You are the auditor of Oakshow Ltd and are searching for evidence to prove that the figures for purchases and related creditors are true and fair in the context of the accounts, taken as a whole. You have extracted the following information from the accounts at 31 December 2019.

Your audit work has revealed the following:
(i) Discussions with management and other tests show that selling prices have been increased by more than the cost of purchases with the result that gross profit has improved by one percentage point.
(ii) The company maintains the following records:
• purchase requisitions from stores to the purchasing department (the request that goods be purchased)
• purchase orders made out by the purchasing department on the basis of purchase requisitions and files of information about suppliers (the purchase order is a request to a supplier of goods to deliver them)
• goods received notes made out by the goods receiving department when goods are received • file of purchase invoices received from a supplier • inventory records showing quantities of receipts, issues and balances of inventory on hand • purchase journal in which all invoices are recorded • purchase ledger containing personal accounts for each supplier • general ledger accounts, containing, among other things, purchase accounts and trade payables control account.
(iii) As a result of your systems work you have concluded that each of the above records is held by different people and that they are carefully and properly controlled.
Required:

(a) In Figure 7.4 fill in the blanks to show the relationship between the above records and the purchases and trade payables figures in the accounts. You should refer to Figure 7.2 on page 272 while you are doing this.

(b) Describe the kinds of evidence that can be used to upgrade the various documents and records.

(c) Explain how the systems work and the review of the accounts may help you to accept the figure of ‘purchases’.

Transcribed Image Text:

2019 2018 f f f Turnover Opening stock 200000 Purchases 1100000 1300000 Closing stock 250000 Cost of goods Sold Gross profit 1500000 1400 000 1 050 000 994 000 450000 406000