Please enable JavaScript.
Coggle requires JavaScript to display documents.
Purchases and Payments Cycle - Coggle Diagram
Purchases and Payments Cycle
Purchasing cycles 3 functions
Receiving Function:
Details of goods received captured on Goods Received Note (GRN) signed by receiver.
GRN includes quantity, PO number, date received, description, and receiver details.
Goods inspected for type, quality, and quantity against PO before signing delivery note.
GRN copies sent to ordering department and accounts department with PO and delivery note.
Recording Function:
Invoices not entered without approval from person responsible for checking accuracy.
Invoices checked for quality, quantity, date against GRN/DN and price/terms/account details against PO.
Invoice calculations verified
Purchases directly entered purchase journal and filed under supplier's name.
Purchases directly entered purchase journal and filed under supplier's name.
Goods returned sent back to supplier, and credit note issued.
Ordering Function:
Purchase orders (POs) issued with specified details
POs sequentially numbered and authorized by purchase manager
List of approved suppliers maintained.
Copies of POs kept for supplier, receiving department, and pending register
Requisitions made when re-order level reached.
The payment Cycle.
Drawing and Signing of Cheques
Cheques drawn should be presented to authorized signatories with necessary supporting documentation.
Documents to be paid must be inspected to ensure validity and accuracy.
Cheques should be signed by two signatories with the required level of authority.
Recording of Payments
Control accounts should not be accessible to individuals responsible for maintaining the accounts payable subledger.
Regular reconciliations should be performed by individuals independent of those maintaining the subledger.
Cheques returned from the bank should not be accessible to those maintaining accounts payable records.
Monthly creditor reconciliations should be produced for all creditor balances.
Recording of cheques should be done by individuals independent of those drawing, signing, or handling the cheques.
Controls over Cheque Forms
All cheques must be crossed with the words "not transferable".
Cash cheques should be discouraged.
Paid cheques should be filed in numerical order.
All cheques should be sequentially numbered.
Cancelled cheques should be clearly marked and attached to relevant cheque counterfoils or separately filed.
Electronic Funds Transfers (EFTs)
While EFTs are a valid payment method, controls related to them have been addressed in Unit 1.
Purchasing Cycle
Accuracy
Ensure orders are executed accurately.
Test involves checking invoice details against PO and GRN and re-performing mathematical accuracy.
Recording
Confirm correct recording of all purchase transactions.
Test includes tracing entries from purchase journal to ledger accounts.
Completeness
Confirm all valid purchase transactions are recorded.
Test includes verifying numerical sequencing of documents and follow-up actions.
Classification
Ensure proper classification of purchase transactions.
Test involves inspecting classification accuracy.
Authorization
Verify purchases are authorized per company policy.
Inspect purchase orders for signatures of the buyer and purchase manager.
Cut off
Confirm purchases are recorded in the correct accounting period.
Validity
Ensure all recorded purchases have proper documentation.
Test involves inspecting sample purchases for supporting documents.
Payment Cycle
Accuracy
Ensure payments are made accurately.
Test involves reviewing reconciliations and verifying calculations.
Recording
Confirm correct recording of all payment transactions.
Test includes tracing entries from payment advice to ledger accounts.
Completeness
Confirm all valid payment transactions are recorded.
Test includes checking numerical sequencing of payment advice.
Classification
Ensure proper classification of payment transactions.
Test involves inspecting classification accuracy.
Authorization
Verify payments are authorized according to company policy.
Inspect cheque requisitions for authorization signatures.
Cut off
Confirm payments are recorded in the correct accounting period.
Test involves matching cheque dates with recording dates in the ledger.
Validity:
Ensure all payments on creditors' accounts are supported by proper documentation.
Test involves inspecting sample payments for supporting documents.
Summary of Substantive Procedures
Substantive Testing of Transactions
Payments are tested for occurrence, accuracy, cut-off, classification, and completeness.
For purchases, tests are conducted on occurrence, accuracy, cut-off, classification, and completeness.
Analytical Review Procedures
Supplement tests of detail.
Include comparisons of expenditure categories, calculation of expenses as percentages, and comparison to budgets.
Abnormal fluctuations are investigated further.
Extent
Greater risk or less effective controls require more extensive testing.
Testing is reflected in sample sizes and types of tests conducted.
Extent of testing depends on assessed risk and results of tests of controls.
Substantive Procedures on Trade and Other Payables
Focus on trade and other payables account balance at year-end.
Assertions tested include obligations, existence, accuracy, valuation, allocation, completeness, classification, and presentation.
Timing
Sometimes, due to audit deadlines, testing may be conducted at interim dates, followed by updates closer to year-end.
Most substantive testing occurs at or after year-end.
Use of Audit Software
Can be helpful in casting creditors' master files, identifying errors, comparing current and prior year data, extracting samples, and identifying specific creditors.
Nature
They include tests of detail and analytical procedures.
Tests of detail involve auditing transaction details, while analytical procedures provide overall evidence.
Substantive procedures aim to detect material misstatements at the assertion level.
Substantive procedures are necessary regardless of the assessed risk or effectiveness of controls.
Weaknesses, Risks, and Recommendations
Risk
Stockouts may occur due to inadequate inventory management.
Unhappy customers resulting from the inability to fulfill orders.
Unnecessary purchases may be made, leading to increased inventory costs.
Recommendations
Establish a structured purchasing policy that outlines inventory levels and reorder thresholds.
Ensure adherence to the purchasing policy to prevent stockouts and unnecessary purchases.
Regularly review and adjust reorder levels based on demand patterns and inventory turnover rates.
Implement a clear reorder level policy to govern when goods need to be reordered.
Utilize inventory management systems or software to automate reorder processes and maintain optimal inventory levels.
Weakness
Lack of a reorder level policy in place.
Ordering goods arbitrarily without a structured system.