COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF ACCOUNTING

DEPARTMENT COMMERCIAL ACCOUNTING

Subject: Auditing and Internal Control 2B

Subject Code: AIC22B2
Test: Test 2

Test date: 18 October 2018

Marks: 50 Marks
Duration: 1.5 Hour
Pages 4 (four) pages (including cover sheet)
No of questions 4 (four)

Examiners: B Kuzwayo, B Mgobozi & L Nzama

Internal moderator: J Mamaile

Information to students:

1. You are allowed to use a calculator.

2. An answer sheet/book will be supplied to you, in which you must write your answers in. If you
need another book/sheet, please ask the invigilator for another.
3. By writing this test and affixing your name and student number to the answer sheet/book, you
confirm that you are conversant with the test regulations of the University.
4. Use only a blue or a black pen to answer your questions. Answers given in pencil will not be
marked.
5. Make sure your handwriting is neat and easy to read. Set out your answer in a clear logical manner.
6. Use the same numbers for your answers as those used for the questions in the test/examination
paper.
7. Hand your answer book to the invigilator at the end of the test/examination.
AIC22B2 – Test 2 - 2018

QUESTION 1 (Green Book) [20]

The Purchases and Payments cycle and Payroll cycle normally involve the outflow of cash from
the business; suppliers and employees are the recipients of the cash. This outflow of cash makes
the occurrence of fraud more likely in these two cycles than in others.

REQUIRED:

1.1 List and describe documents used in the Purchases and Payments Cycle. (10)
1.2 List any seven (7) risks that may occur in the Ordering of Goods and Payment Preparation
functions in the Purchases and Payments Cycle. (7)
1.3 List three (3) ways in which fraud can be committed in the Purchases and Payments Cycle. (3)

QUESTION 2 (Blue Book) [10]

The Payroll cycle deals with the payment of salaries and wages to employees as well as related expenses
to third parties on behalf of its employees. This cycle has numerous risks that may lead to the material
misstatement of an entity’s financial statements.

REQUIRED:

2.1 List the 5 (five) characteristics that wage employees have. (5)
2.2 Describe any 5 (five) basic functions in the Payroll Cycle. (5)

QUESTION 3 (Blue Book) [7]

The Purchases and Payments cycle and Payroll cycle normally involve the outflow of cash from
the business; suppliers and employees are the recipients of the cash. This outflow of cash makes
the occurrence of fraud more likely in these two cycles than in others.

Choose the correct answer from the four possible answers given, write only the correct letter next
to the question number:

3.1 What typically initiates the Purchases and Payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods servicesa.
b. Issuance of payment to vendor.
c. Approval of a new vendor
d. Purchase requisition

3.2 What typically ends the Purchases and Payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods servicesb
b. Issuance of a payment to a vendor.

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AIC22B2 – Test 2 - 2018
c. Approval of a new vendor
d. Purchase requisition

3.3 A document indicating a reduction in the amount owed to a vendor because of returned goods is
a. Supplier invoice
b. Supplier Credit note
c. Receiving room report
d. Shipping room report

3.4 The accounts payable account includes obligations for the acquisition of:
a. Raw materialsd.
b. Equipment.
c. Utilities
d. All three of the above

3.5 The overall objective in the audit of accounts payable is to determine whether accounts payables.
a. Is fairly stated and properly disclosed
b. Overstated
c. Understated
d. Is accurately stated

3.6 At what point do most companies recognize liabilities in the Purchases and Payment cycle?
a. The issuance of a purchase order
b. Receipt of acknowledgement of order by vendor.
c. Receipt of goods or services.
d. The receipt of a vendor statement

3.7 Which of the following departments should have the responsibility for authorizing payroll rate
changes?
a. Personnel
b. Payroll
c. Treasurer
d. Timekeeping

QUESTION 4 (Orange Book) [13]

Integrated learning refers to the fact that all modules that are learnt in our qualification are important,
interrelated and all contribute to the creation of a competent accounting graduate.

PART A – Integration

4.1 Provide the journal entry (excluding narrations) for the following events:
a. Mr Discount purchased a Motor Vehicle for R550 000 (Vat Exclusive) on account (3)
b. Wages of R10 000 for Ms. Temp is still due at year end. (2)
c. XYZ (Pty) Ltd owed a supplier R15 000. When settling an account, XYZ was offered a settlement
discount of 10%. Provide the journal entry on the date of settlement. (3)

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AIC22B2 – Test 2 - 2018
PART B – Application

4.2 Explain which assertion(s) is/are affected by each of the following: (3)
a. Omitting certain creditors balances at the year end.
b. Recording the purchase of goods on credit for the personal use of the directors as company
expenditure just before year end.
c. Using the wrong conversion rate on a foreign creditor’s balance at year end.
4.3. Describe two important divisions (segregations) of duty in the ordering and receiving function of
the purchases and payment cycle. (2)

THE END

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AIC22B2 – Test 2 - 2018
Memo to Test 2 (Mod B) – 2018

QUESTION 1

QUESTION 1.1 – Solution (Maximum 10 marks. One mark per fact)

1. Requisitions: completed by any department that wishes to instruct the buying department to
acquire goods / services on its behalf.Raw materials warehouse will most likely place more
requests. They will closely monitor stock re-order levels and production schedules to know the
correct times to initiate requisitions. 

2. Quotation:  The department requesting the goods or services, of the procurement department,
may have to obtain quotations from one or more supplier.  A quotation stipultes the best price of
the goods or services offered by the supplier. 

3. Purchase order forms:  completed by the buying department; indicates the description, prices
and quantities of goods that the supplier is requested to provide. Must be signed by Chief Buyer. 

4. Supplier delivery note:  proof that the supplier has delivered the goods ordered. Two copies
signed on acceptance of delivered goods. 

5. Goods received note:  completed by the purchasing company when delivered goods are received.
It indicates the quantities and descriptions of goods received.  It is documentary proof that the
entity did receive the ordered goods.  Cross-referenced to supplier delivery note

6. Purchase/supplier invoice:  supplier sends invoice to indicate the amount due for goods that
were delivered It includes the quantity and description of goods delivered/service rendered. 

7. Credit note:  prepared by the supplier; applies where balance owed is reduced due to goods
returned, overcharging by the supplier, etc.

8. Creditors/supplier statement:  received from the supplier on a monthly basis; indicates the
transactions between the company and the supplier for the month (invoices for purchases, credit
notes where applicable, payments, discounts for early payment, outstanding balance) .

9. Cheque requisition:  Completed by the creditors department requesting that a cheque be made
for a particular supplier that needs to be paid. 

10. Remittance advice:  inform the supplier which invoices are covered by the payment being
made. 

11. Receipt:  acknowledgement from the supplier that a payment was received

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AIC22B2 – Test 2 - 2018
QUESTION 1.2 – Solution (Maximum 7 marks. One mark per fact)

Ordering of Goods
 Ordering of incorrect or unnecessary goods, resulting in liquidity problems and wastage 
 Ordering unauthorised goods resulting in losses to the company through fraud
 Requisitions not acted upon or orders not placed timeously or at all 
 Obtaining inferior quality goods
 Paying unnecessarily high prices for goods
 Orders placed with suppliers not filled/not timeously filled
 Order forms misused e.g. for placing orders for private purchases

Payment preparation
 Payment to fictitious creditors
 Payment of incorrect amounts
 Unauthorised payment
 Discounts lost due to late payment

QUESTION 1.3 – Solution (Maximum 3 marks. One mark per fact)

 Employees / management ordering personal goods / services on the company’s account
 Making fictitious payments to suppliers
 Fraudulent claiming of input Vat
 Officials accepting bribes from suppliers for awarding of tenders
 Theft of goods at the receiving stage
 Understating trade payable (trade creditors) 

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AIC22B2 – Test 2 - 2018
QUESTION 2

QUESTION 2.1 – Solution (Maximum 5 marks. One mark per fact)

Wage employee characteristics

 Wages determined based on actual hours worked 
 Employees have to clock in and out of the workplace 
 Employees paid for overtime hours 
 Still a large number of employers who pay wages in cash 
 Paid weekly 

QUESTION 2.2 – Solution (Maximum 5 marks. One mark per fact)

Note to marker: no mark should be awarded for the listing of the functions but rather for the
description of the function

a) Personnel (Human Resources)

Individual / department assisting with HR processes like hiring, terminating, disciplinary, promotions,
dismissals, maintaining records, etc.

b) Time-keeping
There must be a method to accurately record all time worked by hourly paid employees

c) Payroll preparation
Amounts owed to employees (and payroll creditors) must be accurately calculated and supporting
documents created

d) Payment preparation and pay-out

Payment to employees in cash or through electronic bank transfers

e) Deductions: Payment and Recording

Amounts deducted from employees must be paid over to relevant parties.
E.g. Medical aid, Employees’ tax (SITE / PAYE), Pension Fund, etc

QUESTION 3 – Solution (Maximum 7 marks)

3.1 A
3.2 B
3.3 B
3.4 D
3.5 A
3.6 C
3.7 A

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AIC22B2 – Test 2 - 2018
QUESTION 4

PART A
QUESTION 4.1 – Solution (Maximum 8 marks. One mark per fact)

a) Journal entry:

Dr. Motor Vehicle R550 000

Dr. Input Vat R82 500
Cr. Trade Payables R632 500 

b) Journal entry:
Dr. Wages R10 000 

Cr. Accrued Expense R10 000 

c)Journal entry:

Dr. Trade Payables R15 000 

Cr. Bank R 13 500
Cr. Discount Received R1 500

PART B

QUESTION 4.2 – Solution (Maximum 3 marks. One mark per fact)

 Completeness of creditors balance (and potentially, completeness of purchases if the corresponding

purchase was also omitted.) 

 Obligation of creditors (amount is not actually owed by the company) and occurrence of
purchases (a valid purchase had not occurred.) 

 Valuation of creditors, accuracy of foreign exchange profit/loss. 

QUESTION 4.3 – Solution (Maximum 2 marks. One mark per fact)

The person placing the order should not have access to the goods he has ordered. (This helps to prevent
an order clerk ordering goods for himself, taking the goods and then having the company pay.) 

The person receiving the goods should not be responsible for writing up the inventory records. (This
helps to prevent a receiving clerk misappropriating goods and then covering up the shortage in the
records.) 

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