What is purchase and payment cycle?

What Is Purchase-to-Pay?

Purchase-to-pay is an integrated system that fully automates the goods and services purchasing process for a business. The system earned its name because it handles all aspects of acquisition from the purchase of goods to the payment of the vendor. The key benefits to purchase-to-pay are efficiency, cost savings, and increased financial and procurement visibility.

Understanding Purchase-to-Pay

The purchase-to-pay system begins with requisitioning, proceeds to procurement, and ends with payment. Requisitioning is the process of formally requesting a service, item, or product with a purchase request form. Procurement happens when the goods or services are received. The system ends when payment is made.

Key Takeaways

• Purchase-to-pay is a complete purchase system for businesses from the purchase of goods to vendor payment.
• Purchase-to-pay is also called P2P, procure-to-pay, eProcurement, or req-to-cheque.
• The purchase-to-pay process is automated, saves costs, and reduces risk.
• Purchase-to-pay is not designed to speed-up vendor payment because this is not in the interests of companies who want to hold on to their cash for as long as possible.
• Purchase-to-pay systems are designed to improve efficiency and financial controls.

Purchase-to-pay seeks to optimize the purchasing process, thereby benefiting the organization through better financial controls and efficiency. This streamlined, integrated system saves costs and reduces risk. A typical purchase-to-pay system includes five steps and requirements for completion:

• Catalogs: Catalogs from preferred suppliers are the first requirement in a purchase-to-pay system.
• Purchase requisitions: Once a product has been selected from a catalog, the buyer sends a purchase requisition to the appropriate manager.
• Purchase order workflow: A purchase order is generated once the purchase requisition is approved by the manager.
• Invoicing: This is a critical component of a purchase-to-pay system since manual processing of invoices is a hugely laborious and time-consuming process. Automated invoice processing saves time and money and includes a reconciliation feature that matches purchase orders to invoices.
• Payment: Once an invoice is approved for payment, a file is generated in the company's accounts payable system. The approved invoice results in payment to the supplier by the end of the period for which the supplier has extended credit.

Purchase-to-pay systems are not intended to speed up the payment process. While this would be a laudable objective, the reality is that it would not be a priority for most companies because paying bills faster would affect the timing of their own cash flows. Rather, the goal of a purchase-to-pay system is to improve efficiency and financial controls since finance departments have timely purchasing data at their fingertips.

Fast Fact

Purchase-to-pay systems are automated processes that reduce labor costs and increase accuracy.

Best practices for purchase-to-pay systems include solid technology that uses a single point of contact, such as a supplier portal, reduced complexity in catalogs and buying channels, and support from top management. It can provide key data on how much is being spent, what products or services are being received, and delivery times.

SCHOOL OF ACCOUNTANCY

MODULE FOUR – PURCHASES AND PAYMENTS CYCLE

• AUDITING: CAUA
  • 1. STUDY OBJECTIVES CONTENT PAGE
  • 1. IMPORTANCE OF THE TOPIC
  • 1. STUDY MATERIAL
  • 1. EXAMINATION POSSIBILITIES
  • 1. STUDY APPROACH
  • 1. ADDITIONAL NOTES
  • 1. QUESTIONS
    • 7 Tutorial question
    • 7 Self-study questions
  • 1. CLASS SLIDES (Annexure)

1. STUDY OBJECTIVES CONTENT PAGE

After studying this module you students should:

 Explain the nature and purpose of the cycle.  Identify and describe the major general ledger accounts affected by the cycle.  Explain the accounting treatment required for the transactions in this cycle.  Identify and explain the cycle’s functional areas.  Describe the flow of transactions in the cycle through the information system, including its relation to source documents and accounting records and its relation to class of transaction and events, and balances.  Identify and describe the documents and records, both manual and computerised, utilised in the cycle and describe the purpose of each.  Identify and describe the risk of material misstatement affecting account balances, class of transactions and events in the financial statements.  Describe the computer technologies typically used in the cycle.  Formulate control objectives in the cycle.  Describe how the internal controls may assist in achieving the control objectives in the cycle and how these control objectives relate to management’s assertions in the financial statement.  Critically analyse internal control systems in order to identify and explain weaknesses in the control system and recommend improvements by describing the required internal controls.  Design system of internal controls, both manual and computerised, that will achieve the cycle’s control objectives.

Refer to the Learner Guide for additional information.

2. IMPORTANCE OF THE TOPIC

This topic forms the basics of understanding controls in a purchases and payment cycle and how such controls can be audited. You should study this chapter thoroughly as it gives you general understanding and importance of the Purchases and payment cycle in an organisation.

3. STUDY MATERIAL

• Recommended Textbook : Auditing Fundamentals in a South African context,

7. QUESTIONS

4. EXAMINATION POSSIBILITIES

Internal controls

Functions within the Purchases and payment cycle

Acquistion and payment Cycle

Ordering of goods (and services)

Receiving of goods

Recording of purchases

Payment preparation (requisitioning)

Actual payment (preparing the cheque) and recording

Risks categorised per function

Function Responsibilities / Activities Risks Ordering of goods (and services)

The purpose of this function is to initiate orders so that the items/services required to maintain optimum conditions within the organisation, are always available, e. manufacturing does not run out of raw materials or parts, or a retailer does not run out of goods to sell. The function is also responsible for placing official orders with suppliers having established that delivery, quality, quantity and price requirements have been satisfied.

• Ordering of incorrect or unnecessary goods, resulting in liquidity problems and wasting.
• 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 process for goods.
• Orders placed with suppliers not filled/not timeously filled.
• Order forms misused e. for placing orders for private purchases.

Receiving of goods The purpose of this function is to accept and acknowledge deliveries of valid orders from suppliers and to record the delivery (Goods Received Note). Prior to acceptance, physical checks on quantity, quality and description of goods should be carried out.

• Acceptance of o Short deliveries as full deliveries o Damaged and broken items o Items not ordered o Goods not of the required type or quality
• Goods received notes not made out accurately or completely.
• No goods received note made out.
• Theft by employees or outside parties, e. collusion with supplier delivery.

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Typical controls which you would find in the payments and Purchases cycle

The following table illustrate the possible controls and tests of controls in a MANUAL payments

and Purchases cycle. These controls and test of controls should not be regarded as an absolute

complete “guide” of all possibilities. The controls and tests of controls can differ, depending on

the specific circumstances and risks that exist.

Control activity Test of control Ordering of goods (and services) Order clerks should not place an order without receiving an authorised requisition.

• The order should be cross referenced to the requisition.

• Prior to the requisition being made out, stores/production personnel should confirm that the goods are really needed especially where pre-set re-order levels and re-order quantities are used as the basis for the requisition.

• Enquire from store / production personnel and observe the procedures i.r. requesting and ordering of goods.

• Select a sample of orders and:  Inspect the order to ensure that the order has been cross referenced to the requisition.  Ensure that the order has been authorised by means of a signature.

Before the order is placed, a supervisor / senior buyer should:

• Check the order to the requisition for accuracy and authority.

• Review the order for suitability of supplier, reasonableness of price and quantity, and nature of goods being ordered (are they items used or sold by the company).

• Select a sample of orders and:  Check the order to the requisition and ensure that the order is accurate (description of goods required, quantities etc.) and that it was duly authorised.  Inspect the individual items ordered on the order form to ensure that the items being ordered are sold by the company. The company should preferably have an approved supplier list to which the buyer should refer when ordering.

• If the company does not have approved suppliers the buyer should seek quotes etc. from a number of suppliers before placing the order.

• Even when ordering from an approved supplier, the buyer should contact the supplier to confirm availability and delivery dates. (Note: Before a supplier is approved, senior personnel should carefully evaluate the company in respect of their reliability and the quality and price of their goods).

• Select a sample of orders and:  Obtain the approved supplier list and ensure that the contracted supplier appears on the list of approved suppliers.  If no approved supplier list exists ensure that at least 3 quotations were attached to the order form.

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Control activity Test of control

The ordering department should file requisitions sequentially by department (each department will have its own book of requisition forms) and should frequently review the files for requisitions which have not been cross referenced to an order.

Investigate the requisition files from each department and follow up requisitions which are not matched / cross referenced to an order. Inspect the numeric sequence of purchase requisitions and follow up missing numbers.

A copy of the order should be filed sequentially and the file should be sequenced checked and frequently cross referenced to goods received notes, to confirm that goods ordered have been received.

Alternatively the pending file of purchase order forms in the receiving bay can be reviewed for orders which are long outstanding.

• Inspect the order file and follow up orders which are not matched / cross referenced to a GRN (goods received note).
• Inspect the pending order file and follow up long outstanding orders.

Blank order forms should be subject to sound stationery controls.

• Enquire about where the blank order forms are kept and who has access to it.
• Inspect whether the blank forms are kept safe and that no unauthorised access are gained to the forms.

Note: Whenever a control procedure is carried out, the employee responsible for the control should sign the relevant document record (isolation of responsibility).

Receiving of goods

The responsibility for receiving goods should be designated to a goods receiving section which should be physically secured and access controlled.

Inspect the goods received section and:

• Ensure that access is controlled.
• Ensure that a security guard are present at all times during deliveries.

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Control activity Test of control

The purchase invoice received from the supplier should be:

• Matched to the corresponding goods received voucher, delivery note and purchase order for:  Quantity and description of goods.  Correct prices and discounts (from order or supplier price list).

• Reviewed to confirm that the amounts on the invoice have been allocated to the correct account e. inventory, consumables, stationery.

• Select purchases from the purchase journal and follow it through to the invoice.  Agree details (name, amount, date etc.)

• Match the invoice with the GRN, delivery note and order.  Agree the quantity per the invoice with the GRN and delivery note.  Agree the price with the order / price list.  Test the accounting accuracy on the source documents.

• Trace the transaction to the general ledger and ensure that the inventory received was allocated to the correct general ledger account.

When a requisition is made out to initiate an order, the account to which the purchase must be allocated in the purchase journal should be selected form the “official list of accounts” and entered on to the requisition and then transferred to the order (if this is not done, the clerk responsible for the allocation of the purchase will not know which account to allocate it to).

Follow selected purchases through from the requisition / order and ensure that it was correctly classified and recorded.

All casts, extensions and calculations on the invoice should be re-performed.

Test the accounting accuracy on the source documents for selected purchases.

A specific employee should be designated the responsibility of ensuring, by scrutiny of dates of goods received notes and invoices in the pending file, that purchase are timeously and accurately recorded in the purchase journal and correctly posted to the creditors ledger.

Select purchases before and after year end from GRN, match it with the invoice and follow it through to the purchase journal and creditors or provision account. Select items from the purchase journal and repeat the test and ensure recorded in the correct accounting period.

As the rendering of services by a supplier does not usually result in a GRN, the supplier invoice will normally be signed by the head of the section/department to which the service was rendered, as proof and approval of the service rendered.

Where there are not a goods receive note due to a service received obtain the supplier invoice and ensure that the head of department signed the invoice as proof that services have been delivered.

Note: Whenever a control procedure is carried out, the employee responsible for the control should sign the relevant document record (isolation of responsibility).

Payment preparation

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Control activity Test of control

The monthly creditor’s statement sent by the supplier should be reconciled to the supporting documentation, e. invoices, payments etc. and the creditor’s clerk should ensure that the invoices were subjected to accuracy controls before being recorded.

Re-perform the reconciliation. Follow selected payments through to the creditor’s reconciliation.

• Test calculations of reconciliation.
• Vouch with source documents.
• Inspect for signature of person who has reviewed the reconciliation.
• Investigate reconciling items.

The individual creditor’s accounts in the creditor’s ledger should be reconciled with the monthly creditor’s statements sent by the suppliers.

Re-perform the reconciliation.

• Test calculations of reconciliation.
• Vouch with source documents.
• Inspect for signature of person who has reviewed the reconciliation.
• Investigate reconciling items.

A creditor’s clerk should identify those creditors who must be paid at month end to comply with the supplier’s credit terms and to ensure that discounts available for early settlement, are deducted.

Obtain the suppliers terms and conditions and inspect whether the suppliers with settlement discounts were paid on time.

Cheque requisitions should be sequenced and pre-printed and unused requisitions subject to sound stationery controls.

Obtain the cheque requisition file and inspect whether the cheque requisitions were filed in numerical order. Enquire of management with regards to stationary controls implemented over used and unused stationary.

Cheque requisitions should include details of the cheque being requested and should be authorised by the preparer of the requisition (there may also be a review or second authorization procedure by another employee).

Follow selected payments through to the cheque requisition and inspect the cheque requisitions to ensure it was duly authorised and reviewed by an independent employee.

The cheque requisitions and supporting documentation should be presented to the cheque signatories (simple batch controls may be put in place of cheque requisitions are numerous).

Follow selected payments through to the cheque requisition and:

• Inspect signatures for authorisation of payment.
• Inspect supporting documentation.
• Inspect cancellation of documentation after authorisation.
• Follow through to the paid cheque and agree:  The name, amount, date.  Inspect cheque for any endorsements.

Note: Whenever a control procedure is carried out, the employee responsible for the control should sign the relevant document record (isolation of responsibility).

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Control activity Test of control Signed cheques should not be returned to the preparer but should be mailed by an independent employee.

Enquire of management about procedures performed.

All cheques should be recorded in sequence in the CPJ.

Obtain the cash payments journal and inspect that cheques are captured in numerical order. Identify and investigate any gaps in the sequence. The CPJ should be reviewed regularly, by management, for missing cheque numbers and unusual payments.

Obtain the cash payments journal and inspect it for signature of person who has reviewed the cash payment journal. Reconciliation of the cash book to the bank statement should be performed and reviewed monthly, by staffs that are independent of banking functions, and the creditors department.

Select one or two month’s bank reconciliation and re-perform:

• Agree the cash book balance with the cash book.
• Agree the bank balance with the bank statement.
• Follow the outstanding cheques and deposits through to the next month’s bank statements and bank reconciliation.
• Test castings and calculations in cashbook and on the reconciliation.
• Investigate all other reconciling items and vouch it against documentation.
• Inspect proof of review by senior independent official. Return paid cheques should be:
• Filed in numerical sequence
• Reviewed for suspicious endorsements, payees, amounts by someone independent of the initial preparation of the cheque. This is an additional and simple detection check on the payment system as a whole.

Obtain the returned paid cheques and:

• Inspect whether the cheques are filed in numerical sequence.
• Inspect whether the returned paid cheques was reviewed.

NOTE:

Many of controls listed above will in a computerised system be performed by the computer, (e.

edit checks, validation checks and computations). Please refer to pages 11/16 – 11/30 in your

alternative text book, Auditing Notes for South African Students, for controls which should be implemented in a computerised Purchases and payments cycle as they also form part

of your ASSESSMENT

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7. QUESTIONS

The best way to understand and master the principles is to do questions. The more questions

you do, the more you increase your practical understanding of the topic.

Learn by doing QUESTIONS!!

Nr Source Question Name Topic Marks

1. AUDI Replacement Test

Couch Potatoes Manual controls 45

2 AUDI352 Class Question

On The Moove Ltd

Manual controls 47

3 University of Zululand

UL Bookshop Manual and computerised controls

60

4 University of Johannesburg

AJ Plumbing Supplies

Manual controls 29

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Process Description Ordering - As part of the production planning process, schedules reflecting purchasing requirements are prepared in advance. These schedules reflect both the quantities required and the expected delivery dates.

• Copies of the above schedules are forwarded to the buying department which arranges competitive tenders for all requirements.
• Once submitted, tenders are evaluated and formal supply contracts are entered into between the company and the approved supplier. These contracts are signed by the purchasing manager.
• From time to time, additional purchasing requirements arise as a result of deviations from planned production, stock outs and general requirements such as factory consumables and maintenance spares. These requirements are documented by way of pre- numbered purchase requisition which is authorized by departmental manager.
• Copies of purchase requisitions are forwarded to the buying department which negotiates with supplies for the purchase of the items required.
• The buying department reviews the purchase requirement listings and the purchase requisitions. It also monitors stockholdings and re-order levels.
• Based on the above information, the buying department issues pre-numbered purchase orders which are approved by various buyers up to their individual limits of authority. Goods receiving - Goods may only be received at the receiving area of the store.
• All incoming goods are recorded on pre-numbered goods received vouchers (GRVs).
• GRVs are signed by stores personnel once the goods have been checked for quality and quantity and details have been agreed to suppliers’ delivery notes.
• GRVs are attached to suppliers’ delivery notes and forwarded to the Accounts Department.
• Pre-numbered Requests For Credit (RFCs) are issued in respect of all short deliveries, defective goods, goods returned etc.

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Process Description Accounting - Details of all GRVs are entered into a sequential register.

• Supplies’ invoices are matched to the relevant supporting documents.
• Details per invoices are agreed to orders and GRVs and the arithmetical accuracy of invoices is checked.
• A grid stamp is completed in respect of these checks.
• Any invoice which is subject to query are forwarded to the buying department for approval before processing.
• Pre-numbered RFCs are issued in respect of any overcharges etc.
• Account allocations are recorded on invoices and RFCs and each document is allocated a unique sequential transaction number.
• Documents are processed into the computerized accounts payable system in batch mode. A batch total is calculated before processing, using an adding machine tape. If the processed batch total agrees to the tape, the tape is destroyed.
• The output listing is checked to input documents to ensure that data capture was accurate and complete and to ensure that account allocations are correct. Output listings are signed as evidence of this check.
• The general ledger is updated automatically.
• The listing of accounts payable is agreed to the control account on a monthly basis. This reconciliation is reviewed and signed by the department head.
• Processed suppliers’ invoices are marked off in the GRV register against the relevant GRV.
• At the end of each month, a listing of all unmatched GRVs is extracted.
• Unmatched GRVs are costed and extended at prices per purchase orders and the necessary accrual is raised.

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YOU ARE REQUIRED

1. Discuss the risks which a company faces if it does not implement sound control procedures over its “ordering of goods” function.

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1. With reference to working paper WP 200: a) Indicate whether each of the procedures (1 – 6), is a substantive procedure or a test of control. b) Where you have selected “test of control” in (a), indicate which control objective (i. validity, authorization, completeness, accuracy, recording, classification, cut-off) the control is designed to address, and where you have selected substantive test, indicate the assertion you are testing.

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3 List the audit objectives relating to credit purchases. 5

3 Identify for each objective, the key internal controls on which you intend to place audit reliance.

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3 Describe for each key control, the related test of control you will perform to test operating effectiveness.

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Presentation and layout – Your answer to question 3 should be set out in a tabular format as follows:

Audit objective Key internal control Test of controls

3

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QUESTION 2

On the Moove Ltd (hereafter referred to as On the Moove) is a medium sized company specializing in buying and selling active wear. The company was incorporated 2 years ago and due to its competitive prices, it has managed to list on the AltX of the JSE Securities Exchange. Your audit firm where you have been employed as a 3rd year trainee has recently accepted the audit of On the Moove for the financial year ended 28 February 2017 and you have been assigned to audit the payment and acquisitions cycle.

The following system description has been provided to you as part of the information gathering process of the audit.

Requisition of goods & services

The need for goods or services is identified for the day-to-day activities of the entity. A requisition order is completed by the relevant user, when they require goods or services. The requisition order indicates which goods or services are required and why there is a need for the goods or services. The requisition order is then signed by the requesting officer and submitted to the procurement division.

Creation of suppliers on the database

The entity normally buys goods & services from suppliers already registered on their approved supplier database. If a supplier is not yet registered on the database, a master file amendment form must be completed with all the relevant details of the supplier as well as the motivation for adding the supplier to the approved supplier database. The master file amendment form must be assessed and cross referenced to the supporting documentation (e. proof of banking details, VAT registration etc.) by the purchasing manager and then submitted to the CFO for final approval. After the CFO has given the approval, the supplier`s details will then be captured on the database which is updated on a monthly basis. Whenever there is a need for goods or services; suppliers from the database will be selected for consideration and an order will be placed with the one that has the most competitive price.

Ordering of goods & services

The purchasing clerk prepares a purchase order and sends it to the purchase manager who reviews all the details and matches them with the requisition order. The purchase order is printed in quadruplicate and submitted to the designated manager for approval on the system together with the attached documents: Requisition order and Quotation.

The copies of the orders are forwarded and kept as follows:

• The original copy to the supplier.

• One copy kept on file by the purchasing clerks.

• One copy to the requisition division.

• One copy to stores or end user.

Receipt of goods

Goods or services are received by the stores clerk from the supplier. For non-inventory items a representative from the end user department will be invited to be present when goods are received. The goods will be accompanied by a delivery note and invoice from the supplier. Goods received are compared to the order for quantity and quality. The end user / stock clerk signs the

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