# Audit of Purchases

Purchases form one of the most significant expense heads in any trading or manufacturing entity. The auditor must verify both special procedural attributes and obtain audit evidence on completeness and measurement assertions.

## A. Special Considerations During Audit of Purchases

The auditor must verify the following while examining purchase transactions:

1. Original Invoice Copy – The purchase invoice received should be the "Original" copy (not duplicate/photocopy) to prevent double booking.

2. Single Booking with Risk & Reward Transfer – The purchase invoice should be booked only ONCE, and only after the risk and reward incidental to ownership has been transferred to the entity.

3. Invoice in Entity's Name – The purchase invoice should be in the name of the entity (not in personal name of director/employee).

4. Input Tax Treatment – The Input Tax (GST) component should be booked in the input tax ledger (not as part of purchase cost).

5. Related Party Purchases – Where purchases are made from related parties, the auditor needs to verify:

Requisite approval from the Board of Directors has been obtained
Transactions are at arm's length (Section 188 of Companies Act)

## B. Procedures for Completeness & Measurement Assertions

The auditor performs Analytical Procedures (AP) to obtain audit evidence as to the overall reasonableness of purchase quantity and price:

### 1. Consumption Analysis

Analyse raw material consumed as per the manufacturing a/c and compare same with:

Previous years
Closing stock

Ask Management for reasons if any significant variations are found.

### 2. Stock Composition Analysis

Collect reports from Management for composition of stock i.e. raw materials as a percentage of total stock. Compare with previous year and ask Management for reasons in case of significant variations.

### 3. Ratios Analysis

Compare the following ratios of the current year with previous years:

Creditors Turnover Ratio
Stock Turnover Ratio

### 4. Quantitative Reconciliation

Review the quantitative reconciliation of:

> Closing Stock = Opening Stock + Purchases - Consumption

This ensures completeness across the inventory cycle.

Worked example

### Example 1

Example – Detecting Double Booking:

While auditing XYZ Ltd, the auditor noticed that invoice No. 4521 from ABC Suppliers appeared twice in the purchase register. On verification:

First entry: based on original invoice (₹2,50,000)
Second entry: based on duplicate copy (₹2,50,000)

This violates the principle that the original copy alone should be used. The auditor should propose a journal entry reversing the duplicate booking and recommend an internal control whereby duplicate copies are stamped "DUPLICATE - NOT FOR ACCOUNTING".

### Example 2

Example – Consumption Analysis:

Particulars	Current Year	Previous Year
Raw Material Consumed	₹50 lakhs	₹40 lakhs
Units Produced	10,000	10,000
Consumption per unit	₹500	₹400

The 25% increase in per-unit consumption is significant. The auditor must obtain Management explanation – possible reasons could be price increase, wastage, or pilferage. Without satisfactory explanation, the auditor should consider further substantive procedures.

⚠️ Common exam mistakes

Treating photocopies/duplicate invoices as valid for booking purchases – original copy is mandatory
Booking purchase before transfer of risk and reward (e.g., goods in transit on FOB destination basis)
Including input tax (GST) as part of purchase cost instead of separately in input tax ledger
Failing to verify Board approval and arm's length pricing for related party purchases under Section 188
Confusing creditors turnover ratio with debtors turnover ratio while analysing trends
Skipping the quantitative reconciliation – only verifying value-wise records

Bare-Act text Section 188 · Companies Act, 2013 · click to expand

Section 188 of the Companies Act, 2013 requires Board's approval for related party transactions including purchase of goods/materials. Where transactions exceed prescribed limits, prior approval of members by ordinary resolution is required. All such contracts must be at arm's length price.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Audit of Purchases - Special Considerations and Procedures

Worked example

⚠️ Common exam mistakes