transactions.
- Examine: Purchase Order, GRN, Purchase Invoice, Gate Entry Register.
### Step 4 – Substantive Procedures (Always Mandatory)
Substantive procedures are compulsory regardless of control testing results.
---
### Occurrence Assertion: No Fake Purchases
Risk: The entity records purchases that never happened (to inflate expenses or siphon funds).
| Check | Why It Matters |
|---|---|
| Examine vendor selection process | Ensures purchases are from genuine, approved vendors |
| Verify quality inspection was done | Confirms goods were actually inspected on receipt |
| Verify goods received at factory gate / gate register | Physical evidence of receipt |
| GRN prepared and signed by authorised person | Authorization control |
| Purchase invoice approved by authorised person | Payment authorization control |
| Stock records updated after receipt | Confirms goods entered inventory |
---
### Special Considerations in Purchase Audit
1. Original Invoice Only — Insist on original invoices; photocopies risk duplicate claims.
2. Risk & Reward Transfer — Book the purchase only when ownership risks and rewards have passed to the entity.
3. Related Party Purchases — Verify the transaction is at arm's length and approved by the Board of Directors.
4. Input Tax Credit (ITC) — Reconcile ITC as per books with the GST portal.