Payment And Purchase Cycle

Question 1

What does purchase and payment cycle primarily concerned with?

Answer 1

The ordering, receiving and payments of goods.

Question 2

Why is the purchase and payment cycle considered as a high risk cycle?

Answer 2

There is cash involvement. Cash per ISA standards carries an inherent fraud risk.

Question 3

Name the four functions of purchase and payment cycle.

Answer 3

1. The ordering of goods and services
2. The receiving of goods and services
3. The recording of purchase and account payable
4. The payment of goods received

Question 4

Name the accounts that are typically affected by the purchase and payment cycle within the statement of comprehensive income.

Answer 4

1. Salaries and wages
2. General company expenses
3. Goods and service consumed

Question 5

Name the accounts that are typically affected by the purchase and payment cycle within the statement of financial position.

Answer 5

1. Trade payables
2. Other payables
3. Provisions
4. Accruals
5. Bank
6. Cash
7. Discount received
8. Prepaid expenses
9. VAT

Question 6

List the process of ordering of goods.

Answer 6

1. Requesting department complete a requisition form, requesting the procurement department to purchase a specific item/s
2. Upon receiving the requisition, a buyer within the procurement department will source the required goods
3. Buyer should have a list of approved suppliers that provides the best product at the best price. The list of approved suppliers is a summary of all suppliers from whom the department has bought from.
4. In order to amend the list of approved suppliers, the approval of the chief buyer should be obtained
5. Once supplier is selected, a pre-numbered purchase order (triplicate) must be completed and approved by the chief buyer. This is to avoid the risk of buyer buying from another supplier because they are receiving kickbacks or commissions.
6. Copies of the purchase order must be provided to the supplier and to the receiving department to be filed numerically.
7. Telephonic orders must be discouraged, but if could not be avoided, the order should be followed up with an official order.
8. Once the order has been placed, the focus now shift to the receiving function.

Question 7

Discuss the receiving function.

Answer 7

1. The delivery clerk of supplier delivers goods, the receiving clerk must agree the reference per the supplier delivery note to a numerically filled order. To ensure goods received were correct.
2. Once verified, receiving clerk should perform a superficial quality check.
3. Goods not taken into receipt must be clearly indicated on the suppliers delivery note and both receiving clerk and delivery clerk sign off the amendments made.
4. There should be surveillance cameras where the goods are received
5. If goods are returned, a pre-numbered credit note must be completed and must be approved by the purchases manager
6. Once the receiving clerk accepted the delivery, signed off the supplier delivery note, made amendment, a pre numbered good received note must be completed of actual quantity of goods taken receipt of.
7. Goods received note cross referenced to relevant purchase order and delivery note.
8. Copies of this cross referenced documents must be sent to the accounting department for recording of transaction.

Question 8

Discuss the recording of the transaction.

Answer 8

1. Before the transaction is recorded, the accounting clerk should compare the details of the invoice from the supplier to the underlying supporting documents by making use of grid stamp detailing the following:
   - quantity invoiced to GRN
   - price per invoice to purchase order
   - VAT accounted at 14%
   - recalculate invoiced amount
2. Only once all these checks have been performed, can the transaction be posted.
3. Once posted the liability exists and payment must be effected when it becomes due.

Question 9

Name the two sub functions of payment function.

Answer 9

1. Preparation of payment

2. Actual payment to creditor

Question 10

Discuss the preparation of payment function.

Answer 10

1. A payment requisition is prepared by the creditors clerk after inspection of the documentation received from the recording clerk.
2. A reconciliation should be performed by the the creditors clerk whereby the monthly creditors statements received from the creditors are reconciled to the invoice received from the supplier as well as payments made to creditors
3. Once the clerk is confident of the amount outstanding, the clerk can then request payment by means of a payment requisition.
4. All documents supporting the payment should be present before a payment requisition should be effected.
5. The main purpose of this function is to make sure only valid creditors are paid, on time and at the correct amout.

Question 11

Discuss the actual payment function.

Answer 11

1. The payment acquisition, supported by all documents is presented to the authorized signatories.
2. Here should always be two signatories and they must make sure that they inspect to verify the amount, payee, date, supporting documents and afterwards cancel the supporting documentation before they sign a cheque or affect EFT
3. A remittance advice is then prepared to indicate to the supplier what invoice each payment made refers to.
4. Cheques should be numerically numbered, crossed “non-transferable” and all cheques return from the bank must be filed and reviewed for suspicious endorsement

Question 12

List some of the risks within the purchase and payment cycle.

Answer 12

1. Deliberate misapplication of IFRS and fraud by management by:
   - capitalization of expenditure and subsequent impairment of assets that should have been expensed
   - raising of excessive provisions to be held in reserve which are then released as income as and when management wishes to do so
   - use of special purpose entity to move liabilities ‘off balance sheet’ of to create fictitious income stream by virtue of charged between related parties
2. Management bias and incentive to misstate expenditure
3. Complexity of expenditure incurred
4. Management override of controls or fraud by employees in collusion with third parties to process personal expenditure as business expenditure and possible duplication of payments
5. Incorrect cut off period
6. Understate accounts payable where management may be under pressure to reflect high levels of earnings and working capital
7. Incorrect recording of foreign exchange transactions
8. Discounts not claimed

Question 13

Discuss the direction of testing in the purchase and payment cycle.

Answer 13

1. For assets and expenses:
   - test for overstatement
   - accounting records to source documents
2. For liabilities and income:
   - test for understatement
   - supporting documents to accounting records

Question 14

Name the assertions relating classes of transactions.

Answer 14

1. Occurrence
2. Completeness
3. Accuracy
4. Cut off
5. Classification

Question 15

Name the assertions relating to account balances at period end (financial position items).

Answer 15

1. Completeness
2. Existence
3. Rights and obligations
4. Valuation

Question 16

Name the assertions relating to presentation and disclosure.

Answer 16

1. Occurrence
2. Completeness
3. Accuracy
4. Classification
5. Rights and obligations
6. Valuation

Question 17

What are the control objectives in purchase and payment cycle?

Answer 17

1. Purchase transactions are valid (validity and occurrence)
2. Purchase transactions have been properly authorized (authorization)
3. Purchase transactions shown at correct values (accuracy)
4. Purchase transactions are classified correctly (classification)
5. Purchase transactions have been recorded correctly (recording)
6. All purchase transactions have been recorded (completeness)
7. Purchase transactions recorded timely in the correct period (cut off)

Question 18

What are some of the internal controls implement by the client to ensure that all recorded purchases are valid and supported by proper documentations?

Answer 18

All entries in the purchase journal and in the cash book relating to cash purchases are supported by:

1. Requisitions
2. Purchase orders
3. Delivery notes
4. Good received notes
5. Invoices
6. Creditors statements

Question 19

How do you test the internal controls implemented to ensure that all recorded purchases are valid and supported by proper documentations?

Answer 19

1. Enquire of client’s personnel about the procedures for purchases
2. Select purchases from the purchase journal and follow it through to the invoice
   - agree details such as name, amount and date
3. Match the invoice with GRN, delivery notes and order
4. Agree the quantity per the invoice with GRN and delivery notes
5. Agree the price with the order or price list
6. Test the accounting accuracy on the source document

Question 20

What are some of the internal controls that can be implemented to ensure that all purchases are authorized according to company policies? (Authorization)

Answer 20

1. If stock decreases to re-order level a requisition is made out by computer or store-man
2. No goods delivered are accepted if a valid order for it doesn’t exist
3. Separate goods receiving section and where goods are received
4. Orders are prepared by buyers from quotation requested and prices compared
5. Orders are authorized by the purchase manager and supporting documentation is cancelled

Question 21

What are some test of controls to ensure proper authorization of purchases?

Answer 21

1. Enquire of the storeman and buyers and observe the procedures in relation to the requesting, ordering and receiving of goods
2. Observe procedures to agree goods actually delivered to purchase orders
3. Inspect layout of client premises to identity separate receiving division
4. Investigate selected orders and match it with the requisition
5. Compare with the quotation and investigate the signature of the purchase manager as authorization

Question 22

What are some of the internal controls used to ensure completeness in the purchase function?

Answer 22

1. Two persons inspect goods on received for quantity and quality and prepare a GRN
2. The purchase order is matched with the delivery note and short deliveries are indicated on a delivery note and a credit requires is made out
3. A register is kept of unmatched purchase order and is regularly followed up by the senior buyer
4. The GRN is matched with the invoice and is thereafter recorded in the purchase journal
5. All requisitions, orders and GRN are sequentially numbered and missing numbered are followed up

Question 23

What are some of the test of controls to ensure completeness of valid purchase transactions?

Answer 23

1. Enquire and observe procedures in relations to receiving goods and observe the presence of two people receiving the goods
2. Inspect credit requests, follow through to purchase order and delivery notes from suppliers
3. Inspect register for unmatched purchase orders as well as proof of review by senior buyer
4. Select GRN and follow it though to the invoice and the entry in the purchase journal
5. Investigate the list of GRNs and follow up receipts which are not matched with an invoice and follow through to the list of provisions
6. Enquire about procedures for follow up of outstanding orders
7. Inspect requisitions, orders and GRN documents for sequential numbering

Question 24

What are some of the internal controls for accuracy to ensure that all orders are carried out accurately and all purchase transactions are accurately recorded at the correct quantities, amounts and are arithmetically correct?

Answer 24

1. The purchase invoice is independently checked before recording it in the purchase journal and the following is done:
   - prices are compared with price list and orders
   - quantity compared with GRN
   - accounting accuracy checked

Question 25

What are the test of control to ensure accuracy of purchases?

Answer 25

1. Match the order with requisition and agree details
2. Investigate selected purchase invoices as follows:
   - agree quantity with GRN
   - price with order and price list
   - check calculations
3. Test casting and calculations on all ledger accounts

Question 26

What are some of internal controls to ensure purchase recording are correct?

Answer 26

1. The purchase journal is updated from the purchase invoices
2. From the purchase journal purchases are posts to:
   - creditors account in the creditors ledger
   - purchase and creditors control accounts in the general ledger
3. Stock records are updated from the GRN
4. The creditors control account is kept up to date and regularly reconciled with the list of creditors

Question 27

What are the test of controls to ensure all purchase transactions are correctly recorded (recording)?

Answer 27

1. Test postings from the purchase journal to the purchase and creditor control accounts in the general ledger
2. Select GRN and agree to the entires in the stock records
3. Recalculate the creditors reconciliation:
   - agree to supporting documents and records
   - inspect evidence of revision by client

Question 28

What are some internal controls for classification of transactions for purchases?

Answer 28

Inter group purchases clearly distinguished by a code number and separately recorded

Question 29

What is the test of control to ensure classification for purchases?

Answer 29

Follow selected purchases through from the order and ensure correctly classified and recorded as inter group or external purchases.

Question 30

What are some internal controls to ensure correct cut off for ordering, receiving and recording of purchases?

Answer 30

1. Purchase journal updated from invoices in relation to the date of delivery
2. A provision is made at year end in relation to purchases not yet invoiced

Question 31

What are the test of controls to ensure correct cut off in the ordering, receiving and recording?

Answer 31

Select purchases before and after year end from GRN match it with invoices and follow it through to the purchase journal and creditors or provision account. Select items from the purchase journal and repeat the test and ensure recorded in the correct accounting period

Question 32

What is the internal control for occurrence/accuracy of the payment function?

Answer 32

Creditors payments supported by:

• payment requisition
• creditor statement
• creditors reconciliation
• purchase order, GRN, delivery note and invoices

Question 33

What is the the test of control necessary to ensure the validity and occurrence of payment?

Answer 33

1. Select payments from the creditors account per the creditors ledger and match it with the following:
   - authorized payment requisition
   - creditors reconciliation
   - paid cheque
   - proof of EFT
   - supporting documentation: purchase order, GRN, invoice, creditor statement

Question 34

What internal controls are implemented to ensure proper authorization of payments?

Answer 34

1. All payments made to creditors done by means of a payment requisition which is authorized by a senior official
2. Two signatories check and cancel supporting documents

Question 35

Name the test of controls that can be done to ensure proper authorization of payment is being followed.

Answer 35

1. Follow selected payments though to the payment requisition and:
   - inspect the signatures for authorization of payments
   - inspect supporting documents
   - inspect cancelled documents after authorization
   - follow though to the paid cheque/EFT and agree the name, amount, date and inspect endorsements

Question 36

List the internal controls for completeness of recording of payments.

Answer 36

1. Creditors control account is kept up to date in the general ledger and regularly reconciled with the creditors ledger
2. Payment advices recorded numerically and missing number followed up

Question 37

Give the test of controls for completeness of recording in payments.

Answer 37

1. Re perform the reconciliation
2. Select payments from the casebook and follow it though to the payment advices and entry in the creditors account agree amounts, details, etc
3. Inspect the list and follow up missing numbers

Question 38

List the internal controls for accuracy of payment

Answer 38

1. Individual creditors reconciliation are prepared and serve as supporting documents for payments
2. All calculations are checked by an independent person

Question 39

What are some of test of controls to ensure accuracy of payment

Answer 39

1. Re perform reconciliation
2. Select payment from cashbook and follow through to payment advice and entry in the creditors account
3. Follow selected payments through to creditors reconciliation
   - test calculations of reconciliation
   - vouch with source documents
   - inspect reviewer’s signature
   - investigate reconciling items

Question 40

What is the internal control procedure for ensuring all payments at correctly recorded? (Recording)

Answer 40

Payments are posted from the payment advice to the individual creditors account and the total to the control account

Question 41

What is the test of control to test for all payments are recorded correctly (recording)?

Answer 41

Select payment and follow entries through to individual creditors account

Question 42

What internal controls are used to ensure classification of payments?

Answer 42

1. Payments coded according to the creditors number and posted on date of cheque or EFT
2. Second independent person checks codes and date of payment

Question 43

What are the internal control functions to ensure that all payment are recorded at date of payment per payment advice and date of cheque?

Answer 43

1. Payment code according to creditors number and posted on date of cheque and EFT
2. Second independent person checks code and date of payment

Question 44

What are the test of controls for cut off of payments?

Answer 44

1. Select payments before and after year end and follow through to the creditors account - ensure recorded in correct period
2. Select payments from the creditors account and follow through to the cashbook - ensure recorded in correct period

Question 45

What are the general controls of all cycles?

Answer 45

1. Supervision and review
2. Segregation of duties
3. Rotation of duties
4. Management control
5. Internal audit
6. Sufficient stationery control
7. Scrutinize all records and documents for extraordinary items
8. Test castings and calculations on all selected items, documentations and ledger accounts

Question 46

What are the general procedures to be performed on accounts payable balances?

Answer 46

1. Obtain and document understanding of business
   - identify significant classes of transactions
   - identify KPI used by management to monitor expenditure and accounts payables
2. Evaluate the effectiveness of internal control and the impact on the nature, timing and extent of substantive procedures
3. Preliminary analytics
   - current year vs prior year
   - obtain reasons for non expected movements
4. Obtain a list of creditors, provisions and accrual at year end to:
   - test the list for accuracy and completeness by cast and re perform calculations and trace closing balance to trial balance, general ledger and creditors ledger
   - inspect for unusual items and follow up
   - agree the list to prior year and enquire about any omission
5. Audit the creditors, provisions, accrual general ledgers account by:
   - cast and re perform the account
   - trace opening balance to prior year financial statements
   - trace purchases to purchases journal
   - trace payments to cashbook
   - trace adjustments to journals and supporting documents
   - trace closing balance to trial balance
6. Obtain management representation letter
7. Select sample of individual creditors and
   - cast and re perform calculations
   - trace opening balance to prior year audited list
   - trace purchases to invoice and agree detail
   - trace payment to payment advice and cancelled cheque or EFT proof
   - trace credit notes to issued credit notes
   - trace closing balance to creditors statement and agree details
   - confirm balance with creditors with client permission