In general, the objective of an internal audit is to assess the risk of material misstatement in financial reporting. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. As such, testing the validity of various implicit managerial assertions is a key objective of an internal auditor.
While this applies to all financial cycles, this article is the next in a series focusing on the General Control Activities for the Purchasing cycle. The most important general control areas for Purchasing include:
- Performance Management
- Supplier Selection
- Purchase Commissions
- Goods and Services Received
- Invoice Verification
- Master Data Purchasing
In this post, we’ll focus on the General Control Activities for Invoice Verification.
The expectation of the Invoice Verification process is to make sure that the invoices are accurately booked in a timely manner by authorized individuals in the purchase ledger and accruals for goods received but not invoiced are adequate. Without proper controls the invoices may not be booked to the ledger within the appropriate period, accruals may be incorrect, and payments to suppliers may be difficult to trace.
- Verify that purchase invoices are booked onto the purchase ledger once received and investigate any delays.
- Determine if an accrual is generated by the system at the point of goods received.
- Make sure there is regular communication between the purchasing department and finance department to ensure that the accrual for goods received not invoiced is regularly investigated and cleared down of old items.
- Validate that supplier statement reconciliations are completed. The reconciliation should be used as the basis for chasing down missing invoices on goods received. The reconciliation should also be used for investigating differences on the good received not invoiced account.
- Confirm that suitable authorized backing documentation to support creation of, or changes to, supplier master data is maintained.
In conclusion, auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key objectives to these assertions are; Existence and Completeness, Rights and Obligations, Valuation or Allocation, and Presentation and Disclosure.