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Purchases and Payments Cycle - Coggle Diagram
Purchases and Payments Cycle
The purchases cycle
Functions of the purchases cycle
The ordering of goods,
The receiving of goods, and
The recording of goods
Documentation present within
the ordering of goods function
Requisitions
List of approved suppliers
Supplier price lists
Purchase orders
Documentation present within
the receiving of goods function
Copy of purchase order
Supplier delivery notes
Goods received notes
Documentation present within the recording of goods function
Supplier invoice
Copy of PO's
Copy of the GRN
DN from supplier
Purchases Journal
Credit notes
The payment cycle
Functions of the payment cycle
Payment to creditors/payables
This consists of 3 functions, namely:
a. Control over cheque forms
b. Drawing & signing of cheques
c. Recording of payments
Documentation present within the payment to creditors/payables function
Remittance advices
Cheques
Bank statements
Cash payment journal
The internal controls, control objectives and test of controls in the purchasing cycle
Control Objective
Validity: All recorded purchases are valid and supported by proper documentation.
Test of control
Select a sample of purchases from the purchases journal and inspect whether it is supported by the following:
a. Purchase requisitions;
b. PO;
c. GRN;
d. DN from the supplier;
e. Invoices; and
f. Creditor’s statement
Internal Control
All entries in purchase journal (and in the cash book if the purchases was cash) should be supported by the following:
a. Purchase requisitions;
b. PO;
c. GRN;
d. DN from the supplier;
e. Invoices; and
f. Creditor’s statement
Control Objective
Authorisation: All purchases are authorised according to company policy.
Test of control
Select a sample of purchase orders and inspect for the signature of the buyer.
Select a sample of purchase orders and inspect for the signature of the purchase manager
Internal Control
Purchase orders are prepared by purchasing department or buyers only.
Purchase orders are authorised by the purchase manager.
Control Objective
Completeness: All valid purchase transactions are recorded and nothing is left out
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.
Internal Control
All requisitions, PO and GRN are recorded numerically and missing numbers are followed up.
The GRN is matched with the DN and short deliveries are indicated on the delivery note and a numerical credit note is made out.
A register is kept of unmatched invoices and is regularly followed up by the senior buyer.
Control Objective
Accuracy: All orders are carried out accurately. All purchase transactions are accurately recorded at the correct quantity, at the correct amount and are arithmetically correct
Internal Control
The invoice is independently checked for mathematical accuracy before recording it in the purchase journal. The following must be verified:
a. Prices should be compared with PO and price list;
b. Quantity should be checked on the GRN; and
c. Accounting accuracy checked
The purchase journal is recorded from the invoices.
Test of control
Select a sample of invoices and Inspect whether
a. the price is same as on the PO and price list; and
b. the quantity agrees with GRN.
Re-perform the mathematical accuracy of the invoice.
Select a sample of invoices and follow through to the purchases journal inspect that the details matches.
Control Objective
Recording: All purchase transactions are correctly recorded
Internal Control
From the purchase journal purchases are posted to:
a. creditor's accounts in the creditors ledger;
b. 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.
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:
a. whether the supporting documents and records agree; and
b. the signature of management as evidence of review.
Control Objective
Classification: All purchase transactions are correctly classified according to the nature thereof
Internal Control
Inter-group purchases (if there are any) are clearly distinguished by a code number and separately recorded.
Test of control
Select a sample of purchases and inspect whether it has been correctly classified.
Control Objective
Cut off: All purchase transactions are recorded in the correct reporting period
Internal Control
The Purchase journal updated from invoices in respect of the date of delivery.
Test of control
Select a sample of GRN’s dated before and after year end. 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.
The internal controls, control objectives and test of controls in the payment cycle
Control Objective
Validity: All payments on creditors accounts are valid and are supported by proper documentation
Test of control
Select a sample of payments from the creditors account per the creditors ledger and inspect whether it is supported by:
a. an authorised cheque requisition;
b. creditor's reconciliation;
c. paid cheque;
d. supporting documentation namely purchase order, GRN, invoice, creditor statement
Internal Control
Creditor payments are supported by:
a. a cheque payment requisition;
b. a creditor statement;
c. a creditors reconciliation; and
d. a PO, GRN, DN from supplier and an invoice.
Control Objective
Authorisation: All payments are authorised according to company policy.
Internal Control
All payments made to creditors done by means of a cheque requisition which is authorised by a senior official.
Two signatories review and cancel supporting documentation, before approving payment.
Test of control
Select a sample of payments from the bank statement and:
a. match to the cheque requisition inspect that the details are the same; and
b. Inspect the requisition for signatures of authorisation of payment.
Select a sample of payments and inspect:
a. If the supporting documentation has been cancelled; and
b. The two signatories for approval.
Control Objective
Completeness: All valid payment transactions are recorded and nothing is left out
Internal Control
Creditors control account is kept up to date in the general ledger and regularly reconciled with the creditor’s ledger.
Payment advices are recorded numerically and missing numbers are followed up.
Test of control
Select a sample of creditor’s reconciliations and re-perform the accuracy.
Select a sample of payment advices and inspect the numerical sequence and the signature as proof of following up on missing numbers.
Control Objective
Accuracy: Payments are made at the correct amount and is arithmetically correct
Internal Control
Individual creditor’s reconciliations are prepared and serve as supporting documentation for payments. All calculations are reviewed by an independent person.
Test of control
Select a sample of reconciliations and follow selected payments through to the creditors reconciliation;
a. re-perform the mathematical accuracy of the reconciliations;
b. compare entries to source documents; and
c. inspect for reviewer’s signature.
Control Objective
Recording: All payment transactions are correctly recorded
Internal Control
Payments are 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.
Control Objective
Classification: All payments classified to the correct creditor's account
Internal Control
Payments coded according to the creditor's number.
Test of control
Select a sample of payments and inspect that it’s been posted to correct creditors account.
Control Objective
Cut off: All payments recorded at date of payment per payment advice and date of cheque
Internal Control
All payments are 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.
Weaknesses and recommendations
An organisation will be faced with risks when the organisation has a weak internal control environment (weaknesses)
Example:
If an organisation places orders for inventory when it has run out
Weakness:
There is no purchasing policy through which it governs the re-ordering levels of inventory.
Recommendation:
Implement proper purchasing policy that governs re-ordering levels of inventory
Risk:
The organisation will have stock out that can lead to unhappy customers as customers will not be able to get the goods they want