Chapter 7 - Purchases system

Question 1

What are the 4 stages in a purchase system?

Answer 1

1. A purchase order is raised
2. The goods are received by the company
3. A purchase invoice is received from the supplier
4. The purchase invoice is paid

Question 2

Explain what happens in the first stage in a purchase system - A purchase order is raised (3)

Answer 2

• Purchase orders (PO) are created on pre-numbered, sequential forms that are authorised by responsible official
• Approved supplier lists are maintained with only authorised suppliers (and restricted access to this)
• If no authorised supplier exists a tender process is started

Question 3

What is the purpose of using pre-numbered, sequential purchase orders (PO) in a purchase system?

Answer 3

Pre-numbered POs ensure that all orders are tracked, prevent duplication, and maintain completeness of records.

Question 4

Why is maintaining an approved supplier list important in a purchase system?

Answer 4

An approved supplier list ensures that purchases are made from reliable sources, reducing risks of fraud or poor quality goods.

Question 5

What control is applied if no authorised supplier exists for a required purchase?

Answer 5

A tender process is initiated to ensure transparency and competitive pricing.

Question 6

Explain what happens in the second stage in a purchase system - The goods are received by the company (3)

Answer 6

• A pre-numbered/sequential goods received note (GRN) is raised when goods received and matched to the original purchase order to check quantity and validity
• Goods are checked for quality on receipt and returned if substandard
• Inventory system is updated so goods are available for sale

Question 7

How does a Goods Received Note (GRN) function as a control in the purchase system?

Answer 7

The GRN, which is pre-numbered, verifies the receipt of goods by matching them with the PO, ensuring accuracy in quantity and validity.

Question 8

Explain what happens in the third stage in a purchase system - A purchase invoice is received from the supplier (1)

Answer 8

• The purchase invoice is matched to the GRN and PO to ensure invoice contains correct quantity and price

Question 9

Why are goods checked for quality upon receipt in a purchase system?

Answer 9

Quality checks prevent substandard items from entering inventory, ensuring only acceptable goods are available for sale.

Question 10

What control is applied when matching a purchase invoice to the GRN and PO?

Answer 10

This matching process ensures that the invoice reflects the correct quantity and price, reducing errors and overpayments.

Question 11

How does reconciling supplier statements with the payables ledger help in control?

Answer 11

It confirms completeness by ensuring all invoices are accounted for and identifies discrepancies early.

Question 12

Explain what happens in the fourth and final stage in a purchase system - The purchase invoice is paid (3)

Answer 12

• Payments are authorised by responsible official prior to payment
• The purchase ledger is updated promptly, or Invoices are stamped ‘PAID’ to prevent paying twice
• Due dates of invoices are monitored to avoid interest or missing early payment discounts

Question 13

Why must payments be authorised by a responsible official before processing?

Answer 13

Authorisation prevents unauthorised payments, reducing the risk of fraud or errors.

Question 14

How does marking invoices as ‘PAID’ help in a purchase system?

Answer 14

It prevents duplicate payments for the same invoice, maintaining accuracy in cash flow.

Question 15

What is the purpose of monitoring invoice due dates?

Answer 15

Monitoring due dates avoids late payments, preventing interest charges and ensuring prompt payment discounts are utilised.

Question 16

Why is it important to identify deficiencies in a purchase system?

Answer 16

Identifying deficiencies allows for timely improvements, reducing the risk of fraud, errors, and inefficiencies.

Question 17

Give an example of a deficiency related to tracking purchase invoices

Answer 17

A lack of procedures to track due dates for purchase invoices can lead to missed discounts or unnecessary interest charges.

Question 18

What type of fraud could occur if the same person manages both ordering and payments?

Answer 18

This setup could lead to fraudulent orders and payments, as one person can control the process without checks from others.

Question 19

Name two controls that can help prevent fraudulent payments in a purchase system

Answer 19

1. Segregation of duties between ordering, receiving, and payment processing.
2. Requiring authorisation for payments by a senior official.

Question 20

The directors of Lyton Limited (LL) have just uncovered a fraud being perpetrated by the stores manager. He was in charge of ordering, had raised a number of false orders to non-existent suppliers, raised goods received notes in respect of non-existent deliveries and forwarded an invoice to the accounts department, which was then paid.
Which two of the following controls could have prevented this fraud?
A Approved list of suppliers
B Check of goods inward by person other than orderer
C Pre-numbered order forms
D Blank order forms locked in a safe

Answer 20

A Approved list of suppliers
B Check of goods inward by person other than orderer

Question 21

Weezy plc is a company that has a large number of deliveries daily.
Which one of the following internal controls is most likely to prevent Weezy plc paying for goods that have not been received?
A Locked stores
B Matching of purchase invoices with goods received notes
C Authorisation of invoice payment
D Safeguarding of blank order documents

Answer 21

B Matching of purchase invoices with goods received notes

Question 22

Rhonda posts the invoices to the payables ledger.
Which one of the following would help prevent suppliers from being overpaid?
A Posting invoices to the receivables ledger
B Examining the purchase ledger for unusual entries
C Authorisation of payments
D Bank reconciliations

Answer 22

C Authorisation of payments

Question 23

Which two of the following control activities are most likely to reduce the risk of payments being made twice for the same liability?
A Stamping ‘Paid’ on invoices that have been paid
B Prompt dispatch of cheques
C Authorisation of payments
D Checking supplier statements before payments are made

Answer 23

A Stamping ‘Paid’ on invoices that have been paid
C Authorisation of payments

NOT
D Checking supplier statements before payments are made - Although checking supplier statements will help, the timing differences between the statement date and payments made may mean that this method is not foolproof.

Question 24

The auditor of Sunny plc has identified that there is no procedure to track purchase invoice due dates.
Which one of the following is the most likely consequence which might arise as a result of that deficiency?
A Prompt payment discounts may not be obtained
B Goods not actually received may be paid for
C Inferior goods may be purchased
D Payments may be made to fictitious suppliers

Answer 24

A Prompt payment discounts may not be obtained

Question 25

For each of the following, state whether it is an objective relating to ordering, recording invoices or payment:

Orders are only made to authorised suppliers A Ordering
B Recording invoices
C Payment

Liabilities are recognised for all goods and services received
D Ordering
E Recording invoices
F Payment

Orders are made at competitive prices G Ordering
H Recording invoices
I Payment

All expenditure is authorised
J Ordering
K Recording invoices
L Payment

Cut-off is correctly applied
M Ordering
N Recording invoices
O Payment

Goods and services are only accepted if there is an authorised order
P Ordering
Q Recording invoices
R Payment

Answer 25

A Ordering
E Recording invoices
G Ordering
L Payment
N Recording invoices
Q Recording invoices

Question 26

Why is numerical sequence on GRRs checked?

Answer 26

Sequence provides a control that purchases are completely recorded. Missing documents should be explained, or cancelled copies available otherwise the implication could be that goods have been received but not matched with an invoice and the liability in respect of that invoice is being omitted.

Question 27

Give four examples of tests to be performed on the cash payments book.

Answer 27

For a sample of payments:
(1) note that cheques are signed by the persons authorised to do so within their authority limits
(2) check to suppliers’ invoices for goods and services. Verify that supporting documents are signed as having been checked and passed for payment and have been stamped ‘paid’
(3) check to suppliers’ statements
(4) check to other documentary evidence, as appropriate (agreements, authorised expense
vouchers, waves/salaries records, petty cash books etc)

Question 28

1 For each of the following examples, select the type of control activity which it represents. Monthly management accounts are compared to budget and differences investigated.
A Authorisation and approval
B Reconciliations
C Verifications
Numerical sequence checks are undertaken on goods received records.
D Authorisation and approval
E Reconciliations
F Physical or logical

Answer 28

1 Correct answer(s):
C Verifications Correct answer(s):
F Physical or logical
Analysis of actual performance against budget is verification (since it involves the comparison of an item with a policy). Checking numerical sequences is a logical control to do with the completeness of records.

Question 29

4 Redesign Ltd is a large property management company which makes use of the services of many different contractors for building, design and decorating services.

Which two of the following internal controls are most likely to prevent services being used for the private purposes of employees?

A Purchase orders are processed by the buying department following authorisation by the production director.
B Purchase requisitions must be signed by two team members for any given project.
C Purchase orders should only be placed with authorised contractors.
D Purchase invoices are matched to authorised purchase orders.

Answer 29

A Purchase orders are processed by the buying department following authorisation by the production director.
B Purchase requisitions must be signed by two team members for any given project.
The answer is not option C as inappropriate orders could still be made with authorised suppliers. The answer is not option D as once inappropriate orders have been authorised, matching the order with the invoice will not prevent that act having taken place.

Question 30

5 The organisational structure at Molyneux Ltd is as follows.
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The production department is headed by Jack Frost, whose deputy is Tiny Tim. Jack Frost reports to the managing director, Nicholas Clause. There are several other departments (sales and marketing, accounting, purchasing, human resources and internal audit).
Which one of the following statements reflects the ideal situation with regard to purchase ordering?
A Jack Frost and Tiny Tim should make purchase orders as production needs dictate.
B Jack Frost should make purchase orders, although Tiny Tim could make requisitions as production needs dictate.
C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders should be placed by the purchasing department, having been authorised by the purchasing director.
D Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders should be placed by the purchasing department, having been authorised by Nicholas Clause.

Answer 30

C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders should be placed by the purchasing department, having been authorised by the purchasing director.
Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders should be placed (and by implication authorised) by the purchasing department. The managing director would not be involved in authorising normal purchasing transactions in a company with a purchasing department. Someone other than the production department leaders should authorise purchases.

Question 31

8 The auditor has identified the following deficiencies within Rainer Ltd’s accounting system.
For each deficiency, select the most likely consequence which might arise as a result of that deficiency.
Purchase of goods from unauthorised suppliers
A Payment to fictitious suppliers
B Purchase of inferior goods
C Prompt payment discounts not obtained
Purchase ledger clerks permitted to amend standing data on the payables master file
D Payment to fictitious suppliers
E Purchase of inferior goods
F Prompt payment discounts not obtained

Answer 31

B Purchase of inferior goods
Purchase of goods from unauthorised suppliers is likely to lead to inferior goods being purchased.
Correct answer(s):
D Payment to fictitious suppliers
By having access to the payables master file, purchase ledger clerks are in a position to create fictitious suppliers and so then enable payments to them.

Question 32

9 Which three of the following are control activities relating to the purchases system?
A All orders are authorised by a senior staff member.
B Blank order forms are kept in a secure location with restricted access.
C All goods and services received are accurately recorded.
D Order forms are sequentially pre-numbered.

Answer 32

A All orders are authorised by a senior staff member.
B Blank order forms are kept in a secure location with restricted access.
D Order forms are sequentially pre-numbered.
The third statement is not a control activity, it is a control objective relating to the purchases system. The others are all control activities.

Question 33

10 The following describes processes in the purchases system at Woggle Ltd.
For each process, select whether it represents a strength or a deficiency of the system.
New inventory is ordered over the telephone by the company buyer, who initiates orders herself and maintains a record of telephone orders.
A Strength B Deficiency
When goods are subsequently received, the buyer has sole responsibility for checking the quantity of goods received to the record of telephone orders.
C Strength D Deficiency
Invoices from suppliers are sent to the buyer for authorisation, before being forwarded to the Accounts Department for entry into the accounting records and subsequent payment.
E Strength
F Deficiency

Answer 33

10 Correct answer(s): B Deficiency
Although a record of orders is kept, there is a lack of segregation of duties as the buyer both places and authorises the order. A director should authorise purchases (particularly those above a certain cost limit) rather than the buyer.
Correct answer(s): D Deficiency
The buyer only checks the goods received to ensure that the quantities are the same as were ordered.
Correct answer(s): F Deficiency
The buyer appears to have complete control over what is purchased by Woggle Ltd. There does not appear to be any kind of purchase limit placed upon her, or any reference made to the sales department for what they want to sell. There is a risk that the buyer could purchase items for personal use.

Question 34

11 Deficiencies have been identified in the following areas of Pogo Ltd’s purchases system. For each deficiency, select the risk which is most likely to arise.
A lack of segregation of duties in relation to the ordering process
A Unauthorised purchases may be made for personal use.
B The company may not take advantage of the full period of credit extended.
Records of goods received are not kept.
C Goods may be misappropriated for private use.
D Goods and services might not be obtained on the most advantageous terms.
The payment listing produced by the accounting system is only read by the payments clerk.
E Invoices may not be recorded resulting in non-payment.
F Invoices are paid at the wrong time.

Answer 34

A Unauthorised purchases may be made for personal use.
The risk of not taking full advantage of a period of credit would be a consequence of problems with goods received or payments.
Correct answer(s):
C Goods may be misappropriated for private use.
The risk of goods and services not being obtained on the most advantageous terms would be more likely to arise at the ordering stage.
Correct answer(s):
F Invoices are paid at the wrong time.
The risk of invoices not being recorded would arise at the goods received/invoicing stage, before the production of a payment listing.

Question 35

13 The following are descriptions of processes in the purchases system at Pontipines plc.

For each process, select whether it represents a strength or a deficiency of the system. Blank order forms are readily available from a tray in the finance department.
A Strength
B Deficiency
Buyers have a free choice of suppliers, in order to obtain the best terms.
C Strength
D Deficiency
Order forms are prepared only when a pre-numbered purchase requisition has been received.
E Strength
F Deficiency

Answer 35

B Deficiency
Blank order forms should not be readily available, but should be secured; if they were readily available then anyone with access to them could place an order.
Correct answer(s): D Deficiency
Instead of allowing buyers a free choice of suppliers, there should be a central policy for the choice of suppliers so that only authorised suppliers are used. Such suppliers should have been vetted to verify that they give the best value for money.
Correct answer(s): E Strength
Preparing order forms only when a pre-numbered purchase requisition has been received is a strength, as goods will only be ordered once the need for such goods has been approved.