Purchases and Payments Cycle – PART 6 ASSERTIONS

Auditing and Internal Control 2023

Semester 2 – Learning Unit 2

Auditing the Cycle

Remember Assertions …
Auditing the Cycle - Assertions

Transactions (SOCI) Account Balances (SOFP)

C³APO C²REAPV
• Completeness • Completeness

• Classification • Classification

• Cut-off • Rights or Obligations

• Accuracy • Existence

• Presentation & Disclosure • Accuracy

• Occurrence • Presentation & Disclosure

• Valuation

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Auditing the Cycle – Assertions
Purchase Transactions
• Occurrence: did the recorded purchase take
place?
• Accuracy: is the purchase recorded at the correct
amount?
• Cut-off: is the purchase recorded in the correct
accounting period?
• Completeness: did we record all the purchases
that took place?
• Classification: are all purchases recorded in the
correct accounts?

Payment Transactions
• Occurrence: was the recorded payment actually
made?
• Accuracy: is the payment recorded at the correct
amount?

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 Auditing the Cycle – Assertions
Payment Transactions (continued)
• Cut-off: is the payment recorded in the correct accounting period?
• Completeness: did we record all payments made?
• Classification: are all payments recorded in the correct accounts?

Remember the same assertions can also apply to specific accounts

in the SOCI

Trade Payables (Account Balance)

• Existence: do trade payables actually exist at Balance Sheet
date?
• Obligation: does the company have an obligation to trade
creditors?
• Completeness: are all trade payables recorded?
• Valuation: are trade payables recorded at the correct carrying
amount?
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Auditing the Cycle

• Classification: Is the item correctly classified as a

trade payable?

• Presentation and disclosure: Is information relating to

transactions and balances properly presented and
disclosed as required by the applicable financial reporting
framework?

Recommended additional reading: Chapter 7,

Cycle Case Study – Ntsimbi Piping

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Auditing the Cycle – Assertions
Main Accounts Affected in Purchases and Payments Cycle

SOCI SOFP
Non-Current Assets
Sales PPE PURCHASE +
(Cost of Sales)
Gross Income Current Assets
Inventory
Expenses (Services) PURCHASE +
(Stationery) Cash
PURCHASE PAYMENT -
+(Telephone, Insurance, etc.) Equity and Liabilities
(Salaries – PAYROLL CYCLE)
Non-Current Liabilities

Returns??? Current Liabilities PURCHASE +

Reduce Expense OR Reduce Asset Returned Trade Payables
Reduce Trade Payables PAYMENT -

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Auditing the Cycle - Assertions

Exam Technique
1. Issue
e.g. Stock purchase is recorded in 2020 but only relates to the 2021 financial year. It is also recorded at the wrong amount
(Transaction or Account? – Depends on the REQUIRED)

2. Accounts Affected
Trade Payables
Inventory/Raw Materials

3. Assertions Affected
Account Balances Trade Payables (Liability) – Too much (Existence, Valuation, Obligation)
Inventory (Asset) – Too much (Existence, Valuation, Rights)

Transaction – Too early and wrong amount = Cut-off, Accuracy

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Fraud in the Cycle
Auditing the Cycle

Fraudulent financial reporting

• Understating trade payable (trade creditors)
• Eg. Manipulating cut-off by recording the liability
for inventory purchased prior to year-end in the
following year

Misappropriating assets
• Employees / management ordering personal
goods / services on the company’s account
• Making fictitious payments to suppliers
• Fraudulent claiming of input Vat
• Officials accepting bribes from suppliers for
awarding of tenders
• Theft of goods at the receiving stage

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