Performing early substantive testing when control risk is at maximum is not likely to be efficient, however, because of the extent of testing that likely will be required in the intervening period.
The auditor achieves the audit objectives related to purchasing cycle accounts by performing substantive tests or a combination of substantive tests and tests of controls.
Purchase transactions are based on correct prices and quantities and are accurately Accuracy computed and classified in the appropriate general ledger and accounts payable subsidiary ledger accounts. If the basic transaction documents are in numerical sequence, the auditor can note the number of the last receiving report and the last check issued or other basic transaction documents prior to year-end.
Fraud detection is greatly improved with a single, centralized control point for all transactions. They also may represent purchases that were not recorded but were nevertheless paid; in that event, the auditor should ascertain why the purchases were not recorded.
The auditor's responsibility regarding fraud and illegal acts is discussed in Chapter 4. In addition, the auditor can assess the reasonableness of the amounts, for example, by comparing the percentage of selling, general, and administrative expenses in relation to sales from period to period.
This procedure may apply in a loosely controlled centralized environment as well.