Snipped of the relevant paragraphs from ISA 610:
Purchase and Payment Cycle
ACC 300/BCTA
Introduction
Objectives:
Understand The Business Operations:
 Understand the functions/activities/processes within the purchases cycle;
 Understand the source documentations related to the functions/activities
and processes.
Business and Audit risks:
 Identify risks in the purchases system;
 Recommend controls to be implemented to mitigate risks.
Test of Controls:
 Perform test of controls in relation to the affected account balances and
or transactions
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Revenue Cycle: Guide and Learning Process
• Pre-reading;
• Module;
• Question bank;
• Lectures;
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Accounts balances in cycle
Statement of
Comprehensive income
• General company expenses
• Goods and services
consumed
Statement of financial
position
• Trade payables
• Provisions
• Accruals
• Bank
• Cash
• Discount receivable
• Prepaid expenses
• VAT
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1. Understanding The Business
Operations
2.The receiving of goods and services;
3.The recording of purchases and accounts payable;
4.Payments to creditors/payables.
Payments
1.The ordering of goods and services;
Purchases
Main functions of the cycle
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Document flow for the cycle as a
whole
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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
function
and
accounts
payable
recording
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Ordering Function
Flow of documentation:
• Requisitions
• List of approved suppliers
• Supplier price list
• Purchase orders (PO’s)
• Telephonic Order
Process flow
• 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 (built relations, discounts
and quality etc).
• 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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Receiving Function
Flow of documentation:
• Copy of PO
• Suppliers delivery notes (DN)
• Good received note (GRN)
Process flow
Receipt of goods:
• On receipt of goods, staff should inspect type, quantity and quality against PO
before signing DN
• 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
GRN should 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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Recording Function
Flow of documentation:
• Supplier invoice
• PO
• DN
• GRN
• Credit note (Disputed invoices and goods returned)
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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:
• 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 journal
• 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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Payments
Payments
Flow of documentation:
• Remittance advices
• Cheques / EFT transfer advice
• Bank statements
• Cash payments journal
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Payments
Three functions in payments:
• Control over cheque forms & EFT transfers
• Drawing & signing of cheques & EFT’s
• Recording of payments
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Drawing and signing of cheques
• Cheques drawn and presented to persons authorised to sign,
with supporting documentation:
• The person responsible should:
• Examine documents and mark documents as paid in
order to prevent the re-submission of payment.
• Signed by two signatories according to the correct levels
of authority.
• EFT’s:
• Addressed in the bank and cash cycle
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Recording of payments
• Should be done by an independent person who draw, sign
or handle cheques.
• Cheques returned from bank not available to person who
keeps accounts payable record, this is to ensure
segregation of duties.
• 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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2. 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
• Quality and quantity may differ
• 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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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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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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3.Test of Controls
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
the following:
• Requisitions
• PO
• GRN
• DN
• Invoices
• Creditor’s statement
1. Select a sample of PJ’s entries and
inspect whether the entry is supported by
the following documentation:
o Requisitions
o PO
o GRN
o DN
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
PO are prepared by buyers only.
TOC
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 included.
as authorisation and that supporting
documentation is included.
If stock decreases to re-order level a Enquire of the buyers if a requisition is
requisition is made out.
made out at re-order level, and observe the
procedures.
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Controls – Purchase Cycle
Completeness – All valid purchase transactions are recorded and
nothing is left out
Internal Controls
TOC
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 • re-perform calculations; and
list;
• Inspect for signature of independent
• quantity to GRN; and
person who checked for accuracy.
• mathematical accuracy checked
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.
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Controls – Purchase Cycle
Recording – All purchase transactions are correctly recorded
Internal Controls
TOC
From the purchase journal purchases are
posted to:
•creditor's accounts in the creditors ledger;
and
•purchase and creditors control account in
the general ledger.
Select a sample of entries in the purchase
journal and inspect the postings from:
•the purchase journal to the creditors
accounting in the creditors ledger; and
• the purchase journal to the purchase- and
creditors control account in the general
ledger.
The creditors control account is kept up to
date and regularly reconciled with the list of
creditors. Management signs as evidence
of review.
Select a sample of creditors reconciliation
and:
•re-perform the mathematical accuracy;
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 and purchases and
follow selected
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:
• a payment requisition;
• a creditor statement;
• a creditors reconciliation;
• a PO, GRN, DN and invoice
Select a sample of payments from
the creditors account per the
creditors ledger and inspect that
there is the following:
• an
authorised
payment
requisition;
• creditor's reconciliation;
• paid cheque;
• 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
done by means of a requisition
which is authorised by a senior
official.
Select a sample of payments from
the bank statement and:
• match to the requisition;
• 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:
•
• the payment advice to the individual
creditors' account; and
• the total to the creditors control
account.
Select a sample of payment advices
and follow entries through the
individual creditors’ account and the
creditors control account.
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Controls – Payment Cycle
Classification – All payments classified to the correct creditor's
account
Internal Controls
TOC
Payments coded according to the Inspect that its been posted to correct
creditor's number and posted on date account on correct date.
of cheque.
Inspect signature of independent
Independent person reviews codes person.
and date of payment.
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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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Substantive
Procedures
Key principles
to obtaining
audit evidence
Assertions:
• Understand the direction of testing
Record in
purchases journal
ACCOUNTING FLOW
GRN
1. Journal account (single transactions)
2. General ledger (processes data from journals and classifies e.g sum for each creditor)
3. Trial balance sum (processes data from GL for FS e.g sum of all creditors)
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GENERAL PROCEDURES
Good examination technique would be to first provide the examiner with the following general procedures
before you attempt auditing the necessary assertions (unless scoped out by the required). These general
procedures must be applied to the specific business cycle (Payroll, Revenue, Purchases Etc)
Examples:


Preliminary analytics:
o Current year(cy) vs prior year(py)
o Obtain reasons for non-expected movements
Obtain purchases list as at YE:
o Cast and reperform calculations (Use CAATS where necessary)
o Trace closing balance to the trial balance(TB), general ledger(GL) and purchases journal ledger
o Inspect the list for unusual items and follow up
o Agree the list to the prior year and enquire about any omissions
• Obtain management representation letter (mention the assertions required in the question)
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Substantive Procedures
Assertions - Expenses
o Accuracy – all purchases, expenditure have been correctly calculated, allocated and recorded in the
correct amounts in the GL in accordance with IFRS
o Occurrence – recorded purchases have been properly authorised and represent goods, services and
assets actually received during the period.
o Completeness – all purchases & expenses recorded
o Cut off – recorded expense in the correct period
o Classification – All expenses are correctly classified according to the nature thereo
o P&D – expense correctly classified & presented i.t.o. IFRS
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Direction of testing – The starting point and end point
Occurrence
Step 1: Selecting a sample of transactions from purchases journal (PJ) and
Step 2: >>>tracing to GRN, PO and Invoice/supplier statement. (End point source
documents)
Occurrence:
Select expense items from the GL or purchases journal and trace to source
documents such as GRN/Invoice or supplier statements and agree:
• Details (supplier, date, amount)
• Correct VAT treatment
• Re-compute source documents
• Vouch to payment– amount, date, supplier name, authorised signatories,
endorsements
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Assertions - Creditors
oCompleteness – represent all payables owed to suppliers of goods &
services at ye
oValuation & Allocation – stated at the correct amount at ye
oExistence – represents amounts owing by the entity at ye
oRights& Obligation – valid legal claims for payment against the entity
at ye
oCut off – recorded in the correct period
oP&D – are properly classified and presented i.t.o. IFRS
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Substantive procedures
Trade creditors
Primary risk: Understatement
Direction of testing: source document to accounting
records (End point accounting records)
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Direction of testing – The starting point and end point
Completeness
Step 1: Enquire and obtain the bank statement and
Step 2: tracing back to delivery note , related invoice and >>> purchases journal (End point tracing to
purchases journal i.e. books)
Completeness:
 Select expense items from the cashbook/(bank statements pre & post) and trace to
PJ
 Select expense items from the transaction files for suppliers, and agree to
supporting invoices and GL entries
 Select GRN’s pre and post ye and trace to invoice and posting in ledger
 Perform Creditors reconciliation testing
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Any Questions?
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