Purchases and Payables Cycle Flashcards
1
Q
What is the primary purpose of the purchases and payables cycle?
A
To ensure:
- sufficient products and services are purchased from suppliers at competitive prices.
- the purchase is recorded promptly an accurately in the financial accounts
- suppliers are paid timeously for goods and services purchased
2
Q
What accounts are affected by the business process?
A
- Statement of Comprehensive Income
Purchases of goods (periodic system)
Cost of Sales (Perpetual system)
Periodic expenses allocated tp various expense accounts - Statement of Financial Position
Cash and Cash Equivalents
Inventory (incl. raw materials, WIP, finished goods)
Current liabilities - accounts payable - Periodic System
Records purchases in the financial records after completion of the year end stock count the purchases entry is reversed against inventory.
Accounts payable raised on purchase of inventory - Perpetual System
Records acquisition as inventory
An expense in the form of cost of sales is raised
Accounts payable raised on purchase of inventory
3
Q
Functional Areas in the Purchases and Payables Cycle:
A
- Ordering of goods and services
- Receiving goods and services
- Recording of purchases
- Payment preparation
- Paying the supplier
- Recording the payments
- Returning the goods and recording a purchase adjustment.
4
Q
Main risks in the purchases and payables cycle:
A
- Over-stated expenses
- Fictitious expenses
- Altered suppliers
- Misappropriation of assets
- Stolen or damaged inventory
- Financial Reporting risks
- Misappropriation risks
- Incorrect cost analysis
5
Q
What are the three control objectives of the purchases and payables cycle?
A
- Validity
Preapproval and authorising - Accuracy
Recalculation and checks - Completeness
Sequential checks and reconciliation
Authorization referring to completeness
6
Q
Control activities in a business:
A
- Documentation and Records
- Authorisation and approval
- Access controls
- Segregation of duties
- Independent checks and reconciliation
