Payment & Purchase Cycle

• ACC 300/BCTA Purchase and Payment Cycle
• Snipped of the relevant paragraphs from ISA 610:
• Objectives


  • Understand The Business Operations
  • Understand the functions/activities/processes within the purchases cycle
  • Understand the source documentations related to the functions/activities and processes
  • Identify risks in the purchases system
  • Recommend controls to be implemented to mitigate risks
  • Perform test of controls in relation to the affected account balances and or transactions
• Revenue Cycle


  • Guide and Learning Process
  • Pre-reading
  • Module
  • Question bank
  • Lectures
• Accounts balances in cycle

  • Statement of Comprehensive income
  • General company expenses
  • Goods and services consumed
  • Statement of financial position
  • Trade payables
  • Provisions
  • Accruals
  • Bank
  • Cash
  • Discount receivable
  • Prepaid expenses
  • VAT
• Main functions of the cycle

  • The ordering of goods and services
  • The receiving of goods and services
  • The recording of purchases and accounts payable
  • Payments to creditors/payables
• Document flow for the cycle as a whole

  • Requisitions
  • Purchase orders (hereafter PO's)
  • Goods Received Notes (hereafter GRN's)
  • Delivery notes from supplier (hereafter DN's)
  • Invoices from supplier
  • Credit requests / notes
  • Purchase journal
  • Creditor's account in creditor's ledger
  • Creditor's control account in general ledger
  • Creditor's statements
  • Requisitions/ payment advices
• Three functions within Purchases


  • The ordering function
  • The receiving of goods function
  • The purchases and accounts payable recording function
• Ordering Function


  1. Requisitions

  2. List of approved suppliers

  3. Supplier price list

  4. Purchase orders (PO's)

  5. Telephonic Order
• Ordering Function


  • A separate purchasing department or buyer must exist
  • Entity must have a purchasing policy through which they will control their inventory levels
  • When the entity reaches re-order level a purchase requisition will be made out by the purchasing department or buyer
• Supplier list


  • List of approved suppliers must exist (built relations, discounts and quality etc)
  • Not allowed to deviate from the list
  • Authorisation must be obtained from a senior in dept. where other suppliers are to be used
  • Any changes to the list should be authorised by senior official
• Purchase orders


  • Should be sequentially numbered
  • Include the name of the supplier, the quantity ordered, a description of the goods, the price of the good, discounts, terms of payment, delivery address
  • Signed off by the buyer
  • Before PO is sent to supplier - authorised by purchase manager
  • PO must be issued in triplicate: copies sent to supplier, receiving dept, and kept in deliveries pending register
  • Outstanding PO must be followed up by a senior
• Receiving Function


  1. Copy of PO

  2. Suppliers delivery notes (DN)

  3. Good received note (GRN)
• Receiving Function


  • Receipt of goods: staff should inspect type, quantity and quality against PO before signing DN, damaged goods not to be accepted, return back to supplier, notify accounts and purchasing dept. immediately
  • Details of goods received: should be captured on a sequential GRN, GRN issued in duplicate - copies sent to ordering dept and accounts dept, should be signed off by the individual responsible for receiving
• GRN


  • Quantity of goods received, PO number, date on which goods was received, description of the goods, details of person who received the goods
• Recording Function


  Supplier invoice, PO, DN, GRN, Credit note (Disputed invoices and goods returned)
• Invoices received


  • Not entered into records if it has not been approved as correct by the person responsible for checking the accuracy, the person responsible should check quantity and date on the invoice against GRN and DN, price, terms and account details on the invoice against PO, calculations on invoices
• Recording of purchases


  Directly in purchase journal, the actual invoice will be filed under the supplier's name and check to the statement received from supplier, disputed invoices kept separately and followed up by senior, goods returned sent back to supplier and CN must be made out to the supplier
• Three functions in payments

  • Control over cheque forms & EFT transfers
  • Drawing & signing of cheques & EFT's
  • Recording of payments
• Drawing and signing of cheques

  • Cheques drawn and presented to persons authorised to sign, with supporting documentation, the person responsible should examine documents and mark them as paid to prevent re-submission of payment, signed by two signatories according to the correct levels of authority
• Recording of payments


  • Should be done by an independent person who does not draw, sign or handle cheques, cheques returned from bank not available to person who keeps accounts payable record to ensure segregation of duties, no access to control account by person maintaining sub ledger, regular reconciliation by independent person, individual creditors reconciliations should be done on a monthly basis of all creditor balances
• Risks inherent in this cycle

  • Orders: not authorised, not carried out timeously, not acquired at the best prices/conditions
  • Goods received and recording: may not be accurately recorded, quality and quantity may differ
  • Recording (Payments): may be for goods not received, at wrong prices, discounts may not be utilised
• General Controls


  • Supervision and review
  • Segregation of duties
  • Rotation of duties
  • Personnel take leave regularly
  • Management control
  • Internal audit
  • Sufficient stationery control
  • Scrutinise all records and documents for extraordinary items
  • Test castings and calculations on all selected items, documents and ledger accounts
• Specific Controls


  • Occurrence/Validity
  • Authorisation
  • Completeness
  • Classification
  • Accuracy
  • Recording
  • Cut-off
• Important terms to use for TOC's for Purchases and Payments

  • Inspect: always select a sample first, anything that is on a piece of paper like PO, GRN, DN, Invoice and Statement from supplier
  • Observe: a person performing a task/function
  • Enquire: about policies and procedures
  • Re-perform: calculations
• Controls - Purchase Cycle

  1. Occurrence/Validity - All recorded purchases are valid and supported by proper documentation: inspect sample of PJ entries for supporting documentation

  2. Authorisation - All purchases are approved according to the company policy: inspect sample of PO for buyer and purchase manager signatures, enquire about requisition process

  3. Completeness - All valid purchase transactions are recorded and nothing is left out: observe receiving procedures, inspect sample of credit notes, inspect register of unmatched invoices, perform sequence test on requisitions/orders/GRNs

  4. Accuracy - All purchase transactions are accurately recorded at the correct quantity, at the correct amount and are arithmetically correct: inspect sample of invoices for price, quantity and calculations, inspect sample of purchase journal entries

  5. Recording - All purchase transactions are correctly recorded: inspect postings from purchase journal to creditor accounts
• Internal Controls


  • TOC
• Purchase Cycle


  1. GRN is matched with the invoice and is thereafter recorded in the purchase journal

  2. Select a sample of GRN's and match them to respective invoices and inspect if they were entered into the purchase journal

  3. All requisitions, orders and GRN are recorded numerically and missing numbers are followed up

  4. Perform a sequence test on all requisitions, orders and GRN's

  5. Follow up missing numbers through enquiry with management
• Accuracy


  • All purchase transactions are accurately recorded at the correct quantity, at the correct amount and are arithmetically correct
  • The invoice is independently checked for mathematical accuracy before recording it in the purchase journal
  • Prices compared with PO and price list
  • Quantity to GRN
  • Mathematical accuracy checked
  • Select a sample of invoices and: Inspect if the price matches with PO and price list; agree quantity with GRN; re-perform calculations; and Inspect for signature of independent person who checked for accuracy
  • The purchase journal is updated from the purchase invoices
  • Select a sample of purchase invoices and follow through to the purchases journal inspect that the detail matches
• Recording


  • All purchase transactions are correctly recorded
  • From the purchase journal purchases are posted to: creditor's accounts in the creditors ledger; and purchase and creditors control account in the general ledger
  • Select a sample of entries in the purchase journal and inspect the postings from: the purchase journal to the creditors accounting in the creditors ledger; and the purchase journal to the 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
  • Select a sample of creditors reconciliation and: re-perform the mathematical accuracy; and inspect evidence of review by management
• Classification


  • All purchase transactions are correctly classified according to the nature thereof
  • Inter-group purchases are clearly distinguished by a code number and separately recorded
  • Select a sample of inter-group purchases and follow selected purchases through from the PO and ensure correctly classified and recorded as inter-group or external purchases
• Cut off


  • All purchase transactions are recorded in the correct reporting period
  • Purchase journal is updated from invoices in terms of the date of delivery
  • Select a sample of GRN's dated before and after year end. Compare the GRN with invoices and follow through to the purchase journal and creditors account. Inspect that the purchases are recorded in the correct accounting period
• Payments - Occurrence/Validity


  • All payments on creditors accounts are valid and are supported by proper documentation
  • Creditor payments supported by: a payment requisition; a creditor statement; a creditors reconciliation; a PO, GRN, DN and invoice
  • Select a sample of payments from the creditors account per the creditors ledger and inspect that there is the following: an authorised payment requisition; creditor's reconciliation; paid cheque; supporting documentation namely PO, GRN, DN, invoice, creditor statement
• Payments - Authorisation


  • All payments are approved according to company policy
  • All payments made to creditors done by means of a requisition which is authorised by a senior official
  • Select a sample of payments from the bank statement and: match to the requisition; inspect requisition for signatures of authorisation of payment
  • Two signatories review and cancel supporting documentation, before approving payment
  • Select a sample of supporting documentation and inspect if there were two signatories and if documentation was cancelled
• Payments - Completeness


  • All valid payments are correctly recorded and nothing is left out
  • Creditors control account regularly reconciled with the creditors ledger
  • Select a sample of creditor's reconciliations and re-perform the accuracy
  • Payment advices recorded numerically and missing numbers are followed up
  • Inspect the list of payment advices and follow up missing numbers
• Payments - Accuracy


  • Payments are made at the correct amount and is arithmetically correct
  • Individual creditor's reconciliations are prepared
  • All calculations are reviewed by an independent person
  • Select a sample of creditor's reconciliations and re-perform the mathematical accuracy of the reconciliations; inspect for reviewer's signature
• Payments - Recording


  • All payments are correctly recorded
  • Payments are posted from: the payment advice to the individual creditors' account; and the total to the creditors control account
  • Select a sample of payment advices and follow entries through the individual creditors' account and the creditors control account
• Payments - Classification


  • All payments classified to the correct creditor's account
  • Payments coded according to the creditor's number and posted on date of cheque
  • Independent person reviews codes and date of payment
  • Inspect that its been posted to correct account on correct date
  • Inspect signature of independent person
• Payments - Cut off

  • All payments are recorded in correct period
  • All payments are recorded in correct period
  • Select payment before and after year end and follow through to the creditor's account, inspect recorded in correct period
  • Select payments from the creditor's account and follow through to the cashbook, inspect recorded in the correct period
• Substantive Procedures - Key principles to obtaining audit evidence