Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

Audit of Purchases, Payables and Expenses

Updated 10 October 2026 · Fact-checked

Audit of purchases, payables and expenses means checking that every cost recorded is genuine, authorised, correctly valued, recorded in the right period, and that no liability is left out. You vouch transactions to documents, confirm creditor balances, test cut-off around year end, and search for unrecorded liabilities.

Understand Audit of Purchases, Payables and Expenses

Purchases, trade payables and expenses sit on the same chain. A purchase creates stock or an expense, and it also creates a payable if not paid in cash. So an error in one usually shows up in the others.

The main audit risk differs by side. For revenue and assets, the risk is overstatement. For purchases, payables and expenses, the bigger risk is understatement. Management may leave out liabilities or push expenses into the next year to show better profit. So your focus is completeness and cut-off.

Vouching means examining documents that support an entry. For a purchase, you trace the entry back to the purchase order, goods received note (GRN), supplier invoice and the payment. Verification means confirming the existence, ownership, valuation and proper presentation of a balance, such as the closing trade payables.

Cut-off means the transaction is recorded in the correct period. Goods received before year end must be in purchases and payables for that year, even if the invoice arrives later. Goods received after year end must be excluded.

Completeness of liabilities asks one question: is there any liability that exists at the balance sheet date but is not recorded? Because the books cannot show what was never entered, you test from outside the ledger: later payments, GRNs, supplier statements and unmatched documents.

Key rules to remember

Audit assertions for payables: Completeness, Existence (occurrence), Rights and obligations, Valuation (accuracy), Cut-off, Presentation; Name the assertion your procedure tests. For payables, completeness and cut-off carry the most risk.
Direction of testing: Overstatement: book to document. Understatement: document to book.; To check that recorded purchases are genuine, start from the ledger and go to the invoice. To check completeness, start from GRNs or later payments and go to the ledger.
Three-way match: Purchase order = GRN = Supplier invoice; Quantity, rate and party must agree before a purchase is accepted for payment.
Payables reconciliation: Balance per supplier statement ± reconciling items = Balance per ledger; Typical reconciling items are goods in transit, payments in transit, debit notes and disputed items.
Period-end identity: Closing payables = Opening payables + Purchases on credit − Payments − Returns and discounts; Use it as an analytical check on the reasonableness of the closing balance.

How to solve Audit of Purchases, Payables and Expenses questions

Use this order for any question on purchases, payables or expenses. It also gives you a clean structure for the written answer.

1Identify the item: purchases, a specific expense, trade payables, or unrecorded liabilities. State the main risk (usually understatement or wrong period).
2Name the assertion at risk: occurrence, completeness, cut-off, accuracy or classification.
3Check internal control first: authorisation of orders, segregation of duties between ordering, receiving and paying, and the purchase approval process. Say how this affects the extent of testing.
4List the documents to vouch: purchase order, GRN, invoice, inspection report, payment voucher, bank statement. Match them to the ledger entry.
5Perform the specific tests: cut-off around year end, supplier statement reconciliation, examination of payments after year end, and review of GRNs not matched to invoices.
6Check valuation and classification: correct rate, taxes, discounts, capital versus revenue nature, and trade payables versus other liabilities as per Schedule III.
7Conclude: state whether you obtained sufficient appropriate evidence, and mention disclosures such as MSME dues and related-party balances.

Quickest way: Assertion, document, direction

When to use it: Use it for short-note and 'how will you verify' questions when you have 8 to 10 minutes.

Write the one-line risk: understatement of liabilities or wrong period.
Write 3 to 4 procedures, each paired with its document (for example, invoice, GRN, supplier statement, post-year-end payment).
Add one cut-off test and one unrecorded-liabilities test. These two earn the most marks.
Close with one line on disclosure and classification under Schedule III.

Common mistakes in Audit of Purchases, Payables and Expenses

Testing only recorded purchases and calling it a completeness test.
Students start from the ledger because it is the easiest starting point.
Fix: For completeness, start from outside the ledger: GRNs, post-year-end payments, supplier statements and open purchase orders.
Ignoring cut-off and checking only invoice dates.
Invoice date feels like the transaction date.
Fix: Use the date goods were received, shown on the GRN, as the basis for the period. Test the last few GRNs before year end and the first few after.
Treating a supplier statement as final proof when it differs from the ledger.
Students assume the external document is always right.
Fix: Prepare a reconciliation. Differences may be goods in transit, payments in transit, debit notes or errors on either side.
Vouching expenses only to the payment voucher.
A payment seems to prove the expense.
Fix: Check that the expense is also authorised, relates to the business and the period, and is supported by an invoice or bill. Check capital versus revenue nature.
Confirming only large year-end creditor balances.
Students link size with risk.
Fix: Remember that a supplier with a nil or small balance may be where an unrecorded liability sits. Include major suppliers with low or zero balances.
Forgetting disclosure.
Focus stays on procedures only.
Fix: End with classification and disclosure: trade payables separate from other payables, dues to micro and small enterprises, and related-party balances.

Worked examples

Example 1

You are the auditor of a manufacturing company with a 31 March year end. Explain how you would test the completeness of trade payables.

Show the solution

Risk: liabilities may be omitted or recorded in the next year, so payables and expenses are understated and profit overstated.
Review internal control over purchasing and receiving: whether GRNs are serially numbered and every GRN is matched to an invoice.
Examine payments made after year end and trace each to the ledger. If a payment relates to goods or services received before year end, check it was accrued as at 31 March.
Review GRNs raised in the last days of March and the first days of April and check that each is recorded in the correct period.
Obtain supplier statements from major suppliers, including those with small or nil balances, and reconcile to the ledger.
Review open purchase orders, unmatched GRNs, unpaid bills files and legal or dispute correspondence for unrecorded items.
Apply analytical procedures: compare payables to purchases and to the previous year, and investigate unusual fall in the payables period.
Check the management representation on completeness of liabilities, and confirm classification and disclosure under Schedule III.

Answer: Completeness is tested by working from outside the ledger: post-year-end payments, GRNs around the year end, supplier statements, open orders and analytical review, supported by internal control review and management representation.

Example 2

Goods costing ₹4,80,000 were received on 29 March, but the supplier invoice was dated 3 April and booked in April. The year end is 31 March. What is the audit finding and the correction?

Show the solution

Identify the test: cut-off of purchases and payables.
The GRN is dated 29 March, so the company obtained control of the goods before year end.
The purchase and the liability belong to the year ending 31 March, even though the invoice came later.
Because it was booked in April, the year-end purchases (or closing stock cost) and trade payables are understated by ₹4,80,000.
Correction: record the purchase or inventory and the payable of ₹4,80,000 in March. Debit Purchases (or Inventory) ₹4,80,000 and credit Trade Payables ₹4,80,000, and reverse the April entry.
Also check that closing stock includes these goods if they are unsold, otherwise the cost of goods sold will be misstated.

Answer: Trade payables and purchases (or inventory) are understated by ₹4,80,000. The auditor should ask management to record it in the year ended 31 March, and evaluate the misstatement if management refuses.

Exam tips

For 'how will you verify' questions, pair each procedure with a document. Marks are given for the document named.
Always include cut-off and unrecorded liabilities when the question mentions payables. These are the points examiners expect.
In MCQs, watch the direction: completeness points to starting from GRNs or later payments, while occurrence points to starting from the ledger.
For expense vouching questions, add authorisation, business purpose, correct period and capital versus revenue nature, then conclude in one line.
Write short numbered points. Each correct procedure can earn a mark, so avoid long paragraphs.

Practice questions from Audit of Various Items of Financial Statements

Audit of Purchases, Payables and Expenses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateTrade Credit and Payables Management Basics

Audit of Purchases, Payables and Expenses: frequently asked questions

What is the difference between vouching and verification?

Vouching checks a recorded transaction against supporting documents, such as an invoice and payment voucher. Verification confirms that a balance, such as closing payables, exists, is owned or owed correctly, and is properly valued and presented. Vouching is mostly about transactions and verification is about balances.

Why is completeness the main risk for trade payables?

Leaving out a liability reduces expenses and raises profit, so there is an incentive to understate. Also, books cannot reveal what was never recorded. This is why auditors test from outside the ledger, using later payments and GRNs.

How do I test cut-off for purchases?

Select GRNs from the last few days before year end and the first few days after. Check that each is recorded in the period in which the goods were received, and that the related invoice and payable are in the same period.

Should the auditor always send creditor confirmations?

No. Supplier statements or confirmations are useful, especially where control is weak or balances are material, but they are not mandatory in every case. The auditor may rely on external invoices and later payments if these give sufficient appropriate evidence.