Purchase and payment cycles

Question 1

What is management responsibility?

Answer 1

• Determining the organisational objectives related to the purchases and payment cycle within the organization.
• Should implement an adequate system of internal control which includes specific functions and activities.
• Identify the risks and related consequences for not mitigating of those within the purchases and payments cycle that are threatening the meeting of organizational objectives

Question 2

What do internal auditors perform?

Answer 2

• An internal audit engagement.
• Performs the engagement procedures to gather sufficient, relevant, reliable, and useful audit reports the results of the audit engagement to management.
• Assesses the extent to which management acted on the internal audit activity’s recommendations

Question 3

Explain characteristics of this cycle

Answer 3

• Deals with two major activities (ordering and receiving of goods and services from suppliers, secondly the payments made to suppliers)
• Process of the cycle commences with a need to obtain a specific product/services

Question 4

Disclose the basic functions/activities in a typical purchasing and payment cycles

Answer 4

• determining the need for goods and services
• ordering of good and services
• receiving of goods and services
• recording of purchases
• paying and recording of creditors

Question 5

What do management need to do to ensure the internal control objectives are achieved with regard to purchases and payments?

Answer 5

1. Compliance with applicable policies, procedures, law and regulations relating to purchases
2. Achievement of activity objectives regarding the validity of expenditure and authorization of payments to suppliers
3. Reliability and integrity of information regarding purchases of goods and services and payments to creditors
4. Economical and efficient use of organization resources regarding the purchases of goods an services and payments to suppliers
5. Safeguarding of the organization’s assets with the purchases of goods as well as with payments made from the bank account

Question 6

State the first function in the procurement process

Answer 6

Determining the need for goods and services

Question 7

Discuss determining the need for goods and services

Answer 7

• To determine the specific need for materials and to communicate this to the purchasing section. Sources include
• production schedules
• inventory re-order levels
• on-going operational needs

Question 8

What are responsibilities of determining the needs for goods and services?

Answer 8

Identify the inventory item or services to be acquired, its specifications, quantities, delivery requirements and other things.

Question 9

How is information recorded in terms of determining the need for goods and services?

Answer 9

The information is recorded on a pre-numbered multi-copy requisition form that is authorization by the head of the requesting department based on a review of the budget and inventory levels.

The original requisition form is forwarded to the purchasing department and the copy is kept for reference purposes

Question 10

State the second step of purchases and payments cycle

Answer 10

Ordering of goods and services

Question 11

Discuss ordering of goods and services

Answer 11

On receipt of an authorized requisition form, the purchasing clerk selects a supplier from a pre-approved suppliers list that appear to meet the requirements, negotiates the terms (if not pre-determined), establishes that delivery can take place and enters into a formalized purchases agreement called purchase order.

Question 12

Who must authorize the purchase order?

Answer 12

By the head of the purchasing department based on the availability of funds, the supplier used and duly authorized purchase requisition.

Question 13

How receives copies of the purchase order are generated by the system distributed?

Answer 13

• The original is sent to the suppliers
• one copy goes to the accounting department
• on copy goes to the receiving section of the warehouse
• one copy goes to the department requesting the goods
• one copy is filed for reference purposes

Question 14

Where are copies forwarded to? In context to ordering of goods and services

Answer 14

To the receiving section of the warehouse and the accounting department form a very important control activity that ensures that no goods are accepted from suppliers that were no actually ordered and that creditor are paid based on valid and actual deliveries.

Question 15

True or false

The org must maintain optimum inventory levels to ensure the manufacturing process does not run out of raw materials or parts, that the retailers does not run out of goods to sell and that services can be rendered with the necessary material needed>

Answer 15

True

Question 16

True or false

It is important to order too much inventory

Answer 16

False

It is important not to order too much inventory , it will have negative effect on the cash flow of the org

Question 17

Why are follow up procedures necessary?

Answer 17

Yes, to determine that the goods ordered were delivered.
This follow-up can be done either the department who requested the goods or purchasing department

Question 18

State step three of purchases and payments cycles

Answer 18

Receiving of goods and services

Question 19

Explain receiving of goods and services

Answer 19

When actual deliveries are made, the receiving department of the warehouse is responsible for accepting and acknowledging the deliveries of goods from suppliers that match valid purchase orders and for accurate recording of the goods delivered

Question 20

What activity must be completed before accepting the receiving of goods and services?

Answer 20

Prior to acceptance of goods, physical inspection of the quantity, quality and description of the goods should be carried out. The goods must be compared to the supplier’s delivery note and the purchase order received from the purchasing department

Question 21

What is the effective control activity when receiving the goods and services?

Answer 21

To provide the receiving clerk at the receving dock at the warehouse with a blind copy of the order form on which the actual quantities delivered is entered in order to force him to physically count the goods received and not just accept the printed order quantities as correct.

Question 22

True or False

It is not important to accept goods and service that are actually ordered by the organization by means of an official order form

Answer 22

False

It is important to accept goods and service that are actually ordered by the organization by means of an official order form

Question 23

How is goods received note generated?

Answer 23

By the system as proof of receipt of the goods

Question 24

How is goods received note distributed?

Answer 24

• the original is sent to the supplier
• one copy goes to the purchasing department
• one copy goes to the accounting department
• one copy is used to update the warehouse records

Question 25

State the fourth step of payment and purchases cycle

Answer 25

Recording of purchases

Question 26

What is purpose of recording of purchase?

Answer 26

Is to record the purchase in the financial accounting record

Question 27

After receipt of the goods, the invoice received from the supplier is matched to the purchase order, supplier delivery note and goods received note.

What information are matched? (Recording of purchases)

Answer 27

• quality check
• quantity
• supplier information
• dates
• description of goods
• signatures of control personnel
• price per price list or quotation

Question 28

True or false

Invoices should also be reviewed for accuracy of calculations, discount and value-added tax (VAT)

Answer 28

True

Question 29

True or false

Tax voices should be inspected to ensure that they comply with the legal requirements in respect of a valid tax invoice

(Recording of purchases)

Answer 29

True

Question 30

True or false

The purchases are captured in the purchase journal, allocated (discount classification) to the correct account and posted to the general and debtors ledgers

(Recording of purchases)

Answer 30

False

The purchases are captured in the purchase journal, allocated (discount classification) to the correct account and posted to the general and creditors ledgers

Question 31

True or false

Debtors’ reconciliations are performed on a regular basis by an dependent person to ensure that the journalising and posting activity is performed accurately.

Answer 31

Creditors’ reconciliations are performed on a regular basis by an independent person to ensure that the journalizing and posting activity is performed accurately.

Question 32

What is the fifth step of purchasing and payment cycle?

Answer 32

Payment and recording of credit purchases

Question 33

Explain payment and recording of credit purchases

Answer 33

Payments should be made to valid creditors for the correct amount and on a timely basis.

Question 34

True or false

Timing of payments is important as interest can be charged by the creditor for late payment and interest can be lost in available funds in the bank account

Answer 34

True

Question 35

Which method of payments can be made to creditors?

Answer 35

• Electronic funds transfer (EFT)
• Cash
• cheque

Question 36

True or false

Creditors are paid within 60 days

Answer 36

False

Creditors are paid within 30 days

Question 37

With a receipt of a statement from a creditor .
What is the creditors clerk in the accounting department responsibility? ( Payment and recording of credit purchase?

Answer 37

• compare the statements to the
• invoices referred to on the statement and goods received notes to confirm receipt record’s
• compare the statement to the creditors ledger to confirm the accuracy of the outstanding amount according to the org’s records
• prepare a payment requisition to request payment of the creditor
• forward the payment requisition and the supporting documentation to the responsible department for payment

Question 38

State the two senior responsibilities in regards to payment and recording of credit purchases

Answer 38

• Review the supporting documentation before payment is authorized
• compare the payment requisition with the supporting documentation and cancel the requisition by crossing the documents, stamping them as “paid” to prevent double payment of the same documents
• computerized system the transaction should be marked as “processed’ to avoid duplicate payments

Question 39

Who are the senior persons in regards to payment and recording of credit purchases?

Answer 39

• Financial manager
• senior personnel member

Question 40

True or false

The recording of the payment to creditors should be independent from the payment function

( Payment and recording of credit purchases_

Answer 40

True

Question 41

True or False

All cheques or other forms of payment must be recorded accurately and timeously in the cash payments journal and posted to the general and debtors ledger

( Payments and recording of credit purchases)

Answer 41

False

All cheques or other forms of payment must be recorded accurately and timeously in the cash payments journal and posted to the general and creditors ledger

Question 42

True or False

An independent person, not responsible for payment or recording the transactions, should reconcile the creditor control account and creditors ledger on a monthly basis

Answer 42

True

Question 43

Disclose the sixth step of purchase and payment cycle

Answer 43

Goods returned

Question 44

Disclose the sixth step of purchase and payment cycle

Answer 44

Goods returned

Question 45

Explain goods returned

Answer 45

When receiving damaged goods or incorrect goods, the org initiates a process to return theses goods to the supplier.
Usually a pre-numbered debit note is completed internally and accompanies the goods back to the supplier.
When the supplier accepts the returned goods, a credit is issued to the org.
The creditors’ clerk will update the purchase journal and the creditors ledger along with appropriate inventory records

Question 46

What are credit notes other uses? ( Goods returned)

Answer 46

To adjust incorrect amounts on invoices received from supplier

Question 47

State determining the need for goods and service control function

Answer 47

Requisitioning of goods and services

Question 48

What is requisitioning of goods and services control objective?

Answer 48

Correct and required goods are requested

Question 49

State risk of function of requisitioning of gods and services

Answer 49

Incorrect or unnecessary goods may be ordered resulting in wastage and liquidity problems

Question 50

What is requisitioning of goods and services internal control activities?

Answer 50

• Stores/production personnel needs to confirm that goods are really needed
• Predetermined re-order quantities used as basis of requisitions
• Goods are only ordered based on authorized requisitions
• Any other valid control

Question 51

State the risk of credit purchase function of ordering of goods and services

Answer 51

Invalid purchase orders are placed for goods and services

Question 52

State the credit purchase function of ordering of goods and services internal control activities

Answer 52

• Purchase orders should be recorded on pre-numbered order forms
• Orders can only be placed based on an authorized requisition form. The order should be cross referenced to the requisition form
• The purchasing department should frequently review the order file for requisitions that have not ben cross referenced to purchase orders.
• An approved suppliers list should be used, approved by senior personnel and based on a review of the suppliers’ reliability and quality of goods ands services
• 3 quotations should be obtained if the org does not have an approved supplier for a specific product or services
• Blank orders forms should be kept in a safe and issued to authorized users only
• Suppliers should be rotated and reviewed on a regular basis

Question 53

State other risk of ordering goods and services

Answer 53

Invalid purchase orders are placed for goods and services
- Inventory levels too low/high

Question 54

State other internal control activities of ordering of goods and services

Answer 54

• Approved supplier list used
• Orders only be placed based on authorized requisition forms
• Frequent review of order file for requisitions not matched to purchase orders
• Pre-numbered order forms used (PO)

Question 55

What is control objective of the function ordering of goods and services?

Answer 55

Only valid purchase orders are generated and processed

Question 56

What is receiving of goods control objectives?

Answer 56

Goods received are complete and in good order

Question 57

Disclose the risk of receiving goods

Answer 57

Quantities of goods received are incorrect and goods are not in good order

Question 58

Disclose the internal control of receiving goods

Answer 58

• Receiving clerk inspects goods to establish condition
• Receiving clerk compares quantity and description of goods to purchase order and delivery note
• Pre-numbered GRN’s used
• Store man signs transfer note or GRN as proof of receipt

Question 59

Mention the risk of the function of recording of purchases

Answer 59

Purchases transactions are no recorded or contains error

Question 60

Mention the internal control activities of recording of purchases

Answer 60

• Purchase invoice received are reviewed and recalculated and prices compared to price lists
• Invoices should be compared to PO’s, DN’s and GRN’s
• All GRN’s received should be kept in pending file and matched to incoming invoices

Question 61

In terms of the function recording of purchases.

Mention the risk of ICT system

Answer 61

Purchases transactions are not captured in the system or contains error

Question 62

What is the control objectives of recording of purchases?

Answer 62

All purchases transactions are accurately recorded

Question 63

Mention the control objective of the function payment and recording of creditors

Answer 63

All payments are valid and all transactions are recorded accurately

Question 64

Mention the risk of manual accounting system from the function payment and recording of creditors

Answer 64

Incorrect payments are made and transactions are recorded inaccurately (duplicate payments, payments to fictitious creditors)

Question 65

Disclose the manual accounting system internal control activities of function payment and recording of creditors

Answer 65

• Cheque signatories should agree beneficiary and amount with supporting documentation
• All supporting documentation should be cancelled or stamped “paid” by cheque signatories

Question 66

What are the general risk of manual accounting systems?

Answer 66

Collusion takes place or staff are not skilled

Question 67

What are internal controls activities of general manual accounting systems?

Answer 67

• competent personnel should be employed
• duties should be segregated, rotated and there should be adequate supervision
• blank stationery should be controlled through pre-numbering the documents and securing unused documents

Question 68

State the different types fraud related to purchases and payments

Answer 68

• Tender fraud
• Purchases for personal use
• Fictitious supplier paid

Question 69

What is tender fraud?

Answer 69

Awarding procurement contracts and placing unauthorized suppliers on the approved supplier list are fairly common in the business cycle

Question 70

Compliance audits have 2 distinct objectives.

State them

Answer 70

1. To test the effectiveness of the control activities implemented by management
2. To test compliance with laws and regulations

Question 71

Disclose the 3 types of internal audit engagements

Answer 71

1. Compliance audits
2. Financial audits
3. Operational audits