SU6.

1 – ACQUISITION AND PAYMENT

CYCLE
LEARNING OUTCOMES
6.1 Acquisition and Payment Cycle
■ After completion of this study section you should be able to:

• describe the internal control activities relating to each function within the acquisition
and payment cycle (which includes the segregation of duties, the flow of information as
well as the source documents applicable to the recording of these transactions);
• describe the risks relating to each function within cycle as well as the controls to
address those risks for application to a case study;
• identify the weaknesses relating to each function within the acquisition and payment
cycle, provide risks and make recommendations for the weaknesses identified in a case
study;
• describe the risks related to Electronic Fund Transfers (EFT) and suggest relevant
controls to address those risks;
• describe the weaknesses in a system of internal controls of EFTs;
• apply all of the above-mentioned in a case study; and
• integrate any of the above-mentioned learning outcomes with other learning outcomes
and/or other modules.
Textbook reference
AUDITING NOTE REFERENCE – 12TH
EDITION – purchase & payment cycle
■ Manual controls – p11/10-11/13
■ EFT controls – p9/26 – 9/29
■ IT integrated to purchase & payment cycle –
p11/17-11/23
■ MFA integrated to cycle – p11/15-11/16
■ Framework for internal control activites–
p11/24
FRAMEWORK FOR INTERNAL CONTROLS

1. Segregation of duties
• authorization of transactions
• executing of transactions
• custody of assets
• recording of transaction
• [Access profiles/access rights]
2. Use of source documents
• Type of document
• Number of copies
• Who should issue/receive
• Number sequence-internally generated documents
FRAMEWORK FOR INTERNAL CONTROLS
3. Isolation of responsibility
• Signature of responsible staff member on source document
• [Access/transaction logs]
4. Physical and logical access controls
• [Safeguarding of assets/data files]
• [Password controls]
5. Information processing controls/ application controls
this is automated & programmed controls
[Capturing/Processing/Output]
[Screen aids/Edit checks]
FRAMEWORK FOR INTERNAL CONTROLS

6. Authorization of transactions
•Signature of responsible staff member on source document
•[Access/transaction logs]
7. Reconciliation

8. Review of transactions
Exception reports
Determine the flow of purchase &
payment cycle?
1) Ordering of goods
2) Receiving of goods
3) Recording of purchase
4) Payment preparation
5) Actual payment (incl EFTs)

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MADNESS IN MY STICK-MAN METHOD

Have a NAME in each department

Have DUTY

2nd
Have a NAME in each department

Have DUTY

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MADNESS IN MY STICK-MAN METHOD

Have a pre-printed SEQUENTIALLY NUMBERED DOC –

Have a QUANTITY of specific doc

Have a quantity of specific doc go to specific

departments

DOC need to be SIGNED as proof of procedures

performed (mention procedures)

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MADNESS IN MY STICK-MAN METHOD

Have a MATCH/COMPARISON

SEQUENCE TEST (if applicable

STATIONARY CONTROLS
(if blank)

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1) ORDERING
OF GOODS –
PURCHASE
CYCLE

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 Order Incorrect goods = liquidity problems/wastage

Ordering Unauthorized goods resulting in

losses/fraud

RISKS Requisition not acted upon or not timeously

ORDER OF Order placed with suppliers not timeously filled

GOODS
Order forms misused eg. private purposes
DEPARTMENT
Obtain inferior quality goods

Paying unnecessary high prices

ORDER DEPARTMENT
Have a NAME in each department– ex. BUYER / order clerk

Have DUTY :
(Prior to requisition, inventory personnel - confirm good really needed)
• Should not place PO without authorised requisition (signed by inv personnel)
• Cross ref PO to requisition
• Co should have LIST of approved supplier (otherwise: 3 quotes)
• Confirm availability of goods and delivery date – suppliers

2nd Have a NAME in each department– SENIOR BUYER

Have DUTY:
• Check PO = requisition (accuracy+authority)
• Review PO for suitability of supplier, reasonable R & Q and nature
of goods ordered (type used/sold by)

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ORDER DEPARTMENT

Have a pre-printed SEQUENTIALLY NUMBERED DOC – PO

Have a QUANTITY of specific doc – in 4-part (multi-copy)

Have a quantity of specific doc go to specific
departments –
Supplier, File order, Receiving, Recording

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ORDER DEPARTMENT
Have a MATCH/COMPARISON
- Filed requisition sequentially + review requisition for unmatched to PO
- Filed PO sequentially + review for PO unmatched to GRN

SEQUENCE TEST (if applicable):

- File PO sequentially + sequence check

STATIONARY CONTROLS
On blank PO

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2) RECEIVING
OF GOODS
DEPARTMENT

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RISKS RECEIVING OF GOODS DEPARTMENT
Acceptance of Q
WRONG
- damaged items/bad quality
- items not ordered/required
- Short deliveries as full deliveries

GRN not made out accurately/ GRN

completely or not made out at all

Theft by employees/outside parties
(collusion)
 RECEIVING OF GOODS
Have a NAME in each department– ex. GOODS RECEIVING CLERK (GRC)
Receiving section – physically secured + access controlled
Have DUTY :
• Goods offloaded in presence of GRC Ensure
• Obtain supplier DN from driver to obtain PO ref number & locate PO supplier’s
• Compare descript+Q of goods with PO personnel
sign both
• Check condition of goods (superficial test) copies of
• Reject incorrect/damaged good – indicate on PO/both copies of DN's DN to
• Accept goods short delivered - indicate on PO/both copies of DN's acknowled
• Ensure supplier staff to sign both DN's including amendments ge all
amend-
• Thereafter sign supplier-DN ments
• Include on GRN only goods accepted
OTHER Have a NAME in each department– WAREHOUSE CLERK
Have DUTY:
• Compare physical goods to GRN
• Sign GRN to acknowledge receipt

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RECEIVING OF GOODS
Have a pre-printed SEQUENTIALLY NUMBERED DOC –
GRN

Have a QUANTITY of specific doc – in 4-part (multi-copy)

Have a quantity of specific doc go to specific
departments –
Order, File receiving, Warehouse, Recording

Have a MATCH/COMPARISON
- TOOK PLACE IN ORDER DEPARTMENT (GRN IS SENT TO ORDER
DEPARTMENT TO MATCH WITH PO)

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 3)
RECORDING
OF
PURCHASE

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 Recording of incorrect amounts from PO
- prices not as quoted or
quantity/quality/type not as received
- calculation error
RISKS Raising of fictitious purchase/ creditors
RECORDING
OF
PURCHASE Posting errors when entering details into
accounting records – resulting in
reconciliation problems/ failure to obtain
discount
RECORDING OF PURCHASE
Have a NAME in each department– ex. INVOICE/RECORDING CLERK
Have DUTY :
• Receive PURCHACE invoice from supplier and:
Match GRN, DN, PO for:
* Q+descript of goods (GRN+DN)
• Correct price = PO

• All cast, ext + calculations on supplier invoice

to be re-performed
• Review posting of invoice to correct account

Have a NAME in each department– DESIGNATED 2ND EMPLOYEE

2ND Have DUTY:
• Scrutinize the dates of GRN + inv to ensure purchase are
timeously/accurately recorded in PJ and credit ledger

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 4) PAYMENT
PREPARATION

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 Payment to fictitious creditor/
Unauthorised payments

RISKS Payment of incorrect

PAYMENT amounts
PREPARATION
Discount lost due to late
payment
PAYMENT PREPARATION (requisition)
Have a NAME in each department– ex. CREDITORS CLERK

Have DUTY :
• Receive MONTHLY CREDITOR STATAMENT from supplier and RECON:
* With supporting doc (inv, payments) + inv (accuracy controls) (movement)
• With individual creditor’s account in creditors ledger (balance)

• Identify creditors who must be paid at month-end

to comply with the suppliers’ credit terms &
• Ensure discount for early settlement deducted

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 5) ACTUAL
PAYMENT &
RECORDING
OF
PAYMENT

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 EFT’s made out
incorrectly
RISKS
ACTUAL Invalid payments may
PAYMENT & be made
RECORDING
Payments may be
recorded inaccurately
EFT PAYMENTS
AN9.6.4
Refer to the EFT handout
RECORDING OF PAYMENT
Have a NAME in each department– ex. RECORDING CLERK

Have DUTY :
• Record eft in numerical sequence in CPJ

Have a NAME in each department– management (1) &

independent person (2)

Have DUTY:
2ND 1. Review CPJ for unusual payment

2. Bank recon should be performed and reviewed monthly, by

employees independent of banking function & creditors department

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WHAT TYPE OF QUESTIONS TO EXPECT WITH REGARD TO
CONTROLS:

MANAGEMENT
WEAKNESSES EXPLANATION RECOMMENDATION
/CONTROLS

What is wrong / What will result What should

missing? (xxx is from these management
being done and weaknesses? implement to correct
NOT xxx (wrong) Therefore, the the weakness and
OR xxx is NOT risk (what can go why
being done wrong)
(missing))
 SCENARIO:
VERY IMPORTANT!! PO ARE WRITTEN ON A BLANK PAGE

Weakness must indicate a negative – eg. Orders ARE recorded

WEAKNESS on a blank paper and NOT on a PO
CANNOT JUST WRITE orders are recorded on blank paper

Recommendation must indicate a positive + elaborate

RECOMMENDATION = should +
reason
(left&right cannot be the same exactly) – eg. Orders
SHOULD BE recorded on a PO to ensure accurate
recording
CANNOT JUST WRITE order should be recorded on a PO

Explanation – refer to the RISK,

EXPLANATION/ RISK = what can
therefore consequences of the
go wrong
weakness. PO can get lost and
not acted upon

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 IT CONTROLS
RELATING TO
PURCHASE &
PAYMENT CYCLE
Purchases – ORDERING of goods – IT control

Setting of re-order levels and quantities

• Set by experienced personnel and based on supplier lead times/sales
forecasts
• Reviewed regularly
• Ability to change restricted to chief buyer & all changes to be logged
■ Masterfile amendment controls

Purchase requisition report

• Generate a purchase requisition report from inventory masterfile of items that reached
re-order levels (weekly)
• Purchase requisition report should be clearly headed, dated and page sequenced
• Inventory controller should review report and sign it
• Chief buyer should review report, sign it, pass on to buying clerk, and retain a copy
 Purchases – ORDERING of goods – IT control
Access & capture purchase order (ORDER CLERK)
• Access to “create purchase order” module restricted to purchase order clerk (Access controls)
• Screen format = PO
• Validity check – inventory item code
• Data approval check – enter inventory code, approved supplier automatically linked, price
automatically shown based on inv. MF
• System automatically allocates sequenced nr to purchase orders
• Numeric check – quantity field
• Mandatory field check – i.e. quantity field
• Limit/Reasonableness check – quantity field

Access & Authorising the PO (CHIEF BUYER)

• File of PO’s to be accessed by chief buyer for approval (Access controls)
• Only chief/buyer linked to approval function
• Chief buyer will access PO (read only)
- check each order against requisition report
- quantity ordered
- confirm there is an order for every requestion on report
• Once approval function is selected – no changes can be made to PO file
• Executes order (phone, e-mail, fax)
 Purchases – RECEIVING of goods – IT control
Access controls – PO file TO RECEIVE GOOD (Receiving clerk)
• Access to receiving module restricted to receiving clerk. Screen = GRN
• Access to module restricted to terminals in receiving area
• Password controls – limited
• Automatic time-out facility
• Automatic disabling – 3 unsuccessful attempts
• Write access only to quantity field of GRN
• On arrival of goods, enter PO nr from supplier’s delivery note to access PO file

Receiving procedures (user controls)

• Compare goods delivered to purchase order and supplier delivery note (description +
quantity)
• Reject items not ordered in terms of purchase order
• Perform superficial tests on condition of goods
• Note all discrepancies between what was ordered and delivered on supplier delivery
note
• Receiving clerk and delivery personnel sign delivery note with noted discrepancies
 Purchases – RECEIVING of goods – IT control
Capturing of details to create GRN (Q+PO nr)
• Validity check - purchase order number
• Screen format = GRN
• Mandatory field – purchase order number/quantity field
• Limit check – quantity field cannot exceed order quantity
• Alphanumeric check – quantity field only numerical
 Purchases – RECORDING of purchase – IT control
Access controls – invoice module (creditor’s clerk)
• Access to invoice module restricted to creditor’s clerk (Access controls)

Capturing of supplier invoice (Q& R Automatically generated

From PO & GRN) And Authorising of invoice
• Validity test – PO number
• Screen = invoice (info on invoice order) automatically generated from PO and GRN)
• Creditor’s clerk compares details on screen with hard copy invoice and supplier DN
and confirm:
- quantity ordered, received and invoiced reconcile with each other (Q =GRN=invoice)
- prices invoice = prices PO
- casts, extensions and VAT are correct
• System prevents creditor’s clerk to add additional items
• All changes to cost prices – logged and follow up
• Invoice approved by a 2nd creditor’s clerk – update invoice file and creditor’s Masterfile
• Weekly report of GRN’s without supplier invoice
Payment of creditors by EFT - done