# Audit of Purchases
Purchases drive cost of goods sold and inventory valuation. Misstatement direction:
- Understatement of purchases → understated COGS → overstated profit.
- Overstatement of purchases → fictitious vendors, fund diversion.
## Audit Procedure — Occurrence
Ensure purchases are not understated or overstated by checking:
### 1. Fictitious Vendors
- Whether any fictitious vendors have been booked.
- Test vendor master for duplicate addresses, common bank accounts, employee-linked vendors.
### 2. Physical Receipt of Goods
- Whether goods were received at the factory gate.
- Verify entry in the security gate inward register — this is the first independent record of goods entry.
### 3. Quality Inspection
- Whether quality inspection of goods was done — quality reports document conformance to purchase orders.
### 4. Goods Receipt Note (GRN)
- Whether the GRN was prepared and signed by appropriate client personnel.
- The GRN is the link between physical receipt and the accounting record.
### 5. Approval of Purchase Invoice
- Whether the purchase invoice was approved by an authorised signatory before booking.
## The Three-Way Match
Though not explicitly named in this section, the procedure described is essentially the three-way match:
- Purchase Order (PO) — what was authorised
- GRN / Gate Inward Register — what was received
- Vendor Invoice — what is being paid
All three must agree in quantity, rate, and specification before the liability is booked.
## Cut-off for Purchases
A critical assertion (not detailed in this excerpt but implied): goods received before year-end must be in inventory and purchases booked, even if the invoice arrives later. Conversely, goods received after year-end must NOT be in current-year purchases.