Chapter 4

Purchases and payments

cycle

1
Introduction
 Acquisition of
o Goods
o Services
 Three distinct classes of transactions
o Acquisition of goods and services
o Cash disbursements (payment)
o Returns, allowances and discounts
(continued)

2
Introduction (cont’d)
 Five main functions
o Determining the need
o Ordering
o Receiving of goods/services
o Recording (recognising liability)
o Payment (processing and recording)

3
Ordering
 Need identified and goods requested
o Production foreman
o Storeroom supervisor
o Other
 Purchase requisition
o Basis of request
o Completed by authorised employee
o No telephonic requests
o Documentary controls
(continued)

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Ordering (cont’d)
 Purchase requisition approved
o Factory manager
o General manager
o Other
o Proper authorisation
o Separation of duties/ensure ‘valid’ requisition
o Sign as evidence
(continued)

5
Ordering (cont’d)
 Copy of purchase requisition to:
o Purchase/buying department
o Accounts payable department

 Offer to buy is prepared

o Purchase/buying department
o Purchase requisition
o List of approved suppliers
o List of authorised prices
o Purchase order
(continued)

6
Ordering (cont’d)

 Purchase order approved by manager

o Authorisation
o Separation of duties
o Matching of requisitions and orders
o Review for reasonableness
o Follow-up of unmatched requisitions

(continued)

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Ordering (cont’d)

 Copy of purchase order to:

o Supplier
o Warehouse/receiving department
o Accounts payable department
o Requisition department
o Filed
(continued)

8
Ordering (cont’d)

 Risks
o Goods not ordered timeously
o Unnecessary/incorrect goods ordered
o Inventory levels too high or low
o Private use
o Unfavourable prices and terms
o Requisitions not executed

9
Receiving of goods
 Goods delivered by supplier
o Receiving department/clerk
o Separate receiving department
o Segregation of duties
o Inspection of goods (physical check)
o Compare to:
 Copy of purchase order
 Supplier delivery note (sign)
o Physical security controls
o Authorisation of returns
(continued)

10
Receiving of goods (cont’d)

 Goods-received note (GRN) prepared

o Receiving department/clerk
 Copy of GRN to:
o Supplier (original)
o Purchase department
 Match details with orders
 Follow up on unmatched orders
 List of outstanding orders
(continued)

11
Receiving of goods (cont’d)

 Storeroom
o Check goods before accepting
o Update inventory records
 Accounts payable department
(continued)

12
Receiving of goods (cont’d)
 Risks
o Goods taken for personal use
o Goods received not ordered
o Poor quality, defective goods, incorrect goods,
incorrect quantity
o Goods stolen
o Goods ordered not received
o Goods received not ordered

13
Recording
 Accounts payable department
o Purchase order
o GRN
o Supplier delivery note
o Supplier invoice
o Debit memo/credit note
o Goods received not ordered
 Above known as ‘voucher package’
(continued)

14
Recording (cont’d)
 Controls
o Segregation of duties
o Matching of documents
o Check calculations, terms
o Follow-up of differences
o Allocate account number
(continued)

15
Recording (cont’d)
 Purchases journal
o Recorded from invoices/GRNs
o By accounts payable department
 Creditor’s ledger
o Recorded from invoices/GRNs
o By accounts payable department
 General ledger
o Totals from purchase journal
o By accounting department
 Creditor’s listing (A/P Trial balance)
(continued)

16
Recording (cont’d)
 Controls
o Segregation of duties
o Recoded immediately upon receipt
o Chart of accounts
o Format of purchase journal
o Independent reconciliation – creditors ledger vs
A/P control account
o Internal verification
(continued)

17
Recording (cont’d)
 Accounts payable department prepares
supplier statement
o Reconciliation between statement and
creditors ledger
o Follow-up of differences
o Authorisation
 Documents to cash disbursements (voucher
package)
(continued)

18
Recording (cont’d)
 Risks
o Recording of goods never received
o Incorrect amount
o Incorrect period
o Incorrectly classified
o Incorrectly summarised/posted
o Goods received not recorded

19
Payment
 Preparation of cheques
o Cash department
o Accounts payable
 Cash, cheque or EFT
(continued)

20
Payment (cont’d)
 Controls
o Segregation of duties
o Check documents
o Cheque controls
o Pre-numbered
o Unused cheques
o Issue of cheques
o Crossing of cheques
o Filing and inspection of returned cheques
(continued)
21
Payment (cont’d)
 Authorisation of payments by senior
responsible officials
o Two signatories
o Segregation of duties
o Inspect supporting documentation
o Cancel supporting documentation
o Cheque not returned to preparer
o Blank cheques not signed
(continued)

22
Payment (cont’d)
 Recording of payments
o Cash payment journal
 Recorded from relevant documents
 By cash disbursement function
o Detailed creditor’s ledger
 Recorded from remittance advices
 By accounts department
o General ledger
 Totals from cash payment journal
 By accounting department
(continued)

23
Payment (cont’d)
 Controls:
o Separation of duties
o Recorded immediately
o Recorded in number sequence
o Independent reconciliation – creditors’ ledger and
control account
o Internal verification
o Bank reconciliations
(continued)

24
Payment (cont’d)

 Risks:
o Invoice paid twice
o Pay for goods never received
o Pay incorrect amount
o Pay wrong supplier
o Misappropriation of funds

25
Compliance audit: Risks, control
activities and compliance
procedures
 See pages 90–93

26
Financial audit:
Substantive procedures
 Transactions:
o Occurrence
o Completeness
o Cut-off
o Accuracy
o Classification
o Presentation and disclosure
(continued)

27
Financial audit:
Substantive procedures (cont’d)
 Balances:
o Existence
o Completeness
o Valuation and allocation
o Obligation
o Presentation and disclosure
(continued)

28
 Financial audit:
Substantive procedures (cont’d)
 Analytical procedures:
o Purchases
 Compare the current year’s creditors as a percentage of the
current liabilities with previous years and industry data
 Compare actual credit purchases with budgeted credit
purchases for the year
 Compare number of suppliers used in the current year with
those used in the previous year
 Trade creditors
 Compare current year’s creditors days outstanding period
with previous years and industry data
 Compare current year’s trade creditors’ balance with
previous years
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Purchase of non-current assets
 Engagement objectives:
o Compliance with organisational policies regarding
purchase of non-current assets
o Reliability of information
o Safeguarding of assets

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IT perspective

 MeatMasters Limited case – page 101

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