The following are examples of test of controls and substantive tests of transactions procedures that are commonly used in the acquisition and payments cycle, and inventory and warehousing cycle. Each is performed on a sample basis.

(A)Acquisition and payment cycle

1.Trace transactions recorded in the purchases journal to supporting documentation, comparing the vendor's name, total dollar amounts and authorisation for purchase.

2.Account for a sequence of receiving reports and trace selected ones to the related vendor's invoices and acquisitions journal entries.

3.Review supporting documents for clerical accuracy, proper account distribution, and reasonableness of the expenditure in relation to the nature of the audit client's business operations.

4.Examine documents in support of acquisition transactions to make sure that each transaction has an approved vendor's invoice, receiving report, and purchase order.

5.Add the cash payments journal, trace postings of the total tot eh general ledger, and trace individual cash payments to the accounts payable master file.

6.Account for a numerical sequence of cheques in the cash payments journal and examine all cancelled and spoiled cheques for proper cancellation.

7.Compare dates on paid cheques with the dates on the cash payments journal and the bank cancellation date.

(B)Inventory and warehousing cycle

1.Compare the client's count of physical inventory at an interim date with the perpetual inventory master file.

2.Trace the auditor's test count recorded in working papers to the final inventory compilation and compare the tag number, description and quantity.

3.Compare the unit price on the final inventory summary with that on vendor's invoices.

4.Read the audit client's physical inventory instructions and observe whether they are being followed properly by those responsible for counting the inventory.

5.Account for a sequence of raw materials requisitions and examine each requisition to determine that it has properly authorised approval.

6.Trace the recorded additions on the finished goods perpetual inventory master file to the records for completed production.

7.Account for a sequence of inventory tags, and trace each tag to the physical inventory to make sure it actually exists.

Required:

(a)State whether each procedure as above is primarily either a test of control or a substantive test of transactions.

(b)State the purpose of each procedure.

(A) Acquisition and payment cycle

QUESTION

a.

TYPE OF TEST

b.

PURPOSE OF PROCEDURE

1.(sample answer)

a)

Both (test of authorisation is a test of control)

b)

To determine that the amount recorded in the purchases journal is correct

(accuracy).

To determine that recorded purchases are for goods and services actually received .

(occurrence).

2

3

4

5

6

7