Cycle: acquisition and payment

Question 1

Explain the ordering functions

Answer 1

There must be a section or department that initiates the placing of orders for goods or services with suppliers. Requests for orders to be placed will come from other departments, for example, the warehouse (stores) department, the accounting department (stationery, etc.).

Question 2

What is the purpose of the receiving of goods function? {purchasing and payment cycle}

Answer 2

This function will be responsible for receiving goods ordered from suppliers and acknowledging the company’s acceptance of the goods.

Question 3

Explain the recording of purchases function

Answer 3

The purpose of this function is to raise the purchase and the corresponding liability (creditor) in the accounting records.

Question 4

Disclose the payment preparation function

Answer 4

This function will be responsible for determining the amount to be paid to the creditor, confirming that the payment is valid and preparing any documentation required for the payment to be authorised and initiated.

Question 5

Explain the actual payment and recording of the payment

Answer 5

• This function will be responsible for preparing the means of payment, for example, electronic funds transfer, authorising it and carrying out the payment timeously.
• The function will also be responsible for recording the payment in the accounting records.

Question 6

State the different functions in the acquisition and payment cycle

Answer 6

1. Ordering of goods
2. Receiving of goods
3. Recording of purchases (Acquisitions)
4. Payment preparation
5. Actual payment and recording of the payment

Question 7

Disclose the different documents used in the purchase and payment cycle

Answer 7

1. Requisition
2. Purchase order forms
3. Suppliers’ delivery note
4. Goods received note
5. Purchase invoice
6. Credit note
7. Creditors statement
8. Remittance advice
9. Receipt
10. Logs, variance reports and etc

Question 8

Explain the requisition document

Answer 8

This document is used to convey to the buying department that goods are required. The requisition can be initiated in any department but will mainly come from the warehouse department.

Question 9

State the different ways in which the warehouse document determines when goods are required?

Answer 9

• The use of reorder levels and quantities. Each inventory item is assigned a reorder level and a reorder quantity and as soon as the reorder level is reached, a requisition for the reorder quantity is prepared by the warehouse department. This presupposes that some kind of perpetual inventory recording system is maintained. Alternatively, warehouse personnel could perform regular counts of physical inventory and compare quantities on hand to reorder levels. This is not, however, very efficient! Using reorder levels and quantities will be far easier in computerised perpetual inventory systems where the computer can be
  programmed to print a daily report of inventory items that have reached their reorder level.
• The use of production schedules that indicate when particular inventory items are required.
• * By particular request (preferably written), from a manufacturing or other department.

Question 10

Define purchase order forms

Answer 10

Purchase order forms that are completed by the buying department record the detail and price of the goods to be purchased and are addressed to the supplier. They should be signed by the chief buyer.

Question 11

Define suppliers’ delivery note

Answer 11

This document is made out by the supplier and details the goods that are being supplied. It will be crossreferenced to the purchasing company’s order form, and on delivery of the goods, will be signed by the purchasing company to acknowledge the receipt of the goods.

Question 12

Define goods received note

Answer 12

This document is completed by the purchasing company when the goods are delivered by the supplier. It records the actual goods received and will be cross-referenced to the supplier’s delivery note.

Question 13

Define purchase invoice

Answer 13

This document is sent by the supplier to the purchasing company to inform them of the goods for which it is being charged, the price, any discounts and VAT.

Question 14

Define credit note

Answer 14

This is a supplier document that records any credits to the purchasing company’s account other than a payment (i.e. when incorrect, damaged or unwanted goods are returned by the purchasing company). Returned goods should be accompanied by a returned goods voucher.

Question 15

Define creditors statements

Answer 15

Produced by the supplier on a monthly basis, this document summarises the transactions between the supplier and purchasing company for the month, in terms of the supplier’s records.

Question 16

Define remittance advice

Answer 16

A document sent by the purchasing company to the supplier that contains a breakdown of the invoices that are being paid by the accompanying bank transfer.

Question 17

Define receipt

Answer 17

A document provided by the supplier to acknowledge that a payment of Rx has been received.

Question 18

Define logs, variance and etc

Answer 18

In a computerised system, the computer can be programmed to compile logs, variance reports, lists, etc. A log is simply a record of an activity that has taken place on the computer. For example, if a masterfile amendment is made, the computer will automatically “store” the activity, who did it, when and where it was done and the nature of the amendment.

Question 19

What is segregation of duties?

Answer 19

• Separation of functions, for example, ordering, receiving goods, processing payments.
• Separation of responsibilities within functions, for example, generating purchase requisition report, initiating purchase orders, authorising purchase orders.

Question 20

Explain isolation of responsibilities

Answer 20

• Isolating responsibilities through granting access privileges, for example, only the chief buyer can approve purchase orders.
• The goods receiving clerk signs the supplier delivery note that isolates his responsibility for accepting the delivery of goods from a supplier.

Question 21

Explain approval and authorisation

Answer 21

• The system will not allow the order clerk to place an order with a supplier who is not on the creditors masterfile.
• The creditors’ section head approves the schedule of EFT payments to creditors.

Question 22

Explain custody

Answer 22

• Access to the bank account (custody of the company’s money) is strictly controlled by user IDs, PINs and passwords (those with authority to make an EFT are effectively the custodians of the company’s cash).
• Goods received by the goods receiving section are kept securely until they are transferred to the warehouse.

Question 23

What is access controls?

Answer 23

• All users on the system must identify and authenticate themselves by IDs and passwords and what they are authorised to do is reflected in their user profiles.
• Additional access controls such as terminal shut down and logging of access violations are in place.

Question 24

Explain the purpose of comparison and reconciliations

Answer 24

The system reconciles the total amount (and number) of invoices selected for payment with the reduction in the total and number of invoices on the unpaid invoices list.
* The creditors’ clerk reconciles the supplier’s statement with the creditor’s (supplier’s) account in the creditors masterfile.

Question 25

Explain performance review

Answer 25

• Supervisory and management staff can access the purchase order file to see how efficiently approved purchase orders are being executed.
• Reports on inventory ageing (number of days inventory items are held) can give an indication of the appropriateness of reorder levels and the performance of the chief buyer and inventory controller.
• Monitoring complaints from the sales manager relating to sales lost because of inefficient purchasing.

Question 26

What is logs and reports?

Answer 26

• Log of and changes to existing creditors banking details
• Weekly reports of long outstanding purchase orders or of GRNs for that there is no invoice

Question 27

State the different types of fraudulent financial reporting

Answer 27

• Understatement of trade creditors (trade payables): this will usually be done to improve the ratios in the working capital sector of the statement of financial position or to avoid a net liability position. Auditors will conduct comprehensive completeness testing on creditors where they believe such a risk exists.
• A common way of understating creditors is to manipulate “cut-off” at year-end, for example,accounting after year-end for a purchase of inventory made prior to year-end, but including the inventory purchased in the inventory on hand at year-end. This also has the benefit of increasing profits, so all round the financial statements look much better.
• Of course if the directors’ objective was to reduce profits, they could do so by fraudulently increasing purchases.
• Where companies trade with numerous related parties, manipulation of trade payables becomes much easier.

Question 28

State the different types of misappropriation of assets

Answer 28

• Ordering of goods by employees or management for their personal use and having the company pay. Making completely fictitious payments to creditors (occurrence of purchases/obligation of creditors)
• Company claims VAT to which it not entitled
• Directors or employees accepting bribes from suppliers as an inducement to purchase gods from that (supplier) company
• Theft of goods at the receiving stage

Question 29

What should the auditor do to verify that trade payables included in the balance actually exist, and are not fictitious?

Answer 29

• Record the number of the last GRN for the year (cut-off number)
• Select from the purchase journal, material purchases entered during the last two weeks of the year and trace to the relevant GRN and supplier delivery note (via the invoice), and
• Inspect these documents to confirm that the GRN number is lower than the cut-off number and that the documents are dated prior to the year-end date.

Question 30

What should the auditor perform to verify trade payables included in the financial statements at appropriate amounts and related disclosures have been appropriately measured described? (Accuracy, valuation and allocation)

Answer 30

Agree the list of individual creditor’s balances to the balance on the creditors control account.
* Agree a sample of individual creditor’s balances on the list to the individual creditor’s account in the creditors ledger.
* Agree the total of the accrual and creditors control accounts in the general ledger to the trial balance.
* Re-perform casts of the creditors control account, and the creditors list.
* Identify any debit balances on the creditors list, establish the reason with the purchases manager and consider whether the balances should be transferred to debtors.
* Select a sample of creditors (that includes the company’s major suppliers) from the creditors list and obtain the year-end creditors reconciliations performed by the creditors clerks:
– re-perform the casts of the reconciliation
– agree balances on the reconciliation to the creditors statement and creditors listing
– test the logic of the reconciliation
– by inspection of the supporting documentation and by inquiry and confirmation, confirm the validity of reconciling items
* If applicable, select a sample of foreign creditors from the creditors list and by scrutiny of the supporting documentation (invoice), determine the amount owed to the creditor in the foreign denominated currency.
* Obtain from a financial institution or suitable publication, the applicable currency exchange rate at the financial year-end (spot rate), and
– using the spot rate, compute the amount owed to the creditor at the financial year-end in local currency (rand)
– compare this amount to the amount recorded for the creditor on the creditors list and, if necessary, request adjustment. The foreign creditor will have been raised initially at the rate ruling at transaction date i.e. the date on which the risks and rewards of ownership passed, and may require adjustment for any change to the exchange rate.

Question 31

What should the auditor note when testing the assertion accuracy, valuation and allocation for trade payables are included in the financial statements at appropriate amounts and related disclosures have been appropriately measures and described?

Answer 31

The creditors balance will be written up or down, and the corresponding entry will be to an exchange loss or gain.
* Obtain a list of accruals from the client:
– Cast the list.
– Agree the total on the list to the account in the general ledger, the trial balance and the statement of financial position (the amount will be included in creditors).
* Agree amounts recorded on the accrued list to invoices, statements, etc., and re-perform any calculations, for example, leave pay accrual.

Question 32

How can the auditor test for all trade payables and accruals that should have been recorded have been recorded, and all relevant disclosures that should have been recorded have been recorded?

Answer 32

• Compare the list of creditors at the current year-end to the previous year-end, to identify:
  – creditors on the previous list who do not appear on the current list
  – creditors balances that are significantly smaller at the current year-end, and
  – by enquiry and inspection, determine and evaluate the reason.
• Inspect the creditor’s correspondence file for correspondence relating to unsettled disputes with suppliers,
  and by discussion with management, determine whether any adjustments to creditors are required, for example, the audit client may be disputing the actual delivery or condition of the goods delivered and may not have raised the liability.
• If available, inspect the list of GRNs that were unmatched to invoices at year-end. (This list should have been obtained by the auditor at year-end when document cut-off numbers were taken.) Confirm, by inspection, that a journal entry raising the corresponding creditors at year- end has been passed, and that the amounts raised are correctly computed by:
  – obtaining the price of the goods received (from the order or pricelist or corresponding invoice if it has arrived), and
  – recomputing the amount owed.
• Select a sample of material purchases from the purchase journal for the month following the year-end and trace to the goods received note applicable to the purchase, to confirm that:
  – the GRN number is greater than the GRN “cut-off” number
  – the dates on the GRN and supplier delivery note are after the financial year-end.
• Select a sample of large payments from the cash payments journal for the month(s) after the financial year-end and, by inspection of the GRN and delivery note, confirm that if the payment relates to goods or services received prior to year-end, the corresponding creditor had been raised at year-end.
• Inspect the work papers relating to creditors’ reconciliations to identify any instances of reconciling items that result in understatement of the creditors balance, for example, a disputed amount prematurely written off, and follow up with management.
• Inspect the work papers from attendance at the inventory count and investigate any instances of physical inventory materially exceeding recorded inventory. This may indicate deliveries received prior to year-end that have been included in physical inventory but for which no entries in the records have been made (i.e. no goods received note or invoice from which to raise the liability).
• Inspect the general ledger accounts for periodic expenses to determine whether all amounts have been correctly accrued, for example, rent, electricity, have 12 debits to the expense accounts.
• Perform analytical procedures and follow up on any material fluctuations, for example:
  – current year purchases, creditors and accruals at year-end to prior years
  – trade payables as a percentage of current liabilities
  – trade payables days outstanding compared to prior years.
• Enquire of the financial accountant whether suppliers of services (as opposed to goods) who provided the service prior to year-end, have been raised as creditors.
• Inspect the creditors control account for unusual debit entries.

Question 33

How can the auditor test for classification?

Answer 33

By enquiry of management and reference to the audit documentation on purchases and scrutiny of the trade payables account, confirm that:
* only amounts payable to trade creditors with in twelve months have been included in the account, and
* that the balance on the account does not include amounts that should not be included, for example, short-term borrowings, provisions, bank overdraft.

Question 34

How can the auditor test for the assertion presentation?

Answer 34

By inspection of the notes to the financial statements, confirm that:
* disclosures are in terms of the applicable reporting framework, for example, trade payables are presented on the face of the statement of financial position under current liabilities
* any aggregations or disaggregations are appropriate and relevant
* disclosures are accurate in terms of the audit documentation (amounts, details, facts)
* disclosures are clearly described and understandable in the context of IFRS, IFRS for SMEs as applicable, for example, accounting policy relating to currency translation for foreign creditors, and
* all disclosures pertaining to trade and other payables as required are included.