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Purchases and Payments Cycle - Coggle Diagram
Purchases and Payments Cycle
Control Objectives
Completeness
All purchase transactions are recorded.
A purchase order (PO) system with sequential numbering and detailed POs ensures all transactions are recorded.
Accuracy
Transactions are recorded at the correct amounts.
Authorisation
Transactions must be approved by appropriate personnel.
Cut Off
Transactions are recorded in the correct accounting period.
The PO includes detailed information such as supplier name, quantity, description, price, and payment terms to ensure accurate transactions.
Payments are confirmed for correctness against supplier reconciliations and reviewed independently.
Occurrence/Validity
Ensure all purchase transactions actually occurred and are valid.
Classification
Purchase transactions are categorised accurately.
Functions in the Cycle
Ordering
Placing orders with vendors.
Receiving
Accepting delivery of goods and services.
Requisitioning
Initiating purchase requests.
Paying
Processing payments to vendors.
Accounting
Recording financial transactions related to purchases.
Documents
Receiving Reports
Confirming receipt of ordered items.
Invoices
Billing documents from suppliers.
Purchase Orders
Official orders issued to vendors.
Payment Vouchers
Authorisations for payment.
Purchase Requisitions
Documenting the initial request for goods or services.
Weaknesses
Deficient Segregation of Duties
Lack of proper division between ordering, receiving, and payment processes.
Inadequate Documentation
Missing or incomplete purchase orders, receipts, or payment records.
Poor Reconciliation
Failure to regularly reconcile purchase orders with invoices and receipts.
Technology and Data Security Weaknesses
Vulnerabilities in the systems that handle purchase transactions.
Inadequate Approval Processes
Insufficient checks on the authorisation of purchases.
Risks
Error Risk
Inaccurate recording of purchases and payments.
Price Risk
Paying more than the market price or not taking advantage of discounts.
Non-compliance Risk
Failing to adhere to laws and regulations.
Supply Chain Risk
Dependency on key suppliers that may impact the purchases cycle.
Fraud Risk
Potential for fraudulent activities in the procurement process.
Internal controls
Purchases
Three-Way Matching
Matching of POs, delivery notes, and deliveries pending register entries.
Approval Authority
A purchasing department or buyer is required with a purchasing policy in place.
Payments
Secure Transaction Processing
Cheques are to be crossed 'not transferable' and signed by two signatories.
Segregation of Duties
Independent recording of payments from those who draw, sign, or handle cheques.
Test of controls
Purchases
Authorisation
Select a sample of purchase orders and inspect for the signature of the buyer.
Completeness
Select a sample of credit notes and match it with the GRN and DN, inspect whether the details are the same.
Validity
Select a sample from purchases journal and inspect if it is supported by correct documentation.
Accuracy
Select a sample and inspect that the price is the same as on the PO. (Check mathematical accuracy).
Recording
Trace posting of purchases and whether they are recorded in the control accounts.
Classification
Select a sample of purchases and inspect whether it has been correctly classified.
Cut-off
Inspect that the purchases are recorded in the correct accounting period based on the date of delivery.
Payments
Authorisation
Select a sample of payments from bank statement and check the requisition for signatures of authorisation.
Completeness
Select a sample of creditor’s reconciliations and re-perform the accuracy.
Validity
Select a sample of payments from the creditors ledger and inspect if they are supported by the correct documentation.
Accuracy
Select a sample of reconciliations and re-perform calculations to check mathematical accuracy.
Recording
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
Select a sample of payments and inspect that it’s been posted to correct creditors account.
Cut off
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.
Important to test with
Observe
Enquire
Inspect
Re-perform