For context, the auditor is assigned to analyze and test the controls related to purchasing, including inventory items as well as items that are expensed. There are three purchasing agents for a medium-sized company ($250 million in sales) with each specializing in areas. Department heads are authorized to purchase "expense-type" items up to $750 individually and up to $20,000 annually.

Required
a. Explain how the auditor would test to see that the following controls are working effectively:
• Authorization of purchases by department heads
• Authorization of inventory purchases by purchasing agents
• Independent receipt of inventory
• Reconciliation of inventory with perpetual records on a regular basis
• Limit of total purchases for a month to amount approved by budget or planned production
• Clear accounting policies regarding the accounts to be charged for purchases with periodic review by the controller's department
b. Assume management and auditors both conclude the controls are working properly. Of the total purchases made during the year, $120 million was for products (inventory and cost of goods sold) and another $20 million was for expenses, excluding legal and professional fees. These expenses ranged from office supplies, to production supplies, etc., and one large item-advertising expense at $10 million.
1. Identify the implications for the remaining audit testing of expenses. Identify all the assumptions you have made about the nature of the auditor's tests of expense items. Explain your answer.
2. Identify the implications for the remaining testing of cost of goods sold.