Study unit 7

Purchases and payments cycle

GEAR111
Auditing Fundamentals 2nd edition
Chapter 7 (page 259 to 307)
Learning outcomes
After completion of this study unit, you should be able to:
• describe the activities, responsible parties, documents and records, risks and
manual controls applicable to each of the functional areas of the purchases and
payments cycle;
• analyse internal control systems in order to identify and explain weaknesses in
the manual control system of the purchases and payments cycle and recommend
improvements by describing the required internal controls;
• recommend a manual system of internal controls for the purchases and payments
cycle, that will achieve the cycle's control objectives; and
• apply all of the above-mentioned in a case study.
Content
Manual system – internal control tables
Weaknesses vs Recommendations vs Risks
 Purchase Ordering goods and Receiving goods and
requisition services from suppliers services from suppliers

Recording of Payment Paying the

purchases preparation supplier
Functional areas

Returning goods and

Recording of
recording a purchase
payments
adjustment

Auditing Fundamentals page 289 - 307

Manual system – internal control tables

Most common People / responsible

activity party

Documents and Risk (what could go

records wrong)

Manual control

Auditing Fundamentals page 289 - 307

Manual system – internal control tables
Purchase
requisition

People / responsible party Documents & records

Staff member in Purchase

department requisition

Departmental
supervisor or
manager

Risks

Failure to identify Unauthorised

need requisitioning

Incorrect items
are requisitioned

Auditing Fundamentals page 289 - 290

Manual system – internal control tables
Ordering goods and
services from suppliers

People / responsible party Documents & records

Buying Purchase order

clerk (PO)

Chief Approved list of

buyer suppliers

Risks

Invalid or PO’S don’t agree with

unauthorised orders supporting requisitions

PO’s not sent to Items ordered from

supplier timely inappropriate suppliers

Items ordered at
excessive prices
Auditing Fundamentals page 291 - 293
Manual system – internal control tables
Receiving raw
materials / goods from
suppliers

People / responsible party Documents & records

Goods receiving Supplier delivery

clerk note

Goods received
note (GRN

Risks

Unauthorised Items
items misappropriated

Received but not Inferior quality /

recorded damaged

Quantities
incorrect
Auditing Fundamentals page 293 - 295
Manual system – internal control tables
Recording of purchases

People / responsible party Documents & records

Accounts payable Standard chart of Purchase

clerk accounts journal

Senior Goods received Supplier

bookkeeping clerk note (GRN) invoice

Financial
manager
Risks Supplier
statement
Creditors
subsidiary ledger

General ledger creditors

control account

Fictitious purchases Purchases not

recorded recorded

Amounts Purchase transactions

inaccurately allocated to incorrect
recorded GL accounts

Auditing Fundamentals page 295 - 299

Manual system – internal control tables
Payment preparation

People / responsible party Documents & records

Accounts payable Senior bookkeeping Payment EFT

clerk clerk schedule listing

Cheque Remittance
requisition advice

Risks Cheque

Amounts incorrectly Fictitious or

prepared unauthorised
supplier
Fictitious or
duplicated invoices Forfeits discount
(late settlement)

Auditing Fundamentals page 299 - 302

Manual system – internal control tables
Paying the supplier

People / responsible party Documents & records

Payment / Signed Bank

cheque cheque statement
signatories
Proof of Bank
payment reconciliation

Risks

No payment Suppliers / parties

documentation not on payment
schedule paid
Amounts
don’t agree with
those prepared

Auditing Fundamentals page 302 - 304

Manual system – internal control tables
Recording of
payments

People / responsible party Documents & records

Cash book Receipt Bank-stamped

returned cheque or
clerk approved cheque
requisition
Proof of
payment
Bank statement
Risks Bank
reconciliation

Fictitious Payment amounts

payments incorrectly recorded
Payments not
recorded

Auditing Fundamentals page 304 - 305

Manual system – internal control tables
Returning goods and
recording a purchase
adjustment

People / responsible party Documents & records

Warehouse staff Accounts payable Goods returned to supplier

who receive clerk voucher (GRSV)
returned goods
and initiate the
return Managerial staff Debit
transaction member in note
approval capacity
Risks

Recorded returns Amounts

not genuine inaccurately recorded

Returns not
recorded

Auditing Fundamentals page 305 - 307

Weaknesses vs Recommendations vs Risks
Weaknesses are control activities that are not in place or not working as
they should (“no / not”).

If a weakness is written with a “should / must / etc.”, it is incorrect – NO

MARKS WILL BE GIVEN. This represents a control activity and not a
weakness.

You need to identify the weakness by writing it in a negative format – if

you write it in a positive format or a recommendation format – NO
MARKS WILL BE GIVEN.

Example (Mr R Bhayat):

The scenario states:
"All inventory was counted once.”

• The inventory count was not performed twice. CORRECT

• The inventory count was performed once. INCORRECT
(not provided in the negative format).
• The inventory count should be performed twice. INCORRECT
(this is a recommendation, not a weakness).
Weaknesses vs Recommendations vs Risks

Recommendations are things that SHOULD / MUST be implemented

(“must / should / is supposed to / etc.”).

A recommendation is the action the entity SHOULD implement to

overcome / address the weakness AND the reason why it overcomes /
addresses the weakness.

Example (Mr R Bhayat):

The scenario states:
"All inventory was counted once.”

• The inventory count should be performed twice so that inventory is

counted correctly. CORRECT
Weaknesses vs Recommendations vs Risks

Explanation means to further explain the weakness by possible risks.

These risks are from the business’ point of view – possible consequences
because of a weakness / what would happen if the weakness is there.

What could happen…. Might…

It is not a recommendation / an improvement (which are control

activities).

Example (Mr R Bhayat):

The scenario states:
"All inventory was counted once.”

• The inventory might be counted incorrectly. CORRECT

• The inventory count should be performed twice. INCORRECT
(this is a recommendation, and not an explanation).
Weaknesses vs Recommendations vs Risks
Weaknesses are control activities that are not in place or not working
as they should (“no / not”).

There should be regular inventory counts and review of balances in perpetual inventory records to
identify low levels of inventory.

There should be an inventory count once a year and review of balances in perpetual inventory records
to identify low levels of inventory.

The second buying clerk or chief buyer should compare the quantity and description of items on the
purchase order to the supporting purchase requisition

The second buying clerk or chief buyer should compare the quantity of items on the purchase order to
the supporting purchase requisition
Weaknesses vs Recommendations vs Risks
Weaknesses are control activities that are not in place or not working
as they should (“no / not”).

At least two senior managerial staff members authorise payments on the signing of cheques.

At least one senior managerial staff members authorise payments on the signing of cheques.

Debit notes are created only if supported by an authorised GRSV as well as a GRN evidencing that the
goods being returned have originally been purchased

Debit notes are created only if supported by a GRN evidencing that the goods being returned have
originally been purchased
Learning outcomes
After completion of this study unit, you should be able to:
• describe the activities, responsible parties, documents and records, risks and
manual controls applicable to each of the functional areas of the purchases and
payments cycle;
• analyse internal control systems in order to identify and explain weaknesses in
the manual control system of the purchases and payments cycle and recommend
improvements by describing the required internal controls;
• recommend a manual system of internal controls for the purchases and payments
cycle, that will achieve the cycle's control objectives; and
• apply all of the above-mentioned in a case study.
 ©
Copyright © 2024 edition.
Prepared by: Rolé van der Merwe
North-West University, Potchefstroom, South Africa.

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