Purchase and Payment Cycle

Governance and Control

 Purchases and Payments Cycle
Study material:
•Pre-reading
•Module
•Class note/Slides
•Question Bank
•Objective Test.
Study outcomes:
•Understand the risks inherent within the cycle.
•Be able to understand and recommend controls to be
implemented in order to mitigate risks.
•Be able to apply your knowledge to any given scenario.

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 How the topic will be assessed
• Theory application:
• Definitions of control objectives
• Scenario based application:
• Identify weaknesses, give risks and, provide
recommendations;
• Provide the TOC for the internal controls implemented.

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Cycles and how they integrate

Cycles in a
business

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Introduction
 Accounts balances in cycle
• Statement of • Statement of financial
Comprehensive income position
• Salaries and wages • Trade payables
• General company expenses • Provisions
• Goods and services • Accruals
consumed • Bank
• Cash
• Discount receivable
• Prepaid expenses
• VAT

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Explanation of the Purchase
and Payment Cycle
 Main functions of the cycle
1.The ordering of goods and services;
2.The receiving of goods and services;
3.The recording of purchases and accounts payable;
4.Payments to creditors/payables.

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 Document flow for the cycle as a
whole
• Requisitions
• Purchase orders (hereafter PO’s)
• Goods Received Notes (hereafter GRN’s)
• Delivery notes from supplier (hereafter DN’s)
• Invoices from supplier
• Credit requests / notes
• Purchase journal
• Creditor’s account in creditor’s ledger
• Creditor’s control account in general ledger
• Creditor’s statements
• Requisitions/ payment advices

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Purchases
 Purchases
• Three functions within Purchases:
• The ordering function
• The receiving of goods function
• The purchases and accounts payable recording
function

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 Ordering Function
• Flow of documentation:
• Requisitions
• List of approved suppliers
• Supplier price list
• Purchase orders (PO’s)
• Telephonic Order
• A separate purchasing department or buyer must exist
• Entity must have a purchasing policy through which they
will control their inventory levels.
• When the entity reaches re-order level a purchase
requisition will be made out by the purchasing department
or buyer
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 Ordering Function
• Supplier list:
• List of approved suppliers must exist.
• Not allowed to deviate from the list
• Authorisation must be obtained from a senior in dept.
where other suppliers are to be used.
• Any changes to the list should be authorised by senior
official

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 Ordering Function
• Purchase orders:
• Should be sequentially numbered
• Include the following details:
• The name of the supplier
• The quantity ordered
• A description of the goods
• The price of the good
• Discounts
• Terms of payment
• Delivery address
• Signed off by the buyer

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 Ordering Function
• Purchase orders continue:
• Before PO is sent to supplier – authorised by purchase
manager
• PO must be issued in triplicate:
• Copies send to following people:
• Supplier
• Receiving dept.
• Copy kept in deliveries pending register to be match with DN
• Outstanding PO must be followed up by a senior

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Class Example
 Class Example
You are an internal auditor for Boundary Silk Bazaar (Pty) Ltd (hereafter known
as BSB). BSB is a medium sized firm that specialises in the design,
manufacturing and sale of school uniforms.

The BOD provided you with the following system descriptions regarding
the purchase of materials:
•When ordering the materials, the factory foreman Mr. Naidoo will draw up a list
of all the materials they need as soon as they reach the re-ordering level.
•A single copy of the purchase order containing all the relevant information is
then generated by Mr. Naidoo for these materials ordered. He also signs the
purchase order for authorisation. He then sends the purchase order to the
supplier.

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 Class Example
The BOD provided you with the following system descriptions
regarding the purchase of materials:
•BSB makes use of a range of different suppliers in their area. They
usually send their factory foreman Mr. Naidoo to buy materials from the
cheapest supplier available.

YOU ARE REQUIRED TO:

For the purchasing of materials, identify and describe the weaknesses
from the above scenario, and for each weakness provide a suitable
internal control that BSB should implement to ensure that the
weaknesses are appropriately addressed in the future. (19)

Your answer should be in tabular format as indicated below:

Weaknesses Internal Control

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 Class Example Solution
Weaknesses Internal Control
The orders are placed by the The orders should be placed by
factory foreman and not a the purchasing department or
separate person. separate buyer.

Mr. Naidoo also signs the The PO should be signed by the

purchase order as proof of purchasing manager.
authorization.
There is thus no segregation of There should also be
duties as Mr Naidoo is segregation of duties between
responsible for various tasks. the person who places the
order and signs the purchase
order.

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 Class Example Solution
Weaknesses Internal Control
Mr. Naidoo issues a single copy of Purchase orders should be issued in
the purchase order. triplicate and copies should be send
to the following departments:
•The supplier
•The receiving department
•A copy must be kept in the deliveries
pending register to be matched with
the delivery note.

They do not have a list of approved List of approved suppliers must

suppliers, as they make use of the exist from which the buyer may
cheapest supplier they can find. acquire goods.
Under no circumstances may they
deviate from this list.
Only approved suppliers should be
utilised.

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 Receiving Function
• Flow of documentation:
• Copy of PO
• Suppliers delivery notes (DN)
• Good received note (GRN)
• Receipt of goods:
• On receipt of goods, staff should inspect type, quantity
and quality against PO before signing DN
• Treatment of damaged goods:
• Not to be accepted
• Return back to supplier
• Notify accounts and purchasing dept. immediately

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 Receiving Function
• Details of goods received:
• Should be captured on a sequential GRN
• GRN issued in duplicate:
• Copies send to following departments:
• Ordering dept.
• Together with PO and DN to the accounts dept.
• Should be signed off by the individual responsible for
receiving

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 Receiving Function
• Include following details:
• Quantity of goods received
• PO number
• Date on which goods was received
• Description of the goods
• Details of person who received the goods

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Class Example
 Class Example Continue
You are an internal auditor for Boundary Silk Bazaar (Pty) Ltd (hereafter known
as BSB). BSB is a medium sized firm that specialises in the design,
manufacturing and sale of school uniforms.

The BOD provided you with the following system descriptions regarding
the purchase of materials:
•Upon receiving the goods, the receiving clerk Mrs. Robyn Swart signs the
delivery note immediately (hereafter known as DN).
•Robyn then generates a goods received note (hereafter known as GRN) in
duplicate where she indicates the date on which the goods were received and
her personal details. She then signs the GRN and forwards it together with the
purchase order and DN to the accounts department.

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 Class Example
YOU ARE REQUIRED TO:
For the purchasing of materials, identify and describe the weaknesses
from the above scenario, and for each weakness provide a suitable
internal control that BSB should implement to ensure that the
weaknesses are appropriately addressed in the future. (19)

Your answer should be in tabular format as indicated below:

Weaknesses Internal Control

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Class Example Solution Continue
Weaknesses Internal Control
Robyn does not inspect the goods Robyn should be inspecting all of
against the purchase order when the following upon delivery of
she receives them. goods:
Quality
Quantity
Type
This should be compared to the
original purchase order that was
sent to the supplier.
The GRN is incomplete. The GRN should also contain the
following info:
The quantity of the goods received
The purchase order number
A description of the goods

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 Recording Function
• Flow of documentation:
• Supplier invoice
• PO
• DN
• GRN
• Credit note (Disputed invoices and goods returned)
• Purchases Journal

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 Recording Function
• Invoices received:
• Not entered into records if it has not been approved as
correct by the person responsible for checking the
accuracy
• The person responsible should check following:
• Quality, quantity, and date on the invoice – GRN and DN
• Price, terms and account details on the invoice – PO
• Calculations on invoices

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 Recording Function
• Recording of purchases:
• Directly in purchase records
• The actual invoice will be filed under the supplier’s name and
check to the statement received from supplier
• Disputed invoices:
• Kept separately
• Followed up by senior
• Goods returned:
• Sent back to supplier and CN must be made out to the supplier

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Class Example
 Class Example Continue
You are an internal auditor for Boundary Silk Bazaar (Pty) Ltd (hereafter
known as BSB). BSB is a medium sized firm that specialises in the
design, manufacturing and sale of school uniforms.

The BOD provided you with the following system descriptions

regarding the purchase of materials:
•Robyn receives an invoice from the driver who delivers the goods and
sends the invoice to the accountant Mrs. Lerato Mandela.
•When Mrs. Lerato Mandela receives the invoices she files them directly
under the supplier’s name without checking the invoice.
•When Mrs. Lerato Mandela receives the statement from the supplier
she will make the payment.

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 Class Example
YOU ARE REQUIRED TO:
For the purchasing of materials, identify and describe the weaknesses
from the above scenario, and for each weakness provide a suitable
internal control that BSB should implement to ensure that the
weaknesses are appropriately addressed in the future. (19)

Your answer should be in tabular format as indicated below:

Weaknesses Internal Control

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Class Example Solution Continue
Weaknesses Internal Control
• When Mrs. Lerato Mandela Not entered into records if it has not
receives the invoices she files been approved as correct by the
them directly under the person responsible for checking the
supplier’s name without accuracy. The person responsible
checking the invoice. should check following:
•Quality, quantity, and date on the
invoice – GRN and DN
•Price, terms and account details on
the invoice – PO
•Calculations on invoices

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Payments
 Payments

• Flow of documentation:
• Remittance advices
• EFT transfer advice
• Bank statements
• Cash payments journal

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 Payments
• Three functions in payments:
• Control over EFT transfers Dealt with in Bank and Cash
• Drawing & signing of EFT’s Cycle
• Recording of payments

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 Recording of payments

• Should be done by an independent person.

• No access to control account by person maintaining sub
ledger. Regular reconciliation by independent person.
• Individual creditors reconciliations should be done on a
monthly basis of all creditor balances.

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Risks
 Risk inherent in this cycle
• Orders:
• Not authorised
• Not carried out timeously
• Not acquired at the best prices/conditions
• Goods received and recording:
• May not be accurately recorded
• Recording (Payments):
• May be for goods not received
• At wrong prices
• Discounts may not be utilised

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Controls
 General Controls
• These are easy marks and can be applied to any cycle.
• Always need to be applied because without these general controls the
specific controls will not function effectively.
• The following are general controls:
• Supervision and review
• Segregation of duties
• Rotation of duties
• Personnel take leave regularly
• Management control
• Internal audit

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 General Controls
• General controls continue:
• Sufficient stationery control
• Scrutinise all records and documents for extraordinary
items
• Test castings and calculations on all selected items,
documents and ledger accounts

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 Specific Controls
• When management implements specific controls there are
objectives that need to be met in order for the controls to
serve the desired purpose.
• These objective are named control objectives.

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 Control Objectives
• The following are control objectives for the purchase
and payment cycle:
• Occurrence/Validity
• Authorisation
• Completeness
• Classification
• Accuracy
• Recording
• Cut-off

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Test of Controls
 Internal Controls and Test of
Controls
• It is not sufficient for management to just implement controls.
They will need to also test the controls to determine if the
controls implemented meet the objectives as set out by
management.
• The internal controls can be divided into 3 “categories", namely:
1.The Objective to be achieved by the control that you
implement. Eg: Occurrence, Completeness, Authorisation etc.
2.How the objective will be achieved. (Internal Control that you
will implement)
3.How to test implementation of the control.

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Important terms to use for TOC’s for
Purchases and Payments
• Inspect:
• Always select a sample first
• Anything that is on a piece of paper
• PO, GRN, DN, Invoice and Statement from supplier
• Observe:
• A person performing a task/function
• Enquire:
• About policies and procedures
• Re-perform:
• Calculations

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Purchases
 Controls – Purchase Cycle
Occurrence/Validity – All recorded purchases are valid and supported
by proper documentation
Internal Controls TOC
All entries in PJ is supported by 1. Select a sample of PJ’s entries and
the following: inspect whether the entry is supported by
•Requisitions the following documentation:
•PO o Requisitions
•GRN o PO
•DN o GRN
•Invoices o DN
•Creditor’s statement o Invoices
o Creditor’s statement

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 Controls – Purchase Cycle
Authorisation – All purchases are approved according to the company
policy
Internal Controls TOC
PO are prepared by buyers only. Select a sample of PO and inspect for
signature of buyer.

PO are authorised by the purchase Select a sample of PO and inspect for

manager and supporting the signature of the purchase manager
documentation is cancelled. as authorisation and that supporting
documentation is cancelled.

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 Controls – Purchase Cycle
Completeness – All valid purchase transactions are recorded and
nothing is left out
Internal Controls TOC
If stock decreases to re-order level a Enquire of the storeman and buyers if a
requisition is made out. requisition is made out at re-order level,
and observe the procedures.
The goods receiving clerk inspect goods Observe procedures in terms of receiving
received for quantity, quality and type and of goods.
prepare a GRN based on the DN received. Select a sample of the DN and inspect
whether the GRN matches.
The GRN is matched with the delivery note Select a sample of credit notes and match
and short deliveries are indicated on the to GRN and DN.
delivery note and a credit note is made out.

A register is kept of unmatched invoices Inspect register of unmatched invoices and

and is regularly followed up by the buyer inspect for the buyer’s signature

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 Controls – Purchase Cycle
Completeness – All valid purchase transactions are recorded and
nothing is left out

Internal Controls TOC

The GRN is matched with the invoice Select a sample of GRN’s and match
and is thereafter recorded in the them to respective invoices and inspect
purchase journal. if they were entered into the purchase
journal.
All requisitions, orders and GRN are Perform a sequence test on all
recorded numerically and missing requisitions, orders and GRN’s.
numbers are followed up. Follow up missing numbers through
enquiry with management.

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 Controls – Purchase Cycle
Accuracy – All purchase transactions are accurately recorded at the
correct quantity, at the correct amount and are arithmetically correct
Internal Controls TOC
The invoice is independently checked Select a sample of invoices and:
for mathematical accuracy before •Inspect if the price mathces with PO
recording it in the purchase journal. and price list;
The following must be verified: •agree quantity with GRN;
•prices compared with PO and price list; •re-perform calculations; and
•quantity to GRN; and •Inspect for signature of independent
•mathematical accuracy checked person who checked for accuracy.

The purchase journal is updated from • Select a sample of purchase invoices

the purchase invoices. and follow through to the purchases
journal inspect that the detail
matches.
Stock records are updated from the GRN. •Select a sample of GRN’s and agree to the
entries in the stock records.

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 Controls – Purchase Cycle
Recording – All purchase transactions are correctly recorded
Internal Controls TOC
From the purchase journal purchases are Select a sample of entries in the purchase
posted to: journal and inspect the postings from:
•creditor's accounts in the creditors ledger; •the purchase journal to the creditors
and accounting in the creditors ledger; and
•purchase and creditors control account in • the purchase journal to the purchase- and
the general ledger. creditors control account in the general
ledger.
The creditors control account is kept up to Select a sample of creditors reconciliation
date and regularly reconciled with the list of and:
creditors. Management signs as evidence •re-perform the mathematical accuracy;
of review. and
•inspect evidence of review by
management.

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 Controls – Purchase Cycle

Classification – All purchase transactions are correctly classified

according to the nature thereof
Internal Controls TOC
Inter-group purchases are clearly Select a sample of inter-group
distinguished by a code number purchases and follow selected
and separately recorded. purchases through from the PO and
ensure correctly classified and
recorded as inter-group or external
purchases.

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 Controls – Purchase Cycle

Cut off – All purchase transactions are recorded in the correct reporting
period
Internal Controls TOC
Purchase journal is updated from • Select a sample of GRN’s dated
invoices in terms of the date of before and after year end.
delivery. • Compare the GRN with invoices
and follow through to the
purchase journal and creditors
account.
• Inspect that the purchases are
recorded in the correct
accounting period.

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Payments
 Controls – Payment Cycle
Occurrence/Validity – All payments on creditors accounts are valid
and are supported by proper documentation
Internal Controls TOC
Creditor payments supported by: Select a sample of payments from
•a payment requisition; the creditors account per the
•a creditor statement; creditors ledger and inspect that
•a creditors reconciliation; there is the following:
•a PO, GRN, DN and invoice •an authorised payment
requisition;
•creditor's reconciliation;
•supporting documentation namely
PO, GRN, DN, invoice, creditor
statement

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 Controls – Payment Cycle
Authorisation – All payments are approved according to company
policy
Internal Controls TOC

All payments made to creditors Select a sample of payments from

done by means of a requisition the bank statement and:
which is authorised by a senior •match to the requisition;
official. •inspect requisition for signatures
of authorisation of payment.
Two signatories review and cancel Select a sample of supporting
supporting documentation, before documentation and inspect if there
approving payment. were two signatories and if
documentation was cancelled.

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 Controls – Payment Cycle
Completeness – All valid payments are correctly recorded and
nothing is left out
Internal Controls TOC
Creditors control account regularly Select a sample of creditor’s
reconciled with the creditors ledger. reconciliations and re-perform the
accuracy.

Payment advices recorded Inspect the list of payment advices

numerically and missing numbers are and follow up missing numbers.
followed up.

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 Controls – Payment Cycle
Accuracy – Payments are made at the correct amount and is
arithmetically correct
Internal Controls TOC
Individual creditor’s reconciliations Select a sample of creditor’s
are prepared. reconciliations and
All calculations are reviewed by an •re-perform the mathematical
independent person. accuracy of the reconciliations;
•inspect for reviewer’s signature.

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 Controls – Payment Cycle
Recording – All payments are correctly recorded
Internal Controls • TOC
Payments are posted from: • Select a sample of payment advices
•the payment advice to the individual and follow entries through the
creditors' account; and individual creditors’ account and the
•the total to the creditors control creditors control account.
account.

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 Controls – Payment Cycle

Classification – All payments classified to the correct creditor's

account
Internal Controls
Payments coded according to the
creditor's number and posted on date
of cheque.
Independent person reviews codes
and date of payment.
TOC
Inspect that its been posted to correct
account on correct date.
Inspect signature of independent
person.

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 Controls – Payment Cycle
Cut off – All payments are recorded in correct period

Internal Controls TOC

All payments are recorded in correct Select payment before and after year
period. end and follow through to the creditor's
account, inspect recorded in correct
period.
Select payments from the creditor's
account and follow through to the
cashbook, inspect recorded in the
correct period

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Any Questions?

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