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Purchases and Payment cycle - Coggle Diagram
Purchases and Payment cycle
Documents in the purchasing cycle
Ordering of goods
Requisitions
List of approved suppliers
Supplier price lists
Purchase orders (PO)
Receiving of goods
Copy of the PO
Supplier delivery notes
Goods received notes
Recording
Supplier invoice
Copy of the PO’s
Copy of the GRN
DN form supplier
Purchases Journal
Credit Notes (Disputed invoices and goods returned)
The control objectives: Purchasing Cycle
Occurrence/Validity
All recorded purchases should be valid and supported by proper documentation.
Internal control
All entries in purchase journal (and in the cash book if the purchases was cash) should be supported by:
a) Purchase requisitions
b) PO
c) GRN
d) DN from the supplier
e) Invoices
f) Creditor’s statement
test of contro
l
Select a sample of purchases from the purchases journal and inspect whether it is supported by relevant supporting documents
Authorization
:
All purchases should be authorized according to company policy
Internal control
A requisition should be made out either by the computer/ store man if stock decreases to re-order level,.
Orders should prepared by purchasing department or buyers only and prices compared and best selected and they should be authorised by purchase manager
Test of control
Select a sample of purchase orders and inspect for the signature of the buyer as well as signature of the purchase manager
Completeness
All valid purchase transactions should be recorded and nothing should be left out
Internal controls
Two persons should inspect goods on received for quantity and quality and prepare a GRN.
The GRN should be matched with the DN and short deliveries should be indicated on the DN and a credit request should be made out.
A register should be kept of unmatched invoices and be regularly followed up by the senior buyer.
The GRN should be matched with the invoice and should thereafter be recorded in the purchase journal.
All requisitions, orders and GRN should be recorded numerically and missing numbers should be followed up.
Test of control
Select a sample of requisitions, PO’s and GRN’s and inspect whether they are numerical and inspect for the signature as proof of following up on missing numbers.
Select a sample of credit notes and match it with the GRN and DN, inspect whether the details are the same.
Select a sample of entries in the register and inspect for the signature of the senior buyer as proof of following up on unmatched invoices.
Accuracy
All orders should be carried out accurately and all purchase transactions should be accurately recorded at the correct quantity at the correct amount and are arithmetically correct
Internal Control
The purchase invoice should be independently checked for mathematical accuracy before recording it in the purchase journal.
Prices should be compared with orders/price list
Quantity should be checked on the GRN accounting accuracy checked
Test of control
Select a sample of invoices and Inspect whether the price is same as on the PO and price list and the quantity agrees with GRN
Re-perform the mathematical accuracy of the invoice
Recording
All purchase transactions should be correctly recorded
Internal control
Purchase invoices is used to update the purchases journal
Purchases should be posted to creditor's accounts in the creditors ledger and purchase and creditors control account in the general ledger from the purchase journal
The creditors control account is kept up to date and regularly reconciled with the list of creditors and the management signs as evidence of review
Test of control
Select a sample of entries in the purchase journal and trace posting to the creditor’s accounts in the creditors ledger and the purchase and creditors control account in the general ledger, inspect whether the details are the same.
Select a sample of creditors reconciliation and inspect whether the supporting documents and records agree as well as the signature of the senior manager as evidence for review
Classification
All purchase transactions should be correctly classified according to their nature
Internal control
If there are any inter-group purchases they should clearly distinguished by a code number and recorded separately
Test of controls
Select a sample of purchases and inspect whether it has been correctly classified.
Cut off
All purchase transactions should recorded in the correct reporting period
Internal Control
Internal control
The Purchase journal should be updated from invoices in respect of the date of delivery.
Test of controls
Select a sample of GRN’s dated before and after year end and match the GRN with invoices and follow through to the purchase journal.
Inspect that the purchases are recorded in the correct accounting period based on the date of delivery.
Documents in the payment cycle
Payments to creditors/payables
Remittance advices
cheques
Bank statements
Cash payments journal
Functions in the payment cycle
Controls over cheque forms
Drawing and signing of cheques:
Recording of payments:
The control objectives: Payment Cycle
Occurrence/Validity
All payments on creditors accounts should be valid and should supported by proper documentation
Internal controls
Creditor payments should supported by
i) a cheque payment requisition
ii) a creditor statement
iii) a creditors reconciliation
iv) a purchase order, GRN, DN from supplier and an invoice
Test of control
Select a sample of payments from the creditors account per the creditors ledger and inspect whether it is supported by relevant documents
Authorisation
All payments should be authorised according to company policy
Internal controls
i) All payments made to creditors done by means of a cheque requisition should be authorised by a senior official.
ii) Two signatories should review and cancel supporting documentation, before approving payment.
Test of control
Select a sample of payments from the bank statement match to the cheque requisition inspect that the details are the same
Select a sample of payments and inspect the approval of two signatories and if the supporting documentation has been cancelled
Completeness
All valid payment transactions should be recorded and nothing should be left out
Internal controls
Creditors control account should be kept up to date in the general ledger and regularly reconciled with the creditor’s ledger.
Payment advices should be recorded numerically and missing numbers should followed up
Test of control
Select a sample of creditor’s reconciliations and re-perform the accuracy.
Select a sample of payment advices and perform a sequence test and inspect the signature as proof of following up on missing numbers.
Accuracy
Payments should be made at the correct amount and should be arithmetically correct
Internal Controls
Individual creditor’s reconciliations should be prepared and serve as supporting documentation for payments
An independent person should review all calculations
Test of control
Select a sample of reconciliations and follow selected payments through to the creditors reconciliation
re-perform the mathematical accuracy of the reconciliations
Recording
All payment transactions should be correctly recorded
Internal control
Payments should be posted from the payment advice to the individual creditors' account and the total to the creditors control account.
Test of control
Select a sample of payment advices and follow entries through the individual creditors account and the creditors control account and inspect that the details match
Classification
All payments should be classified to the correct creditor's account
Internal controls
Payments should be coded according to the creditor's number and posted on date of cheque.
Codes and date of payment should be reviewed by an independent person .
Test of control
Select a sample of payments and inspect that it’s been posted to correct creditors account.
Cut off
All payments should be recorded at date of payment per payment advice and date of cheque
Internal control
All payments should be recorded in correct period in respect of the date of the cheque
Test of control
Select payment before and after year end and follow through to the creditor's account and inspect whether it has been recorded in correct period based on the date of the cheque
Explanation
:
Internal controls are put in place in order to avoid fraudulent financial reporting which can result from understating trade creditors by manipulating cut-off at the end of the year as well misappropriation of asset by ordering of goods by employees or management for their personal use
Substantive procedures- purchases
Cut-off – the purchase has been recorded in the correct accounting period
Classification – the purchase has been recorded in the proper accounts
Accuracy – the amount of the purchase has been recorded appropriately
Occurrence – the recorded transaction has occurred and it pertains to the give company
Completeness – all purchases that should have been recorded have been recorded
Substantive procedures-
Payments
Accuracy – the amount of the payment has been recorded appropriately
Cut-off – the payment has been recorded in the proper accounting period
Occurrence the recorded transactions of payment occurred and
Classification – the payment has been recorded in the proper accounts