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Purchases and Payments Cycle - Coggle Diagram
Purchases and Payments Cycle
An explanation/example of possible weaknesses and risks
Weakness
(What is the company currently doing wrong?)
Risks
(What is the consequence of the weakness, what can go wrong, the financial implication?)
Example
Five buying clerks are responsible for placing orders with the suppliers.All the buying clerks
together with the receiving clerks have access to the ordering ‘module’ as well as the receiving ‘module’.The two departments have their own general password used to access the modules
Risk
There is a risk that a buying officer can place an order fraudulently(e.g. order goods for himself) resulting in financial loss to the entity.
Weakness
There is a lack of division of duties between the initiation of the order and its execution as the buying clerks decide what to order without the authority of a signed requisition from the warehouse and they place the order.
FUNCTIONS IN CYCLE
2.Receiving of
goods/services
Ordering of
goods/services
4.Payment
preparation
3.Recording of
purchases
5.Actual payment and recording of the payment
Activities and source
documents
Ordering department
Requisition
Order/purchase order form
List of approved suppliers
Processing department
Supplier invoice (Purchase invoice)
Signed GRN
General ledger
Creditors ledger
Purchses journal
Signed order
Processing department
Cash payments journal
Bank Statement
General ledger
Creditors ledger
Returned paid cheque
Receiving department
Goods received note (GRN)
Supplier delivery note (DN)
Preparation of payment
Remittance advice (RA)
List of creditors/Creditors ledger
Creditors statement
Cheque/EFT request/ requistion
Making of payment
List of creditors/creditors ledger
Creditors statement
Supporting documentation
Cheque/EFT request
The control objectives
THE INTERNAL CONTROLS AND CONTROL OBJECTIVES IN THE PURCHASING CYCLE
Authorisation: All purchases are authorised according to company policy. Internal Control
Internal Control
1) If stock decreases to re-order level, a requisition is made out either by the computer/ store man.
2) Orders are prepared by purchasing department or buyers only and prices compared and best selected.
3) Orders are authorised by the purchase manager.
Completeness: All valid purchase transactions are recorded and nothing is left out
Internal Control
1) Two persons inspect goods on received for quantity and quality and prepare a GRN.
2) The GRN is matched with the delivery note and short deliveries are indicated on the delivery note and a credit request is made out.
3) A register is kept of unmatched invoices and is regularly followed up by the senior buyer.
4) The GRN is matched with the invoice and is thereafter recorded in the purchase journal.
5) All requisitions, orders and GRN are recorded numerically and missing numbers are followed up.
Recording: All purchase transactions are correctly recorded Internal Control
Internal Control
1) The purchase journal is updated from the purchase invoices.
2) 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.
3) The creditors control account is kept up to date and regularly reconciled with the list of creditors. Management signs as evidence of review.
Classification: All purchase transactions are correctly classified according to the nature thereof
Internal Control
1) Inter-group purchases (if there are any) are clearly distinguished by a code number and separately recorded.
Occurrence/Validity: All recorded purchases are valid and supported by proper documentation
Internal Control
1) 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
Cut off: All purchase transactions are recorded in the correct reporting period Internal Control
Internal Control
1) The Purchase journal updated from invoices in respect of the date of delivery.
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
1) The purchase 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 orders/price list; b. Quantity should be checked on the GRN; and
c. accounting accuracy checked
THE CONTROL OBJECTIVES AND INTERNAL CONTROLS IN THE PAYMENT CYCLE
Occurrence/Validity: All payments on creditors accounts are valid and are supported by proper documentation
Internal Control
a cheque payment requisition;
b. a creditor statement;
c. a creditors reconciliation;
d. a purchase order, GRN, DN from supplier and an invoice
Authorisation: All payments are authorised according to company policy.
Internal Control
Internal Control
1) All payments made to creditors done by means of a cheque requisition which is authorised by a senior official.
2) Two signatories review and cancel supporting documentation, before approving payment.
Cut off: All payments recorded at date of payment per payment advice and date of cheque
Internal Control
1) All payments are recorded in correct period in respect of the date of the cheque.
Classification: All payments classified to the correct creditor's account
Internal Control
1) Payments coded according to the creditor's number and posted on date of cheque.
2) Independent person reviews codes and date of payment
Accuracy: Payments are made at the correct amount and is arithmetically correct
Internal Control
Internal Control
1) Individual creditor’s reconciliations (reconciliation per supplier, known as supplier reconciliation) are prepared and serve as supporting documentation for payments.
2) All calculations are reviewed by an independent person.
Recording: All payment transactions are correctly recorded
Internal Control
1) Payments are posted from the payment advice to the individual creditors' account and the total to the creditors control account.
Completeness: All valid payment transactions are recorded and nothing is left out
Internal Control
1) Creditors control account is kept up to date in the general ledger and regularly reconciled with the creditor’s ledger.
2) Payment advices are recorded numerically and missing numbers are followed up.