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Unit 2 Purchases- and Payments cycle, Dean Fensham AUD 31 Unit 2 summary…
Unit 2
Purchases- and Payments cycle
Purchase cycle:
Select samples of various relevant journals and inspect for - Supporting documents (
validity
); Valid signatures (
authorisation
), numbered requisitions, matched GRN and DN and proof of following up on unmatched invoices (
completeness
); Price match to PO and price list, and quantity agrees with GRN (
accuracy
); trace entries in journal to creditor accounts (
recording
); Inspect classification of purchase (
classification
); Investigate GRN before year end and after year end and match with relevant documentation (
Cut-Off
)
Payment cycle
Sample of relevant documents and accounts are again taken and inspected: - See that supporting documentation is present (authorised cheque, creditor reconciliation, paid cheque etc. (
Validity
); - Inspect bank statement and match to cheque requisition. Determine presence of authorized signatures.(
authorisation
); - Inspect creditor reconcilliation and re-perform accuracy (
completeness
) - Re-perform creditor reconcilliations by determining mathematical accuracy and compare to source documents from entries (
accuracy
); - Correlate creditor payment advice to creditor control account and inspect details (
recording
); - Inspect payment classification (
classification
); - Select payment before and after year end and correlate with creditor account (
cut-off
)
Purchasing Cycle
Involves controls implemented ensuring purchase of goods meets management control objectives.
1.
Activites
Organization needs buyer/ purchase dept.
Organization needs re-order policy at appropriate inventory levels
Organization needs approved supplier list. No deviation/ changes unless authorized.
Relevant documents
a) Purchase requisition
b) Approved supplier- & price list
c) Purchase order
To include:
Name of supplier;
Quantity ordered;
Description of goods;
Price of goods;
Discounts;
Terms of payment;
Delivery address;
Signature of buyer/purchase dept.
Protocol
PO issued in triplicate - sent to:
a) The Supplier
b) Receiving department
c) Copy kept in deliveries pending
Re-order level: Purchase order requisition made out by relevant dept./buyer.
PO signed & authorized by purchase manager.
2.
Protocol
Before signing DN:
Responsible staff inspect goods for quantity, quality and type against PO's.
Capture goods received on GRN - sign by responsible person
GRN issued in duplicate and sent to:
Ordering department
Accounts dept + copies of PO and DN
Damaged goods
a) Do not accept goods
b) Return to supplier
c) Notify accounts- and purchasing dept.
Relevant documents
a) Copy of PO
b) Supplier DN
c) Goods received note (GRN)
To include:
Quantity of goods received;
PO number;
Date of receipt;
Description of goods;
Details of receiving clerk.
3.
Relevant documents
a) Purchase journal
b) Copy of GRN
c) Supplier invoice
d) Copy of PO
e) DN from supplier
f) Credit note
Protocol
Approve invoices by authorized person before entering in records
Inspect following:
a) Quality, Quantity and date to GRN and DN
b) Price, terms and account details against PO
c) Calculations on invoice
Enter purchase in purchase journal, file under supplier name, check to received statement
Disputed invoices
kept seperately; Followed up by senior management
Goods returned
are sent to supplier; Issue credit note
All of goods ordered and received will be recorded for accounting purposes.
3 Functions:
Ordering
(of goods)
function
Receiving
(of goods)
function
Recording
(of goods)
function
Payment Cycle
Focuses on payment for purchases and creditors
3 Functions
Controls over cheque forms
Drawing and signing cheques
Recording of payments
Relevant documents
a) Bank statements
b) Remittance advice
c) Cheques
d) Cash payments journal
Protocol
a) Cancelled cheques marked "cancelled"; Attach to counterfoil.
b) Cheques sequentially numbered
c) Paid cheques filed numerical order
d) Discourage cash cheques
e) Cheques crossed =
Not transferable
a) Present drawn cheques to authorized senior incl. support documents to sign.
b) Inspect documents for validity and accuracy; Mark as paid, preventing resubmission.
c) Cheques signed by two authorized signatories.
a) Independent person to record cheques; Ensuring duty segregation
b) Returned cheques not available to accounts payble dept.
c) Control account not available to accounts payable sub ledger dept.
d) Indpendent person to do regular reconcilliations.
e) Monthly reconciliations of indiv. creditors balances
Internal controls and Test of controls for cycle:
Purchases control objectives
Occurrence/ validity:
-All purchases = valid and with proper documents.
Authorization:
All purchases are approved as per policy.
Completeness:
Valid purchase transactions are recorded, nothing left out.
Accuracy:
Purchase transactions recorded accurately at correct quantity and arithmetically correct.
Recording:
Purchase transactions correctly recorded.
Classification:
Purchases correctly classified according to nature thereof.
Cut off:
Purchase transactions recorded in correct period.
Example of Purchase weakness and risk:
If a company foregoes a decent reorder policy and just orders frantically - Leads to risk of stock out or overstocking inventory
Payment Control objectives
Occurrence/ validity:
Payments on creditor accounts are valid with proper documents.
Authorization:
Payments are approved as per policy.
Completeness:
-Valid payments correctly recorded, nothing left out.
Accuracy:
Payments made at correct amount and arithmetically correct.
Recording:
Payments correctly recorded.
Classification:
Payments classified to correct creditor journal.
Cut off:
Payments recorded in correct period.
Example of Payment weakness and risk:
If company does not follow protocol and cross out cheques/ cancel documentation, can lead to risk of resubmission fraud and money being stolen from company
Substantive procedures
Detect material misstatements through:(
1
) Test of detail classes and (
2
) Substantive analytical procedures.
Substantive procedures for Purchases, Payments and Creditors (Payables)
Includes procedures are similar to test of controls for control objectives.
Purchases and Payments: Test for Occurrence; Accuracy; Cut-Off; Classification; Completeness
Creditors (Payables): Test for Obligations; Existence; Accuracy; Completeness; Classification; Presentation.
Use of audit software:
Use of audit software can be useful to determine creditor account errors/ faults, missing information, reduced balances to a significant degree, nil balances etc.
Creditor master file contains: 1. Account number; 2. Name' 3. Address and contact details; 4. Total amount payable; 5. Aging of total amount payable; 6. Payment and discount terms.
Dean Fensham
AUD 31
Unit 2 summary
20 March 2022