An auditor is performing tests of controls related to a client's purchasing cycle. The control states that all purchase orders (POs) must be sequentially numbered and that the accounting department must reconcile POs to vendor invoices and receiving reports before payment. The auditor selects a sample of payment vouchers and traces them back to the underlying purchase orders, vendor invoices, and receiving reports. Which of the following control objectives is the auditor primarily testing?
- ACompleteness of recorded purchases.
- BAuthorization of recorded purchases.
- COccurrence of recorded purchases.
- DAccuracy of recorded purchases.
Show answer & explanationAnswer & explanation
Correct answer: C. Occurrence of recorded purchases.
Tracing from payment vouchers (which indicate a recorded purchase) back to the underlying purchase orders, vendor invoices, and receiving reports is a primary test for the occurrence assertion. This procedure aims to ensure that recorded purchases (and subsequent payments) actually occurred and are supported by valid transactions and appropriate documentation.
Why the other options are wrong
- A. Completeness would involve tracing from source documents (e.g., receiving reports) forward to payment vouchers or the general ledger to ensure all valid purchases are recorded.
- B. Authorization is partially tested by the presence of a properly approved purchase order, but the primary objective of tracing from payment to all three documents is occurrence.
- D. Accuracy would involve testing the mathematical calculations on the invoice and payment voucher, and verifying quantities and prices.
Occurrence Assertion (Purchases)
The occurrence assertion for purchases states that all recorded purchase transactions and associated liabilities actually occurred and pertain to the entity during the reporting period. It is typically tested by vouching from the accounting records back to supporting documentation.
- Tests for occurrence typically involve vouching from the accounting records back to source documents.
- A common risk for occurrence is fictitious purchases or purchases recorded in the wrong period.
- Evidence includes purchase orders, vendor invoices, and receiving reports.
Memory trick: OCCURRENCE means RECORDED purchases REALLY HAPPENED.