Purchases and Payments Cycle Flashcards

Flashcards covering key vocabulary and concepts related to the purchases and payments cycle, based on lecture notes.

Purchases Cycle

The purchases cycle includes the ordering of goods and services, receiving of goods and services, and recording of goods and services.

Ordering Function

The ordering function involves requisitions, a list of approved suppliers, supplier price lists, and purchase orders (PO’s).

Activities and Controls for Ordering

A separate purchasing department or buyer must exist, the entity must have a purchasing policy to control inventory levels, and a purchase requisition will be made out when the entity reaches the re-order level.

Supplier List Control

A list of approved suppliers must exist, deviation from the list is not allowed, and authorization must be obtained from a senior if other suppliers are to be used.

Purchase Order (PO) Details

POs should be sequentially numbered and include the name of the supplier, quantity ordered, description of goods, price, discounts, terms of payment, delivery address, and be signed off by the buyer.

Purchase Order Authorization

POs must be authorized by a purchase manager before being sent to the supplier and issued in triplicate to the supplier, receiving department, and kept in a deliveries pending register.

Receiving Function

The receiving function involves a copy of the PO, supplier's delivery notes (DN), and a good received note (GRN).

Receipt of Goods

Upon receipt of goods, staff should inspect the type, quantity, and quality against the PO before signing the DN. Damaged goods should not be accepted and returned to the supplier.

Details of Goods Received

Details of goods received should be captured on a sequential GRN, issued in duplicate to the ordering department and accounts department, and signed off by the responsible individual.

GRN Details

A GRN should include the quantity of goods received, PO number, date the goods were received, description of the goods, and details of the person who received the goods.

Recording Function

The recording function includes a supplier invoice, PO, DN, GRN, credit note, and purchases journal.

Activities and Controls for Recording

Invoices received are not entered into records if they have not been approved as correct by the person responsible for checking the accuracy.

Invoice Accuracy Check

The person responsible should check the quality, quantity, and date on the invoice against the GRN and DN, and the price, terms, and account details on the invoice against the PO.

Recording of Purchases

Purchases are recorded directly in purchase records, and the actual invoice will be filed under the supplier’s name and checked against the statement received from the supplier.

Disputed Invoices

Disputed invoices should be kept separately and followed up by a senior.

Goods Returned

When goods are returned, they should be sent back to the supplier, and a credit note (CN) must be made out to the supplier.

Payment Cycle

The payment cycle includes remittance advices, EFT transfer advice, bank statements, and the cash payments journal.

Payment Activities and Controls

Payments involve control over EFT transfers, drawing & signing of EFT’s, and recording of payments.

Recording of Payments

The recording of payments should be done by an independent person with no access to the control account. Regular reconciliation should be performed by an independent person, and individual creditors reconciliations should be done monthly.

Orders (Risks)

Orders may not be authorized, carried out timeously, or acquired at the best prices/conditions.

Goods Received and Recording (Risks)

Goods received and recorded may not be accurately recorded.

Recording (Payments) Risks

Payments may be for goods not received, at wrong prices, or discounts may not be utilized.

General Controls

General controls include supervision and review, segregation of duties, rotation of duties, personnel taking leave regularly, management control, internal audit, sufficient stationery control, scrutinizing all records, and testing calculations.

Internal Controls Categories

Internal controls are divided into the objective to be achieved, how the objective will be achieved (internal control implemented), and how to test implementation of the control.

Control Objectives

Control objectives for the purchase and payment cycle include Occurrence/Validity, Authorization, Completeness, Classification, Accuracy, Recording, and Cut-off.

TOC Verbs

Important terms to use for TOC’s for Purchases and Payments TOC Verbs Steps on how to use them Inspect

TOC Verbs

Important terms to use for TOC’s for Purchases and Payments TOC Verbs Steps on how to use them Observe:

TOC Verbs

Important terms to use for TOC’s for Purchases and Payments TOC Verbs Steps on how to use them Enquire:

TOC Verbs

Important terms to use for TOC’s for Purchases and Payments TOC Verbs Steps on how to use them Re-perform/re-calculate:

Occurrence/Validity Control

All entries in the purchase journal are supported by proper documentation (requisitions, PO, GRN, DN, Invoices, Creditor’s statement).

Authorization Control

POs are prepared by buyers only and authorized by the purchase manager with supporting documentation cancelled.

Completeness Control

If stock decreases to re-order level a requisition is made out.The GRN is matched with the delivery note and short deliveries are indicated on the delivery note and a credit note is made out. A register is kept of unmatched invoices and is regularly followed up by the buyer

Accuracy Control

The invoice is independently checked for mathematical accuracy before recording it in the purchase journal.The purchase journal is updated from the purchase invoices.Stock records are updated from the GRN.

Recording Control

From the purchase journal purchases are posted to:creditor's accounts in the creditors ledger;andpurchase and creditors control account in the general ledger.

Classification Control

Inter-group purchases are clearly distinguished by a code number and separately recorded.

Cut off Control

Purchase journal is updated from invoices in terms of the date of delivery.

Occurrence/Validity - Payment Cycle

Creditor payments supported by: a payment requisition; a creditor statement; a creditors reconciliation; a PO, GRN, DN and invoice

Authorisation - Payment Cycle

All payments made to creditors done by means of a requisition which is authorised by a senior official.Two signatories review and cancel supporting documentation, before approving payment.

Completeness - Payment Cycle

Creditors control account regularly reconciled with the creditors ledger.Payment advices recorded numerically and missing numbers are followed up.

Accuracy - Payment Cycle

Individual creditor’s reconciliations are prepared. All calculations are reviewed by an independent person.

Recording - Payment Cycle

Payments are posted from: the payment advice to the individual creditors' account; andthe total to the creditors control account.

Classification – Payment Cycle

Payments coded according to the creditor's number and posted on date of cheque. Independent person reviews codes and date of payment.

Cut off – Payment Cycle

All payments are recorded in correct period.