Bac2664auditing l9 Purchase Cycle
Transcript of Bac2664auditing l9 Purchase Cycle
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AUDITINGBAC2664 (New), BAC2287(Old)
Topic 8, Lecture 9
Audit of the Acquisition and Payment Cycle
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Audit of Acquisition and Payment Cycle
• System cycle and internal control• Objective of audit on purchase and account
payable• Tests of controls system and internal control• Test on real transactions• Substantive tests of transactions and account
payable• Balance confirmation on creditors and accrued
liabilities
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Overview of the purchase cyclePurchases and cash payments cycle covers the purchase of raw
materials and consumables on credit, payments to creditors, purchase returns and discount received.
Two classes of transactions (credit purchases and cash payments) are processed by the accounting system in a different manner.
Internal controls are applied to ensure:1 Complete processing of transactions;2 Transactions are processed accurately; and3 Only valid transactions are processed.
(Refer to transactions and credit purchases cycle diagram)
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Purchases cycle
• A purchase begins with the request made by various dept (a purchase requisition is generated, approved by the respective HOD).
• Purchase order prepared by purchase dept, approved and sent to supplier.
• Approved purchase order provides the authority that goods sent by the supplier can be received.
• Purchas invoices received after goods had been received.
• Supplier expects payment to be made within credit period.
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Account Balances in the purchase cycle
Credit purchases: Debit: purchases (summarized in the PJ) Credit: purchase ledger control account (summarized in the
purchase ledger)
Payments made to supplier: Debit: purchase ledger control account (summarized in the cash
book) Credit: bank account (summarized in the cash book)
The accounts pertinent to the test of details of transactions are purchases account and bank account. Test of details of balances are performed on purchases ledger control account and its detailed counterpart, the purchase ledger.
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Purchases Activities, Documents, Records
Auditor has to understand the flow of purchase transactions through the accounting system.
To facilitate understanding and identification of appropriate controls, an auditor has to gain sufficient knowledge about the activities in purchase cycle, the documents, the records, related to processing purchase.
Then, the auditor describes his understanding in flowcharts.
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Purchases Activities, Documents, Records continued
Activity
Authorization:Accepting and processing purchase requisition
Approving purchases
Receiving of goods from supplier
Billing by supplier
Document
Purchase requisition
Purchase order
Approved suppliers quotation
Approved purchase order
Delivery note
Receiving report
Purchase invoice
Record
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Purchases Activities, Documents, Records continued
Recording:
Journalizing and posting the purchases
Summarizing the journal entries, posting the summary
Custody:Access to documents, records, limited to authorized personnel
Purchase invoice Purchase journal
Purchase ledger
General ledger
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Purchase DepartmentActivity/responsibilities:1 Accepting and processing purchase requisition (PR).2 Approving purchases entry.3 Selecting a supplier.4 Issuing purchase orders (PO).
Possible errors/irregularities:1 PO could be issued for fictitious purchase2 PO does not agree with PR pertaining to the specification and quantity of
items required3 PO misplaced
Control procedures:1 Matched particulars of PR to suppliers quotations2 Matched particulars of PO with PR3 PO are pre-numbered4 PR are kept on file together with PO
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StoresActivity/responsibilities:1 Receiving of goods from supplier delivery note – DN)2 Checking goods and preparing receiving report
Potential risk:1 Receiving of damaged goods or wrong specification and quantity2 Goods received by-pass the checking or approved without
making reference to PO
Control procedures:1 Numerical sequence of approved receiving report2 Copy 1, sent to account dept, copy 2 used to update the bin card
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Accounts DepartmentActivity/responsibilities:1 Billing (invoicing) by supplier2 Keeping the supporting document (approved PO, DN)3 Ensure PO, DN sequence
Possible errors/irregularities:1 goods billed, but not yet receivedAmount billed may be incorrect
Control procedures:1 Account for pre-numbered PO to determine all invoices are for
goods actually received2 Match invoice with DN and approved PO to determine the validity of
authorized transactions
PO, DN, approved PO, copy 2, are stapled and filed numerically
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Accounts Department continued
Activity/responsibilities:1 Journalizing the PJ, posting, recording the purchases and purchase invoices
into the GL2 Monitoring the amount owing
Possible errors/irregularities:1 Purchases are not recorded2 Purchases recorded to the wrong account3 Purchases are received twice4 Purchases recorded in the wrong financial year
Control procedures:1 Account for pre-numbered invoice2 Establish proper chart of account3 Invoices marked ‘POSTED’ or cancelled after posting are done4 Establish internal verification of pricing, extensions, footings5 Establish proper cut-off, i.e., all receiving report issued before the year end
are not billed by suppliers in the following year
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Cash Payments
Activity
Authorization:Approving payment vouchers
Approving cheques
Document
Suppliers remittance advice (SRA)
Approved purchase invoice (API)
Approved payment vouchers (APV)
SRA, API, APV
cheques
Records
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Cash Payments continued
Recording:Journalizing, posting the payments
Summarizing journal entries, posting the summary
Custody:Access to documents, records limited to authorized personnel
Approved payment vouchers
Cash book
Purchase ledger
General ledger
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Accounts Department
Activity/responsibilities:1 Approving payments vouchers (PV)2 Issue PV in sequence, in order to ensure
completeness of the payment made to suppliers
3 Approval for payment given after the officer is satisfied with the supporting documents that were attached together with the PV
4 Cashier before signing the cheques, needs to ensure the validity, accuracy of the payment.
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Cashier
Activity/responsibilities:1 Approve cheques
Irregularities:1 Payment made for unauthorized payments
Control procedures:1 Supporting documents are marked “PAID’ or
cancelled at the time cheques are signed
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Accounts Department
Activity/responsibilities:
1 journalizing, posting the payments, by using particulars from the PV
2 Update the cash book and purchase ledger
3 Keep the PV by serial number
4 Summarizing the journal entries and posting the summary for the month from the PJ, cash payments from cash book, to the GL
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Subsequent Accountability
Activity
Agreeing GL balance with creditors balances in PL
Agreeing creditors balances in PL with statement of accounts
Preparing bank reconciliation statement
Record
GL, PL, Creditors reconciliation statement
PL, statement of account, creditors reconciliation statement
Cash book, bank statement, bank reconciliation statement
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Accounts Department
Activity/responsibilities:1 Agreeing GL balances with creditors balances
in PL2 Determine accuracy of recording on monthly
basis by verifying agreement of the total balances in the PL with the PL control account in the GL
Possible errors1 Errors in recording are highlighted in the
creditors reconciliation statement
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Accounts Department
Activity:
1 Agreeing creditors balances in PL with statement of accounts
2 Check and confirm entries made in the accounts
3 Highlight the age of the debts
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Accounts DepartmentActivity:1 Preparing bank reconciliation statement2 Prepare bank reconciliation every month for the following
reasons: (a) the differences between the balances as per bank statement
and cash book are valid ones (b) the differences in balances are not a result of errors made by
the book-keeper or the bank (c) ensure that no payments have been passed through the bank
account which has not been entered in the cash book (d) irregular items, such as statute barred unrepresented cheques,
will be shown in the bank statement, thus ensuring their reversal in the accounting records
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Internal Control Questionnaire for Purchases
Does the System Ensure That No Invoice Can Be Passed for Payment Without Proof of Receipt of Goods or Services?
1 Are receiving report used?2 Are invoices and receiving report sent directly to
accounting dept and promptly recorded in the PJ?3 Is the PL functions independent of purchasing, stores,
cashier, GL functions?4 Are invoices compared to Po and receiving report by
different people who cross referenced and initial? (alternatively, are the signed receiving report and PO attached to the purchase invoice?)
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Internal Control Questionnaire for Purchases continued
Does the System Prevent Invoices Being Passed for Payment Without Proper Approval?
1 Is the numerical continuity of pre-numbered purchase requisitions and PO checked?
2 Are PO approvals required?3 Is purchasing independent of stores, receiving, PL, cashier, and
inventory record keeping functions?4 Are quotations obtained from suppliers?5 Is the PJ balanced monthly and agreed to the GL?
Does the System Ensure That Invoicing Errors Do Not Escape Attention?
1 Are prices and calculations independently checked?2 Are documents cancelled to prevent re-use?3 Are unmatched documents investigated regularly?
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Internal Control Questionnaire for Cash Payments
Does the System Ensure That Payments Cannot Be Made If Not Properly and Independently Authorized?
1 Do cheques require two signatures independent of purchasing, receiving, PL, invoice approvals and cheque preparation functions?
2 Are cheque signatories authorized by the BOD?3 Is advance signing of blank cheques prohibited?4 Are cheques mailed out directly and supporting
documents cancelled at the time when cheques are signed?
5 Are altered or corrected cheques prohibited?
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Internal Control Questionnaire for Cash Payments continued
Does the System Ensure That Payments Cannot Be Made for Goods and Services Not Received?
1 Does signatories examine supporting documents accompanying cheques and review for propriety and completeness?
2 Are cheques prepared independent of payment voucher approval?
3 Are calculations, additions, discounts, freight, terms and quantities checked?
4 Are cheques payable to ‘bearer’ or ‘cash’ prohibited?5 Is there evidence of cross check between details on
PO and goods received?
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Evaluation of Internal Control: Purchases
Audit objectives:The audit of purchases should be sufficiently comprehensive to determine whether:1 Purchases are properly charged to the company; and2 Purchases have been correctly recorded in the books.
Audit procedures:
For 1-3 months:1 Cast total column of PJ from which items are individually posted2 Check posting from PJ to GL3 Check posting from PJ to creditor control account in GL
For, say 30 items or 10%:Vouch PJ with purchase invoices noting:1 Invoices are original and not duplicates2 dates are correct3 Suppliers and clients name on invoice are correct4 Evidence of independent checking with supplier quotation for price5 Evidence of independent comparison with PO and receiving report for specification and quantity6 Evidence of independent check of extension and casts7 Approval were given by correct person8 Nature of expense and account charged (revenue and capital)9 Invoices stamped “PAID” or cancelled at time cheques paying the invoices were signed
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Evaluation of Internal Control: Purchases continued
Select 30 items, say 10% of creditors account, by ensuring all ledgers are available for the selection:
1 Scrutinize and enquire into any old or unusual items2 Cast each account selected
Examine system of reconciliations of creditors ledger balances with creditors statement of accounts, ensure that:
1 Statements of accounts are obtained regularly from the suppliers
2 All statements obtained are reconciled with the creditors ledger
3 Reconciling items are being followed up.
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Evaluation of Internal Control: Cheque Payments
Audit objectives:The audit of cheque payments should be sufficiently comprehensive to
determine whether:1 Cheque payment ought to have been made2 Cheque payment have been received by the payee, or3 Cheque payment have been correctly recorded in the books.
Audit procedures:Control of cheque books:1 Vouch cheque books received/purchased from bank with bank
notifications (note serial number)2 Verify that cheque books issued have been properly recorded in
register3 At all time of audit, count un-issued cheque books and agree with
register
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Evaluation of Internal Control: Cheque Payments continued
Control of payment vouchers:1 Vouch payment voucher books purchased with printers invoices
(note serial number)2 Verify that payment voucher books issued have been properly
recorded in register3 At the time of audit, count un-issued payment voucher books and
agree with the register
For 1-3 months:1 Account the numerical sequence of payments vouchers2 List any missing payment vouchers.3 Cast creditors payment column of cash payments journal from
which item are individually posted: (a) check posting the total for both columns from cash receipts
journal to GL (b) Check posting the total for creditors payments from cash
payment journal to creditors control account
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Evaluation of Internal Control: Cheque Payments continued
For 1-3 months vouch payments made to creditors noting:1 Proof of payments, i.e., official receipts. (list ant missing receipts. Discuss
with independent responsible official)2 Indication that goods or services charged for have been received and
approved, and have been checked with order3 Authorization for payment by the correct person (as listed in the permanent
file)4 Payment vouchers have been stamped “PAID” or cancelled
Select 30 items, say 10% payment vouchers:1 Trace payment vouchers to cash payment journal2 Check posting to creditors ledger
For 1-3 months:1 Check cheque payments with bank statements, noting that cheques are
debited without undue delay2 Cheque payments side of bank statement and find out why unticked
payments are not entered on credit side of cash book.
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Substantive Tests: Verification of Trade Creditors
Audit of trade creditors is to ensure that creditors are not understated and all trade creditors are accounted for in the financial statements.
Audit procedures must ensure:1 Unrecorded liabilities are identified2 Make sure accounting policies being
applied by the client are consistent with those applied in the previous years
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Audit of Creditors Balances
Management Assertions
Existence
Audit Objectives of Test of Details of Balances
Existence
Substantive Audit Procedures
1 Obtain list of balances
2 Agree figures in GL, check individual balance are made up of specific and recent invoices
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Audit of Creditors Balances continued
Completeness Completeness 1 Ensure all year end transactions in respect of creditors are accounted for
2 Creditors for that accounting period have actually been recorded
3 Ensure supporting documents are sequential order
4 Determine how client deal with cancelled documents
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Audit of Creditors Balances continued
Valuation and Allocation
Accuracy 1 Review all creditors balances, check or test the addition of the list
2 Examine supporting documents
3 Review reconciliation by checking to suppliers statements
4 Review prior year list to ensure no omissions
5 Investigate debit balances. Consider their recoverability
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Audit of Creditors Balances continued
Classification
Cut-off
Detail tie-in
Creditors figures are classified properly according to chart of accounts
Obtain and trace creditors cut-off information ( number, amounts, PO) into PJ and PL
Figures of creditors balances in PL tie with creditors figures in GL
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Audit of Creditors Balances continued
Rights and Obligations
Presentation and Disclosure
Ownership
Presentation and disclosure
Send positive confirmation letters
1 Ensure comparative figures agree with last year’s FS
2 Consider whether significant debit balances should be re-classified as debtors
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References
• Text – Chapter 11
• Lecture Notes
• Tutorial Questions
• Past Exam Questions
• ACCA, MIA, MICPA, Articles from Journals and Magazines