Please enable JavaScript.
Coggle requires JavaScript to display documents.
PURCHASES AND PAYMENTS CYCLE - Coggle Diagram
PURCHASES AND PAYMENTS CYCLE
INTERNAL CONTROLS
(Purchases)
Select a sample of invoices and:
inspect if price matches with PO and invoice,
agree quantity with the GRN,
re-perform calculations, and
inspect for independent person's signature who checked for accuracy.
Select a sample of creditors reconciliation and inspect:
if supporting documentation and records agree, and
the signature of management as evidence of review.
Select a sample of entries in the purchase journal and trace relevant postings to inspect if the details are the same.
Enquire with relevant people if requisition is made at reorder level and observe procedures. Observe receiving of goods procedures. Select a sample of DN and inspect if the GRN matches. Inspect unmatched invoices for buyers signature. Follow up missing numbers through enquiry with management.
Select a sample of purchases and inspect whether its been correctly classified (inter-group/external purchases)
Select a sample of purchase orders and inspect for the signature of the buyer and purchase manager.
Select a sample of GRN's dated before and after year end, match them with invoices and follow through to the purchase journal to ensure the purchases are recorded in the correct accounting period based on delivery date.
Select a sample of purchases from the purchases journal and inspect whether its supported by:
Purchase requisitions, PO, GRN, DN from supplier, invoices and creditor's statement.
FUNCTIONS IN THE CYCLE
Receiving function (Purchase Cycle)
Recording function (Purchase Cycle)
Payments to creditors/payables (Payments Cycle)
Ordering function (Purchase Cycle)
DOCUMENTS IN THE CYCLE
Recording function
Supplier invoice
Copy of PO's
Copy of GRN
DN from supplier
Purchase journal
Receiving function
Copy of PO
Supplier deliver notes (DN)
Goods received notes (GRN)
Ordering function
Requisitions
List of approved suppliers
Supplier price lists
Purchase orders (PO)
Payments to creditors/payables
Remittance advices
Cheques
Bank statements
Cash payments journal
SUBSTANTIVE TESTING
Substantive Procedures
Nature (identify and assess the risk of material mismanagement, and gather audit evidence about the test of controls.
Substantive tests consist of: tests of details of classes of transactions, account balances and disclosures, and substantive analytical procedures.)
Timing
Extent of testing
Substantive testing of transactions in
the purchases and payments cycle
Accuracy
Completeness
Occurrence
Classification
Cut-off
Substantive procedures
on trade and other payables
Existence
Accuracy, Valuation and Allocation
Obligations
Completeness
Classification
Presentation
Control Objectives
(Purchases and Payments)
Accuracy
Recording
Completeness
Classification
Authorisation
Cut off
Occurence/Validity
WEAKNESSES AND RISKS
Weaknesses are internal controls a firm has not implemented, or correctly implemented. The control environment will therefore not be working as effectively as it should be which creates a specific risk for the firm.
Example:
Every firm must have a reorder level that will govern exactly when the firm must reorder goods they need.
Weakness:
Not having a reorder level in place, therefore goods are ordered whenever one feels like it.
Risk:
Experiencing a stock out that results in unhappy customers if you are unable to provide them with what they want.
Internal control:
Have a purchasing policy in place that will govern inventory levels and determines when it is necessary to reorder.
INTERNAL CONTROLS
(Payments)
Select a sample of payments from bank statement and:
match to cheque requisitions (inspect details are the same)
inspect for signatures of authorisation of payment.
Select a sample of payments and inspect:
supporting docs have been cancelled,
2 signatories for approval.
Select a sample of creditors reconciliations and re-perform accuracy.
select a sample of payment advices and inspect the numerical sequence, and signature as proof of following up missing numbers.
Select a sample of reconciliations and follow selected payments through to the recon:
re-perform mathematical accuracy of recons,
compare entries to source docs, and
inspect for reviewer's signature.
Select a sample of payments from creditors account per creditors ledger and inspect whether its supported by:
authorised cheque requisition,
creditors reconciliation,
paid cheque
supporting documentation (PO, GRN, invoice, creditor statement.
Select a sample of payment advices and follow entries through individual creditors account and creditors control account, inspecting they match.
Select a sample of payments and inspect for independent persons signature and that it's been posted to the correct creditors account, on the correct date.
Select payments before and after year end and follow through to the creditors account, inspect if its been recorded in the correct period based on the date of the cheque.