Purchase System

Question 1

Purchase System

Answer 1

1. Unauthorized Orders:
   
   • Orders for goods or services may be made without proper approval or authorization.
2. Non-Approved Suppliers:
   
   • Orders may be placed with suppliers who are not on the approved list.
3. Lack of Competitive Bidding:
   
   • For large orders, suppliers may not be asked to submit tenders, or the order might not be given to the supplier quoting the lowest price.

1. Authorization:
   
   • Ensure all purchase orders are properly authorized.
2. Approved Suppliers:
   
   • Ensure orders are placed only with approved suppliers.
3. Competitive Pricing:
   
   • Ensure competitive price quotations are obtained for all large orders.

1. Segregation of Duties:
   
   • Separate the roles of individuals who make requisitions for new supplies from those who place the orders with suppliers.
2. Sequential Numbering:
   
   • Purchase orders should be sequentially numbered to ensure completeness and traceability.
3. Approved Supplier List:
   
   • Implement a procedure for placing suppliers on the approved list. In an IT system, control access to the master file of approved suppliers.
4. Approved Supplier Reference:
   
   • All orders must be placed with suppliers on the approved list, and the purchase order should include an approved supplier reference number.
5. Authorization for Large Orders:
   
   • Orders above a certain value must be authorized by a senior manager, who should confirm that competitive tenders have been obtained from suppliers.

1. Segregation of Duties:
   
   • Test: Verify that the segregation of duties exists by observing the process and checking documentation.
   • Reason: Ensure that no single individual has control over the entire ordering process, reducing the risk of unauthorized orders.
2. Sequential Numbering:
   
   • Test: Check lists of sequentially-numbered purchase orders or view documents on screen. Alternatively, submit test data in the form of an order and check it is allocated the next number in the sequence.
   • Reason: Ensure all purchase orders are recorded and traceable.
3. Approved Supplier List:
   
   • Test: Ask management to provide documentary evidence that the procedure for placing suppliers on the approved list operates as intended. In an IT system, test the controls over the master file of approved suppliers.
   • Reason: Ensure orders are placed only with approved suppliers.
4. Approved Supplier Reference:
   
   • Test: Check purchase orders to ensure they contain an approved supplier reference number.
   • Reason: Verify that orders are placed with approved suppliers.
5. Authorization for Large Orders:
   
   • Test: Check large orders for management authorization and confirm that competitive tenders have been obtained.
   • Reason: Ensure that large orders are authorized and competitively priced.

1. Risk: Orders may be placed without proper authorization.
   
   • Control Objective: Ensure all purchase orders are authorized.
   • Control: Require managerial approval for all purchase orders.
   • Test of Control: Verify managerial signatures on purchase orders.
2. Risk: Orders may be placed with non-approved suppliers.
   
   • Control Objective: Ensure orders are placed only with approved suppliers.
   • Control: Use an approved supplier list and include supplier reference numbers on purchase orders.
   • Test of Control: Check purchase orders for approved supplier reference numbers.
3. Risk: Large orders may not be competitively priced.
   
   • Control Objective: Ensure competitive pricing for large orders.
   • Control: Require competitive tenders for large orders and managerial authorization.
   • Test of Control: Review documentation for competitive tenders and managerial authorization on large orders.

By understanding these risks, control objectives, controls, and tests of controls, auditors can effectively evaluate the ordering process, ensuring it operates as intended and mitigating potential risks.

If you have any further questions or need more examples, feel free to ask!

1. Unordered Goods:
   
   • Risk: Goods may be accepted from a supplier without having been ordered, or suppliers may claim to have delivered goods that were not actually delivered.
   • Control Objective: Ensure all receipts of goods are recorded and checked against a purchase order.
2. Missed Discounts:
   
   • Risk: The company may fail to claim discounts from suppliers for orders above a certain size or as regular customers.
   • Control Objective: Ensure discounts are claimed from suppliers where available.
3. Incorrect Invoicing:
   
   • Risk: Suppliers may invoice for goods that have not actually been provided.
   • Control Objective: Prevent or detect invoicing for goods not received.

1. Retention of Delivery Notes:
   
   • Control: Retain a copy of all delivery notes with a signature of the staff member who received and checked the goods.
2. Goods Received Notes (GRNs):
   
   • Control: Produce a goods received note for each delivery, based on the delivery note or after a physical count of the items received.
3. Discount Verification:
   
   • Control: Assign a member of the accounts or purchasing staff to check and claim discounts allowed by suppliers.
4. Segregation of Duties:
   
   • Control: Separate the roles of individuals who take delivery of goods, place orders, and record purchase invoices in the accounting system.
5. Matching Invoices:
   
   • Control: Check all purchase invoices against a purchase order and a goods received note.

1. Matching Documents:
   
   • Test: Check that delivery notes, goods received notes, and purchase invoices are matched with each other. Look for evidence of checks, such as signatures or initials on purchase invoices.
   • Reason: Ensure all goods received are properly recorded and matched with orders and invoices.
2. Segregation of Duties:
   
   • Test: Verify that segregation of duties exists by observing the process and checking documentation.
   • Reason: Prevent unauthorized transactions and ensure proper control.
3. Sequential Numbering:
   
   • Test: Check lists of sequentially-numbered purchase orders or view documents on screen. Alternatively, submit test data in the form of an order and check it is allocated the next number in the sequence.
   • Reason: Ensure all purchase orders are recorded and traceable.
4. Discount Verification:
   
   • Test: Look for documentary evidence that discounts are checked and claimed from suppliers when available.
   • Reason: Ensure the company benefits from available discounts.
5. Matching Issues:
   
   • Test: Look for any evidence that invoices, purchase orders, or goods received notes cannot be properly matched, indicating that controls are not working in practice.
   • Reason: Identify and address any control weaknesses.

1. Risk: Goods may be accepted without being ordered.
   
   • Control Objective: Ensure all receipts of goods are recorded and checked against a purchase order.
   • Control: Retain delivery notes with staff signatures and produce goods received notes.
   • Test of Control: Check that delivery notes and goods received notes are matched with purchase orders.
2. Risk: The company may fail to claim discounts.
   
   • Control Objective: Ensure discounts are claimed from suppliers.
   • Control: Assign staff to verify and claim discounts.
   • Test of Control: Look for evidence of discount verification and claims.
3. Risk: Suppliers may invoice for goods not provided.
   
   • Control Objective: Prevent or detect incorrect invoicing.
   • Control: Match purchase invoices with purchase orders and goods received notes.
   • Test of Control: Verify that invoices are matched with purchase orders and goods received notes.

By understanding these risks, control objectives, controls, and tests of controls, auditors can effectively evaluate the process of receiving goods and invoices, ensuring it operates as intended and mitigating potential risks.

If you have any further questions or need more examples, feel free to ask!

It looks like you’re working on understanding the risks, control objectives, and tests of control for recording and accounting for purchases and expenses. Here’s a summary of the key points:

1. Risk: Purchase invoices may be recorded for goods or services not provided.
   
   • Control Objective: Ensure only valid invoices are recorded.
2. Risk: Purchase invoices may be incorrectly recorded in supplier accounts.
   
   • Control Objective: Identify and correct any errors.
3. Risk: Credit may not be claimed for returned goods.
   
   • Control Objective: Ensure credit is taken for purchase returns.

1. Invoice Verification: Match purchase invoices against purchase orders before recording.
2. Supplier Statements: Regularly receive and reconcile supplier statements with trade payables ledger.
3. Control Account Reconciliations: Perform regular reconciliations for trade payables.
4. Debit Notes: Create and match debit notes for returned goods with supplier credit notes.

1. Invoice Matching: Check for evidence (e.g., signatures) that invoices are matched against purchase orders.
2. Supplier Statement Checks: Look for evidence of checks and approvals on supplier statements.
3. Reconciliation Evidence: Verify documentary evidence of control account reconciliations.
4. Debit Note Verification: Ensure sequentially-numbered debit notes are cross-referenced with supplier credit notes.

If you need more detailed explanations or examples, feel free to ask!