QB Chapter 7: Purchase System Flashcards
For each of the following examples, select the type of internal control activity which it
represents.
Monthly management accounts are compared to budget and differences investigated.
A Authorisation
B Performance review
C Information processing
Numerical sequence checks are undertaken on goods received records.
D Authorisation
E Performance review
F Information processing
B,F Analysis of actual performance against budget is performance review. Checking
numerical sequences helps ensure completeness of records
The auditor of Twickenham Ltd has identified the following deficiencies within that
organisation’s accounting system.
For each deficiency, select the most likely consequence which might arise as a result of that
deficiency.
Goods inwards are not checked.
A Accepting inferior quality goods
B False invoices could be paid
C Services received are not accurately recorded
Invoices are not checked to original orders.
D Accepting inferior quality goods
E False invoices could be paid
F Services received are not accurately recorded
A,E Option B is incorrect as does not relate to the goods inwards stage of the purchase
system. Option C is also incorrect as the question refers to goods and not services.
The checking of invoices to orders will reduce the risk of accepting invoices for goods
or services which were not ordered.
The following describes processes which make up the purchases system at Hawthorns and
Co.
For each process, select whether it represents a strength or a deficiency of the system.
Orders are placed by department heads, usually by telephone, when they determine a
service is required.
A Strength
B Deficiency
Invoices for services are checked against the service provider’s proof of delivery of service,
which is requested from every service provider.
C Strength
D Deficiency
Payments are made by direct transfer. The direct transfer list is authorised by the financial
controller, who checks the payments to supporting documents, such as the invoice or
service agreement.
E Strength
F Deficiency
B,C,E
Deficiency – there is no authorisation of payment orders
Strength – company only recognises liability for services received
Strength – payments authorised SAMPLE PAPER
Redesign Ltd is a large property management company which makes use of the services of
many different contractors for building, design and decorating services.
Which two of the following internal controls are most likely to prevent services being used
for the private purposes of employees?
A Purchase orders are processed by the buying department following authorisation by
the production director
B Purchase requisitions must be signed by two team members for any given project
C Purchase orders should only be placed with authorised contractors
D Purchase invoices are matched to authorised purchase orders LO 2
A,B The answer is not option C as inappropriate orders could still be made with authorised
suppliers. The answer is not option D as once inappropriate orders have been
authorised, matching the order with the invoice will not prevent that act having taken
place. SAMPLE PAPER
The organisational structure at Molyneux Ltd is as follows.
The production department is headed by Jack Frost, whose deputy is Tiny Tim. Jack Frost
reports to the managing director, Nicholas Clause. There are several other departments
(sales and marketing, accounting, purchasing, human resources and internal audit).
Which one of the following statements reflects the ideal situation with regard to purchase
ordering?
A Jack Frost and Tiny Tim should make purchase orders as production needs dictate.
B Jack Frost should make purchase orders, although Tiny Tim could make requisitions as
production needs dictate.
C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but
orders should be placed by the purchasing department.
D Jack Frost and Tiny Tim should requisition materials as production needs dictate but
orders should be placed by the purchasing department, having been authorised by
Nicholas Clause
C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but
orders should be placed (and by implication authorised) by the purchasing
department. The managing director would not be involved in authorising normal
purchasing transactions in a company with a purchasing department. Someone other
than the production department leaders should authorise purchases.
Grey Ltd has recently discovered that it has been paying invoices in respect of goods which
had been returned as faulty before acceptance. It is company policy to record goods only if
they have been accepted.
Which one of the following controls would have prevented this from occurring?
A Matching of purchase invoices with goods received records
B Matching of purchase invoices with orders
C Comparison of supplier statements with payables ledger accounts
D Date stamping purchase invoices on receipt
A As it is company policy to record goods only if accepted then a comparison of invoices
with goods received records would identify if the goods had not been accepted – as
there is no goods received record, the goods must have been faulty (or rejected for
some other reason). This would then prevent the invoice from being processed.
The following are examples of deficiencies in the purchases system of Burns Ltd.
For each example, select the type of internal control activity which would improve the
system.
Errors have been made in the calculation of discounts receivable.
A Authorisation
B Physical controls
C Information processing
There has been increasing levels of theft from the main distribution centre.
D Authorisation
E Physical controls
F Information processing
C,E Checking arithmetical accuracy is an information processing control. Physical security
measures should reduce risk of theft.
Which two of the following deficiencies identified in the purchases system of Harrow Ltd
could result in a misstatement of liabilities?
A The buying department does not always use authorised suppliers
B Harrow Ltd does not always take advantage of prompt payment discounts
C Purchase invoices are not matched with goods received records
D The payables ledger is not reconciled to the payables ledger control account
C,D Where goods received records are not matched to purchase invoices, goods may have
been received and not invoiced; or, where invoices not matched to goods received
records, invoices could be posted without having received goods, leading to a
misstatement of liabilities. Control account reconciliations help to identify posting
errors. Options A and B are control deficiencies that do not result directly in the
misstatement of liabilities.
The auditor has identified the following deficiencies within Rainer Ltd’s accounting system.
For each deficiency, select the most likely consequence which might arise as a result of that
deficiency.
Purchase of goods from unauthorised suppliers
A Payment to fictitious suppliers
B Purchase of inferior goods
C Prompt payment discounts not obtained
Purchase ledger clerks permitted to amend standing data on the payables master file
D Payment to fictitious suppliers
E Purchase of inferior goods
F Prompt payment discounts not obtained
B,D Purchase of goods from unauthorised suppliers is likely to lead to inferior goods being
purchased. By having access to the payables master file, purchase ledger clerks are in
a position to create fictitious suppliers and so then enable payments to them.
Which three of the following are control activities relating to the purchases system?
A All orders are authorised by a senior staff member
B Blank order forms are kept in a secure location with restricted access
C All goods and services received are accurately recorded
D Order forms are sequentially pre-numbered
A,B,D
Statement C is not a control activity, it is a control objective relating to the purchases
system. The others are all control activities.
The following describes processes in the purchases system at Woggle Ltd.
For each process, select whether it represents a strength or a deficiency of the system.
New inventory is ordered over the telephone by the company buyer, who initiates orders
herself and maintains a record of telephone orders.
A Strength
B Deficiency
When goods are subsequently received, the buyer has sole responsibility for checking the
quantity of goods received to the record of telephone orders.
C Strength
D Deficiency
Invoices from suppliers are sent to the buyer for authorisation, before being forwarded to
the Accounts Department for entry into the accounting records and subsequent payment.
E Strength
F Deficiency
B,D,F
Deficiency – although a record of orders is kept, there is a lack of segregation of duties
as the buyer both places and authorises the order. A director should authorise
purchases (particularly those above a certain cost limit) rather than the buyer.
Deficiency – The buyer only checks the goods received to ensure that the quantities are
the same as was ordered.
Deficiency – The buyer appears to have complete control over what is purchased by
Woggle Ltd. There does not appear to be any kind of purchase limit placed upon him,
or any reference made to the sales department for what they want to sell. There is a risk
that the buyer could purchase items for personal use.
Deficiencies have been identified in the following areas of Pogo Ltd’s purchases system.
For each deficiency, select the risk which is most likely to arise.
A lack of segregation of duties in relation to the ordering process
A Unauthorised purchases may be made for personal use
B The company may not take advantage of the full period of credit extended
Records of goods received are not kept.
C Goods may be misappropriated for private use
D Goods and services might not be obtained on the most advantageous terms
The payment listing produced by the accounting system is only read by the payments clerk.
E Invoices may not be recorded resulting in non-payment
F Invoices are paid at the wrong time`
A,C,F
The risk of not taking full advantage of a period of credit would be a consequence of
problems with goods received or payments.
The risk of goods and services not being obtained on the most advantageous terms
would be more likely to arise at the ordering stage.
The risk of invoices not being recorded would arise at the goods received/invoicing
stage, before the production of a payment listing
Deficiencies have been identified in the following areas of Loot Ltd’s purchases system.
For each deficiency, select the risk which arises most immediately.
Comparisons are not made of goods received notes with purchase orders
A Unauthorised purchases may be made for personal use
B Entries to the payables ledger are not made to the correct accounts
Supplier terms are not regularly monitored
C Goods and services may be obtained from unauthorised suppliers
D Goods and services may not be obtained on the most advantageous terms
Pre-numbered goods received notes are not used to record the arrival and acceptance of
goods.
E Goods and services received may not be accurately recorded
F Goods and services received may not result in liabilities being recorded correctly
A,D,E
Comparing goods received records with purchase orders is mainly a check on whether
the purchases have been authorised and are bona fide purchases.
Monitoring supplier terms helps ensure that the terms obtained are the most
advantageous ones available.
Although it is true that pre-numbered goods received records would help to ensure
that liabilities are recorded correctly, this is only as a consequence of the goods or
services first having been recorded accurately.
The following are descriptions of processes in the purchases system at Pontipines plc.
For each process, select whether it represents a strength or a deficiency of the system.
Blank order forms are readily available from a tray in the finance department
A Strength
B Deficiency
Buyers have a free choice of suppliers, in order to obtain the best terms
C Strength
D Deficiency
Order forms are prepared only when a pre-numbered purchase requisition has been
received
E Strength
F Deficiency
B,D,E
Blank order forms should not be readily available, but should be secured; if they were
readily available then anyone with access to them could place an order.
Instead of allowing buyers a free choice of suppliers, there should be a central policy
for the choice of suppliers so that only authorised suppliers are used. Such suppliers
should have been vetted to verify that they give the best value for money.
Preparing order forms only when a pre-numbered purchase requisition has been
received is a strength, as goods will only be ordered once the need for such goods has
been approved.
Which two of the following describe control activities in the purchases system of
Wottinger Ltd?
A A purchase ledger clerk checks all supplier invoices against the order and the goods
received record
B All orders for goods and services are properly authorised and duly processed
C All goods and services received are accurately recorded
D All purchase order forms are sequentially pre-numbered
A,D The remaining options describe control objectives rather than control activities.
