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SIGNIFICANT ACTIVITIES
Ordering and Receiving of Goods from
Supplier
The Payment of amounts due for
goods ordered and received
Mayor balance is Trade Creditors
DOCUMENTATION
Requisitions
Order forms
Suppliers delivery note
Goods received note
Purchase invoice
Credit note
Creditors statements
Cheque requisitions
Remittance advice
CHARACTERISTICS OF GOOD
INTERNAL CONTROL
Control environment
Competent trustworthy personnel
Segregation of duties:
Ordering goods not access to goods,
Access to goods not access to amendments,
Sign cheques and prepare
Isolation of responsibilities
Access/custody control
Source documents design
Comparison and reconciliation
INTRODUCTION
Cycle important and needs
comprehensive Auditing
Cycle produces Trade Creditors
Cycle produces Purchases
FINANCIAL STATEMENT
ASSERTIONS
Purchase transactions
Payments (Transactions)
Occurrence
Accuracy
Cut-off
Completeness
Classification
Occurrence
Accuracy
Cut-off
Completeness
Classification
Existence
Obligations
Completeness
Valuation
Presentation
Disclosure
FRAUD
Misappropriation of Assets
Test of Controls
Inspect
Enquiry
Re-performance
Observe
Inspection
Creditors reconciliation
Substantive procedures
Inspection
Supporting documentation
Re-performance, calculations
Inspect returned paid cheque
Inspect supporting documentation
Re-calculation
Analytical procedures
Assertion: existence
Assertion: valuation
Assertion: completeness
The creditors master file can be cast (added) to obtain the total amount owing and a
detailed list of creditors and their balances can be printed out. The aging of creditors
can also be cast and cross cast to the total.
Master file scanned for error conditions
The master file for the current year-end can be compared to the prior year master file
to identify
nil balances
amounts above a certain amount
Software can be used to extract lists of any creditors which can be identified by a
particular field or code, e.g. a creditor with whom the company is in dispute may be
identified by the addition of a code to its record.
The creditors master file will usually contain the following fields,
account name
name
address and contact details
total amount payable
aging of total amount payable
discount terms
INTRODUCTION
Most systems are computerised today
Does not alter the need for systems of internal
control
Does not affect the control objectives
Validity
Accuracy
Completeness
Computerised systems risks that need to be
addressed
OVERVIEW OF CYCLE
Ordering function
Requisitioning
Ordering
Receiving function
Ordered goods are received
Recording of acquisitions
Reconciliation of supporting documentation AND entering
of invoices
Payments for goods (and recording of transaction)
Payment by cheque or EFT
Segregation of duties
Isolation of responsibilities
Staff recruitment policies
Trustworthy and competent staff
Authorization of transactions
By user
Computer
Specific authorisation
Overrides to be reflected on exception reports
Control totals
Matching by computer
Entered transactions are compared by computer to
data on master files
Financial totals
Hash totals
Record count
Batch processing
Reviewing of output reports by users
Regular backups during input, and after
processing
Adequate error correction procedures
Suitability of supplier
Reasonableness of price and quantity
Nature of goods being ordered
Delivery address
Availability of goods in required timeframe
RECEIVING OF GOODS
Segregation of duties between Ordering and Receiving
Limits misappropriation of assets by staff
RECEIVING OF GOODS
Procedure to be followed
Match order to suppliers DN
Ensure goods received relates to a valid order
Do not accept goods that were not ordered
Prepare GRN
Prepared from Order and DN
Sequentially numbered and cross-referenced to Order
RECEIVING OF GOODS
Generation of GRNs computerized system
Controls in place to ensure that GRN is valid,
accurate and complete
Important controls
Matching by computer
Exception reports
Edit checks
Access controls
RECEIVING OF GOODS
Goods sent to Stores
Goods accompanied by GRN
Segregation between Receiving and Stores
Transfer of custody
Manually
Use of computer-generated exception reports
RECORDING OF ACQUISITIONS
Purpose of function
To record the purchase in accounting records
Source document is the suppliers invoice PJ
Invoice to be matched to
Purchase order
Suppliers DN
GRN
RECORDING OF ACQUISITIONS
Purchase invoice received from supplier
Matched to corresponding GRN, DN, purchase
order
Quantity and description of goods
Correct prices and discounts authorised price list
Allocations checked
Obtained from Requisition
RECORDING OF ACQUISITIONS
Documentation to be signed as evidence of
performance of control
Scrutiny of Pending File
Accurate cut-off
Monthly reconciliations
Creditors statements to Creditors Ledger
Creditors Ledger to GL Control Account
Reviewed by senior staff
Follow up of unusual items
PAYMENT PREPARATION
Risk of unauthorised payments
Matching of all supporting documentation
Order, DN, GRN, Invoice
Reconciliation to creditors statement and
Creditors account in Creditors Ledger
Preparation of cheque requisition
Supporting documentation attached
Accurate
Financial accountant to test check payments
Complete
Number of EFT transfers to equal the number of
creditors being paid
MANAGEMENT / SUPERVISORY
CONTROLS
Frequent checks over unused stationery
Preparation of budgets and forecasts of
expenditure
Able to detect when unexpected payments
are being processed
TESTS OF CONTROL
Before conducting tests of control
Auditor must have expectation that system is
operating effectively
he
wishes to rely on, and tests them to
ensure they are working as intended
SUBSTANTIVE PROCEDURES
Primary audit risk
Understatement of Trade Creditors balance
Completeness
Focus is on unrecorded liabilities
Occurrence
Accuracy
Cut-off
Classification
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Obligation
Inspect documentation supporting the
transaction to confirm that
Made out in the name of the company
In respect of goods or services used by the
company
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Existence
I.e. relates to whether balance contains
fictitious creditors
Secondary risk
Do not wish to overstate liability
Procedures
Perform cut-off tests to ensure transactions have not been
raised prematurely
Looking for evidence that PJ has been held open
Inspect GRNs at year-end
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Valuation
Agree
List of individual creditors to GL control account
Individual creditors per list to balance in CL
Accruals and GL control account to TB, AFS
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Valuation
Select sample of creditors from creditors list
Obtain year-end recons
Re-perform reconciliation
Re-perform casts of recon
Agree balances per recon to creditors statement
and creditors listing
Test logic of recon
Inspect supporting documentation
Confirm validity of reconciling items
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Valuation
Foreign creditors
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Valuation
Accruals
Obtain list of accruals
Cast list
Agree total of list to
GL
TB
AFS
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Note
Focus is on unrecorded liabilities
Direction of testing
Source documents accounting records
Procedures
Compare list of creditors to previous years
Missing creditors
Balances that are significantly lower
Reasons??
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Creditors correspondence file
Evidence of unsettled disputes
Discuss need for adjustments with management
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Other procedures
Payments in CPJ after year-end
Confirm whether goods received prior to year-end
Inspect supporting documentation e.g. GRN
Confirm that creditor was raised
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Other procedures
Inventory count
Evidence that physical inventory is materially
different to recorded inventory
Periodic expenses
12 payments
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Other procedures
Direct confirmation of balances from creditors
Nil balances
Major creditors
Creditors for which there are no statements
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Completeness
Other procedures
Analytical review
Compare current amounts to prior years
Purchases
Creditors
Accruals
Trade creditors as a % of current liabilities
Creditors days
SUBSTANTIVE PROCEDURES:
ACCOUNTS PAYABLE
Assertion: Presentation and Disclosure
IASs and 4th Schedule
E.g. Trade creditors disclosed as Current
Liability