Purchases and Payment cycle

Filed: PR1, PR2, PR3

Goods Receiving Area Warehouse

ACCESS CONTROLS
PO
PO GRN Review
and approves PR
Prepares the Purchase
GRN Shelves Shelves Requisi on
Purchase
Filed: GRN1, Goods receiving Requisi on X2 PR1, ….,
Warehouse clerk
Store Manager
GRN2, GRN3 Manager GRN X2
GRN1, …,GRN3
Store Manager

Based on the re-

- Confirms the goods are really needed
Prepares
Goods Re- order quan ty - Confirms the re-order level
ceived Note Warehouse clerk - Confirms the re-order quan ty
(GRN) x 4
PO is based on the purchase requisi on
Filed: PO1, PO2, PO3 Review
Goods receiving
clerk PO and PR
Prepares
approves the
Second clerk Purchase
PO Purchase
GRN Order
Order
X5

Supplier Purchase Purchase clerk

PO1, …., PO3
Delivery Manager
Note x2 List of approved
Purchase Sent to supplier
suppliers
ACCESS CONTROL
Manager Order Department

Filed: GRN1, GRN2, GRN3

Sales Department

PO
CUSTOMER ENTER

Cash
DN
book
DR / KR
GRN
journals
MAIN Senior Accounts payable
bookkeeping clerk
GATE
clerk Financial
General Ledger
Manager Payment List
Payment clerk
EFT
Accounts payable
clerk
Senior
Creditor bookkeeping
Finan-
Accounting Department Creditor Ledger Statement clerk
cial
 EACG2708

Ref. Control Description:

Identify a need to order inventory (Preparing a purchase requisition)
Background:
Determining the need for raw materials/inventory or services will depend on sales
or production demands. The company should use sales forecasts, production
schedules based on market research to determine the need.
What are the control objectives and risks that can happen in this department?
1. Identifying inventory to be ordered and preparing a Purchase
Requisition:
 The warehouse clerk is responsible for reviewing the inventory levels
regularly to determine when new inventory items should be ordered. The
inventory clerk should conduct regular inventory counts to compare the
actual quantity on the shelved to the pre-determined re-order level.
 If the actual quantity is equal to or below the re-order level, the warehouse
clerk should prepare a pre-printed and sequentially numbered purchase
requisition (document) in duplicate (x2) to record the items that should be
ordered.
 The quantity should be based on the re-order quantity.
 Once the purchase request has been prepared, the warehouse clerk should
sign the document as proof of preparing the document.
Reorder level: The inventory level at which a company would need to place
Definitions:

an order for new inventory to ensure that it does not run out of inventory.
Re-order quantity: The number of inventory items that a company order
from a supplier. The number is calculated by the Economic Order Quantity
(EOQ) formula.
2. Review of the Purchase Requestion by a senior:
 A senior person in the department making the request (supervisor or
manager) should review the purchase request (prepared in duplicate).
 The senior person performing the review should confirm:
o That the items are needed (commonly sold or for a particular order).
o That the re-order level has been reached (cross referencing the
purchase requestions to the supporting documentation).
o The correct quantity as per the re-order quantity has been included in
the purchase request.
 After reviewing the purchase request, the senior person should sign as
proof that the document has been reviewed and approved.
 One copy should be filed sequentially in the relevant department, and the
other copy should be sent to the ordering department.

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 EACG2708

Ref. Control Description:

Identify a need to order inventory (Preparing a purchase requisition)
 The pre-printed and sequentially numbered Purchase Requisition (PR)
should have 2 copies:
The Purchase
Requisition:
o Copy 1 is sent to the purchasing/ordering department to prepare the
purchase order.
o Copy 2 is filled sequentially in the department that prepared the
purchase requisition.
 Copy 2 should be matched with an approved purchase order to ensure that
the order was placed.
All purchase requisition documents are subject to strict document controls:
o Purchase requisition documents should be pre-printed in a manner where
Document
controls:

only minimal information must be completed.

o Sequentially numbered (1,2,3).
o Designed in a manner that is logical and easy to complete.
o Blank documents should be locked away.
3.  On a regular basis, the order of purchase requisitions filed should be
reviewed to identify gaps in the sequence (missing documents).
 On a regular basis, the filled purchase requisition should be matched to the
approved purchase orders (see next department).
Auditing Fundamentals Page 289-290, table 7.5 Purchase Requisition

Ref. Control Description:

The Ordering (Purchase) Department: Preparing an order
What are the risks that can happen in this department?
4. Preparing a purchase order:
 A purchasing clerk prepares the pre-printed and sequentially numbered
Purchase Order (PO) (x5) based an approved Purchase Requestion
received from the warehouse department (or any other department). The
PO should be cross-referenced to the purchase requisition.
 Orders should only be placed with approved suppliers. A company should
keep a list (hardcopy or electronically) of suppliers that have been reviewed
and approved by the senior buyer.
 The purchasing clerk should contact the approved supplier (before placing
an order) to confirm the availability and delivery time.
 Once purchasing clerk has prepared the PO, he/she should sign the
document as proof of preparing the document.

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 EACG2708

Ref. Control Description:

The Ordering (Purchase) Department: Preparing an order
Approved Supplier  Before a supplier is added to the list of approved suppliers, the senior buyer
should review the supplier for:
o Reliability of the supplier to deliver the order.
List

o Quality of the products/services.

o Competitiveness of the prices.
 Adding or removing a supplier from this list should be subject to Masterfile
amendment controls.
If a company does not have a list of approved suppliers, then the purchasing
clerk should obtain quotes from different suppliers and the best quote should
be selected.
5. Review of the Purchase Order by a senior:
Before an order is placed with a supplier, the order should be reviewed by
senior buyer (chief buyer). The senior buyer should:
o Confirm the cast and calculations on the purchase order (calculations are
correct).
o Compare the quantity and description of the goods on the PO to the
supporting approved purchase requisition.
o Confirm that the supporting purchase requisition was approved.
o Confirm the suitability of the supplier (approved supplier / sufficient
quotations obtained and evaluated).
o Compare the prices on the PO against the quotations / price lists (if
available) of the supplier.
o Sign the PO as proof of review and authorization.
The pre-printed and sequentially numbered Purchase Order (PO) should
have 5 copies:
The Purchase Order:

o Copy 1 is sent to the department who prepared the purchase requisition to

inform them of the order that was placed.
o Copy 2 is sent to the supplier to place the order.
o Copy 3 is sent to the goods receiving area to inform them of the upcoming
delivery.
o Copy 4 is filled sequentially in the ordering department and matched the
GRN.
o Copy 5 is sent to the accounting department and filled in a pending file.
6.  After the review and approval, the PO should be sent to the supplier to
place the order for the goods required.

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 EACG2708

Ref. Control Description:

The Ordering (Purchase) Department: Preparing an order
All purchase order documents are subject to strict document controls:
o Purchase order documents should be pre-printed in a manner where only
Document
controls:
minimal information must be completed.
o Sequentially numbered (1,2,3).
o Designed in a manner that is logical and easy to complete.
o Blank documents should be locked away.
After the goods (order) has been delivered, a copy of the goods received
note (GRN – see goods receiving department) is sent to the purchasing/order
department to inform them that the order has been delivered. This GRN
should be matched to the purchase order.
7. The senior buyer should review the pending file on a regular basis to:
o Identify and follow up on gaps in the sequence of the PO’s (missing PO’s).
o Identify and follow up on PO’s not yet matched to GRN’s (long outstanding
orders).
Auditing Fundamentals Page 291-293, table 7.6 Ordering raw materials /
goods from suppliers

Ref. Control Description:

Receiving raw materials/goods from suppliers:
What are the risks that can happen in this department?
8. The responsibility for receiving goods should be designated to a goods
receiving section (segregation of duties) that should be separate and
physically secure (physical access controls).
9. Receiving the delivery:
 On arrival of the delivery vehicle, the goods should be offloaded in the
presence of a dedicated goods receiving clerk. The goods receiving clerk
will take custody of the raw material/goods (isolation of responsibility).
 The goods receiving clerk should obtain the supplier delivery note from
the driver (supplier), and by referring to the order number thereon, locate
the relevant purchase order received for the ordering department.
Reviewing the goods delivered:
The goods receiving clerk should:
o Compare the delivery note with the corresponding purchase order (copy 3)
before accepting the order to ensure that the delivery is valid.
o Agree the quantity and the description of the actual goods delivered to the
supplier delivery note and the purchase order.
o Perform a superficial test on the condition of the goods delivered (E.g.,
broken or wet boxes).
o Accept short deliveries but identify such goods clearly on both copies of
the supplier delivery note and purchase order.

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 EACG2708

Ref. Control Description:

Receiving raw materials/goods from suppliers:
o Ensure the supplier personnel signs both copies of the supplier delivery
not (including any amendment thereto).
o Sign both copies of the delivery note and retain one copy.
10.  The goods receiving clerk should prepare a Goods Received Note (GRN)
(X4) for the actual goods that are received and accepted.
 Once goods receiving clerk has prepared the GRN, he/she should sign the
document as proof of preparing the document.
The pre-printed and sequentially numbered Goods Received Note (GRN)
The Goods Received

should have 4 copies:

o Copy 1 is sent with the physical goods to the warehouse department.
Note (GRN)

o Copy 2 is sent to ordering department to confirm the receipt of goods.

o Copy 3 is sent to the accounting department to record the goods raw
material/goods received.
o Copy 4 is filled sequentially in the goods receiving department and
matched to the corresponding purchase order.
11.  A second staff member in the goods receiving area should agree the actual
goods received against the GRN for accuracy of the quantity recorded on
the GRN, before accepting the goods into the warehouse for further
safekeeping.
 The second staff member should sign the GRN as proof of review.
All Goods received notes are subject to strict document controls:
o Goods received notes should be pre-printed in a manner where only
Document
controls:

minimal information must be completed.

o Sequentially numbered (1,2,3).
o Designed in a manner that is logical and easy to complete.
o Blank documents should be locked away.
12.  On transfer of the goods to the warehouse, the warehouse clerk should
compare the physical goods to the GRN and acknowledge receipt by
signing the GRN.
 Any discrepancies should be reported to the warehouse senior
immediately.
13. The goods receiving manager should review the pending file on a regular
basis to:
o Identify and follow up on gaps in the sequence of the GRN’s (missing
GRN’s).
o Identify and follow up on PO’s not yet matched to GRN’s (long outstanding
orders).
Auditing Fundamentals Page 294-296, table 7.7 Ordering raw materials /
goods from suppliers

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 EACG2708

Ref. Control Description:

Accounting Department: Recording
What are the risks that can happen in this department?
Recording the goods received and the corresponding liability:
14.  Upon receiving the invoice from the supplier, the accounts payable clerk
should match the corresponding GRN, PO and supplier delivery note to
the invoice to confirm:
o Quantity and description of the goods delivered to the invoice.
o Correct prices and discounts have been charged on the invoice.
o All casts, extensions (3 x R10 = R300) and calculations are accurate.
 Any price variance between the invoice and the purchase order should be
followed up and resolved accordingly.
 The expense account to which the transaction should be posted is
specified on the purchase order and requisition with reference to the
standard chart of accounts.
 The invoice is signed/initialled by the accounts payable clerk as
evidence/proof that this control was performed.
When the purchase order is prepared, the price should be confirmed with the
supplier or obtained from the supplier price list (if available). Not all purchase
orders will have a price on them, but in most cases the price is included.
15. The accounts payable clerk should record the purchase in the purchases
journal and raise the corresponding creditor in the creditor's ledger.
Dr Inventory/purchases
Cr Creditor
Depending on the type of inventory system (the perpetual inventory system
and the periodic inventory system), the accounts payable clerk will either
debit inventory or purchases (cost of sales) when recording the purchase.
Review of posting made by the senior bookkeeping clerk:
16. The senior bookkeeping clerk should review the purchases journal regularly
to ensure that:
 Each entry is supported by a GRN, supplier delivery note and authorised
purchase order.
 Based on the dates on the GRN, the purchase has been recorded in the
correct accounting period.
 The purchases have been correctly recorded (amounts).
 The purchases have been posted to the correct accounts (inventory,
stationery, consumables) based on the standard chart of accounts.
The accounts payable clerk keeps a numerical pending file of GRN’s
received from the warehouse that are matched the approved purchase order
received from the ordering department. The GRN’s (with the matching PO’s)
are matched to the supplier invoices when they are received.
16. The senior bookkeeping clerk should review:
 The pending file identify any missing GRN’s (1,2,3).

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 EACG2708

Ref. Control Description:

Accounting Department: Recording
 Scrutinize the purchases journal to identify any missing GRN’s (1,2,3) –
search of any unrecorded purchases.
 Ensure that all GRN’s with a supporting supplier invoice has been
recorded in the purchases journal and the corresponding liability has been
raised in the creditor’s ledger.
If a supplier renders a service and does not supply goods, the supplier
invoice will be signed by the head of the section/department to whom the
services was rendered as proof and approval of the services rendered.

Performing reconciliations:
17.  The senior bookkeeping clerk should perform a reconciliation between
the creditor ledger and the general ledger to identify postings made to the
general ledger and not the creditor’s ledger.
 The financial manager should review the reconciliations.
For all GRN’s without a corresponding supplier invoice at year-end, a liability
is accrued at year-end by means of a general journal entry (liability should
be raised).
Auditing Fundamentals Page 297-300, table 7.8 Recording of purchase

Ref. Control Description:

Accounting Department: Payment Preparation
What are the risks that can happen in this department?
Often in business, invoices are not paid immediately. Suppliers often allow
customers to settle their accounts within 30 days, 45 days, or 60 days,
depending on the business. Due to limited resources, a company will only
pay those invoices due or qualify for an early payment discount. The supplier
will send a monthly statement to a customer to indicate the total amount
outstanding and which invoices are due for payment.
18. Performing a supplier statement reconciliation:
 The senior bookkeeping clerk should perform a reconciliation between
the creditor/supplier statement and the creditor balance in the creditor
ledger to:
o Identify any amounts on the supplier statement that has not been
recorded as a purchase/trade creditor in the accounting records.
o Identify errors in the entity’s records that should be corrected in their
records.
 All reconciling items should be investigated by the senior bookkeeping
clerk performing the reconciliation.
 The financial manager should review the reconciliation to ensure valid
reasons and supporting documentation exists for all reconciling items.
Preparing a payment schedule:
19. The payment clerk should prepare a payment list from the creditor ledger.

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 EACG2708

Ref. Control Description:

Accounting Department: Payment Preparation
A payment list is a listing containing all the balances due to suppliers,
accompanied by:
o A remittance advice and supplier statement reconciliation for each balance
Payment List:

to be paid.
o Purchase documentation: Supplier invoice, GRN, supplier delivery note,
and approved PO relating to the outstanding balance.
o The payment schedule and the supporting documentation should be
presented to the financial manager to review and approve the payment
schedule.
20.  The payment clerk should scrutinise the file of unpaid supplier statements
on a periodic basis to identify statements that have fallen due but have not
been paid or early settlement discounts.
 The senior bookkeeping clerk should follow up on unpaid supplier
statements on a regular basis to ensure all outstanding amounts are
timeously.
Auditing Fundamentals Page 301-303, table 7.9 Payment preparation

Ref. Control Description:

Accounting Department: Paying the supplier
What are the risks that can happen in this department?
21. Preparing the EFT payment:
 The payment schedule and the supporting documentation should be
presented to the financial manager to review and approve the payment
schedule.
 The financial manager should review the payment schedule for
reasonableness, looking for any payments which appear to be abnormal
(large amounts), regular suppliers not included on the list and amounts for
which there is no supporting documentation.
 Supporting documentation should be cancelled to ensure it cannot be
presented again for payment.
Loading the payments onto the EFT application:
22. A payment clerk / senior bookkeeping clerk (not the same person as the
preparer of the payment list) should load the approved amounts onto the EFT
application on the Bank website or banking app.
Reviewing the payments loaded:
23.  The financial manager should compare the amounts loaded onto the EFT
application to the approved payment schedule to ensure that:
o All payments have been loaded (completeness).
o No unauthorised payments have been loaded (validity).
o The payments are loaded at the correct amount (accuracy).
 After the review, the financial manager should request final approval by
the payment signatories.

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 EACG2708

Ref. Control Description:

Accounting Department: Paying the supplier
The following controls contribute to the occurred, authorized, accuracy and
completeness of the Electronic Fund Transfer (EFT) itself:
 Responsibility to make payments should be limited to one (1) employee
(Isolation of responsibility).
 The number of terminals (workstations) from which the EFT is effected
(made) should be restricted (one only if possible).
 Two passwords from two different senior employees should be required
to effect a transfer of money (two signature principle).
EFT Payment Controls

 The bank should “identify” terminal (workstation) before accepting the

EFT (call-back facility).
 Automatic shutdown after three unsuccessful attempts to access the EFT
application (banking app).
 Full range of password/identifications controls should be implemented.
 Users should be restricted to gain access based on their identification
(access tables).
 The total amount to be paid should 1st be transferred to a designated
clearing account (separate from the main account). All payments should
be limited to the designated clearing accounts.
 EFT’s may be limited to a particular day, e.g. 23rd of the month.
 The bank should acknowledge receipt of the payment instruction and may
request a final approval before making the payment (e.g. one time
password).
 Data transferred should be encrypted.
24. The payment signatories will receive a notification requesting their approval
(passwords) of the EFT application's pending payment. Once approved, the
EFT payment will be affected.
Auditing Fundamentals Page 304, table 7.10 Paying the supplier

Ref. Control Description:

Accounting Department: Recording the payment
What are the risks that can happen in this department?
25. The accounts payable clerk should record the payment made after the
payment has been approved and processed by the bank.
Dr Creditor, Cr Bank
26.  The cash book clerk should perform a bank reconciliation between the
cash book balance and the balance as per the bank statement to identify
payments which:
o Never took place but were recorded.
o Were recorded at incorrect amounts.
o Took place but were never recorded.
 The financial manager should review the bank reconciliation to ensure that
all reconciling items are resolved or explained.
A bank reconciliation will be performed every month to ensure that all bank
transactions have been recorded.

9
 EACG2708

Ref. Control Description:

Accounting Department: Recording the payment
Auditing Fundamentals Page 305, table 7.11 Recording of payments

Ref. Control Description:

Returning goods and recording of a purchase adjustment
What are the risks that can happen in this department?
When damaged goods are identified in the warehouse, a Goods return to
supplier voucher (GRSV) is created and approved by the warehouse
manager. A copy is sent to the accounting department.
27. The accounts payable clerk should create a debit note for the goods being
returned, only if the following support has been provided:
o An authorised GRSV with the GRN evidencing that the goods being
returned had originally been purchase.
o A supplier invoice on which the goods originally appear.
A debit note is a document that requests the supplier to debit (reduce) the
company’s account balance owing to the supplier. A debit note should be
Debit Note:

prepared in duplicate (x2):

o Copy 1 is sent to the supplier to make the request.
o Copy 2 is filed in numerical order in the accounting department after it is
matched to the GRSV.
All debit notes are subject to strict document controls:
o Debit notes should be pre-printed in a manner where only minimal
Document
Controls:

information must be completed.

o Sequentially numbered (1,2,3).
o Designed in a manner that is logical and easy to complete.
Blank documents should be locked away.
28. The financial manager (senior staff member) should approve the debit note
after confirming that:
o Cast and calculations on the debit note are correct.
o Quantities on the debit note agree with the GRSV.
o Prices on the GRSV agree with the supplier invoice or with trade
agreements with the supplier.
29. The senior bookkeeping clerk should review the file of GRSV on a regular
basis to ensure:
o Missing GRSV (1,2,3) are followed up with the warehouse.
o All GRSV matched to debit notes have been recorded in the purchase
journal.
o Debit notes have been recorded in the correct accounting period.
Auditing Fundamentals Page 306-307, table 7.12 Returning goods and
recording of a purchase adjustment

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