topic 9 ziha audit of purchase and payment cycle + acc payables (1)

7/28/2019 Topic 9 Ziha Audit of Purchase and Payment Cycle + Acc Payables (1)

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AUDITING AND ASSURANCESERVICES IN MALAYSIA

AUDIT OF PURCHASE AND PAYMENT CYCLE

NUR NAZIHAH BT AZIZI 2010660652

NUR FARIHAH BT IBERAHIM 2010842246

NUR HAKIMAH AQILAH BT PAKHORUDIN 2010292232

NUR AZRA FAKHIRA BT ABDUL RAZAK 2010869038NURUL ‘ATIKAH BT MHD NOOR 2010845212

IZZATUL HATASYA BT IZHAM 2010227722

1



AUDIT OF PURCHASE

AND PAYMENT CYCLE OVERVIEW OF

PURCHASE ANDPAYMENT CYCLE

CLASSES OFTRANSACTION,

BUSINESSFUNCTIONS AND

DOCUMENTS

FINANCIALREPORT

ASSERTIONS

MAJOR INTERNALCONTROL &

RELATED AUDITPROCEDURES

SUBSTANTIVETESTS FORACCOUNTS

PAYABLE

2



STEP IN PURCHASE

AND PAYMENT CYCLE Recognition of

needs

Specifyneeds

Determine sourcingoptions

Establish price &terms

Prepare purchase order

Deliver purchase

order

Expediting

Receive &

inspects

Approval & payments

Maintainrecords

3



OVERVIEW OF PURCHASE &

PAYMENT CYCLE

• Objective to audit:

– To evaluate whether the account affected by the

purchase of goods and services and the cash

payment for those purchased are fairly presentedin accordance with generally accepted

accounting principles

4



Classes Of Transactions

1. Acquisition / Purchase of goods &

services

2. Cash disbursements3. Purchase returns and allowances and

purchase discounts

5



CLASSES OF

TRANSACTIONS

ACCOUNTS BUSINESS

FUNCTIONS

DOCUMENTS &

RECORDS

1. Acquisition

/Purchase

Inventory

Property, Plant &

Equipment

Prepaid Expenses

Leasehold

Improvements

Accounts Payable

Manufacturing

ExpensesSelling Expenses

Administrative

Expenses

1. Processing

purchase order

2. Receiving goods

& services

3. Recognizing the

liability

Purchase requisition

Purchase order

Receiving report

Acquisition transaction

file

Acquisitions journal or

listingVendor’s invoice

Debit memo

Voucher

Accounts payable

master file

Accounts payable trialbalance

Vendor’s statement

2. Cash

disbursements/

Payment

Cash in bank

Accounts Payable

Purchase Discount

4. Processing &

recording cash

disbursements

Cheque

Cash disbursements

transaction file

Cash disbursementsournal or listin

6



MAJOR INTERNAL CONTROL

ACTIVITIES

1. Authorization of purchases

2. Separation of asset custody from other

functions

3. Timely recording

4. Independent review of transaction

5. Authorization of payment

7



1. Authorization Of Purchases

• Purpose:

– To ensure that the goods & services purchase are

for authorized company purposes

– To avoid the purchase of excessive orunnecessary items

• E.g.

–Established approval authority i.e. purchase of capital assets above RM1 million may require

approval from BOD

8



Cont… – Issued relevant documents to authorize the

transaction occur i.e.• After the purchase requisition have been

approved, a purchase order to purchase the

good must be initiated

• Purchase order issued should be

prenumbered and should include sufficient

column and spaces to minimize the likelihood

of unintentional omission on the form whengoods are ordered

9



2. Separation Of Asset

Custody From Other Functions

• Separate the receiving department,

storeroom unit and accounting function

–To prevent theft or misuse of goods

10



3. Timely Recording

• Method of recording:

– Upon the receipt of the goods & services

OR

– Upon the vendor’s invoice is received

• Proper recording involves verifying goods

received against relevant documents i.e.

details on the purchase order, the receiving

report & vendor’s invoice, to determine all

information are correct11



4. Independent Review Of Transaction

• Independent party check on information recorded in the

system is required to ensure proper procedure of record

keeping

12



5.Authorization Of Payment

• Establish List of Approval authority

– Different ranking of personnel responsible to

approve different amount of payment

– E.g.

13

Amount of Payment

(RM)

Approval Authority

Above RM1,000,000 Board of Directors

500,000 – 1,000,000 Senior Managers

100,000 – 500,0000 Head of Administration

Department



Cont… • Separation of responsibilities between those:

– Recording the transaction

– Preparer of the cheque

– Approval of the payment

• Proper documentation

– Cheque should be in sequence of number

– Printed on special paper that makes it difficult to

alter the payee or amount – Establish a special physical control over blank,

voided and signed cheque

14



SUBSTANTIVE TESTS FOR

ACCOUNT PAYABLES

• Using Tests of Details of Balance

1. Existence

2. Completeness

3. Accuracy

4. Classification

5. Cutoff

6. Obligations

7. Presentation and disclosures15



Accounts Payable

Existence

• To determine:

– AP is the AP List exist

•

Examples of Audit Tests: – Trace from AP List to vendors’ invoices and

statements

–

Confirm AP, emphasizing large and unusualamounts

16



Accounts Payable

Completeness

• To determine:

–Existing AP are included in the AP list

• Examples of Audit Tests: –Perform out-of-period liability tests

17



Accounts Payable

Accuracy

• To determine:

– Account Payable (AP) in the AP list are

accurate

• Examples of Audit Tests:

– Trace from AP List to vendors’ invoices and

statements

18



Accounts Payable

Cutoff

• To determine:

– Transactions in the acquisition and

payment cycle are recorded in the proper

period


– Perform out-of-period liability tests

– Perform detailed tests as part of physical

observation of inventory

–

Test for inventory in transit 20



Accounts Payable

Obligations

• To determine:

–The company has an obligation to pay

the liabilities included in accountspayable


–Examine vendors’ statements and

confirm accounts payable

21



Account Payables

Presentation & Disclosure

• To determine:

–Accounts in the acquisition and

payment cycle are properly presented

and disclosed


–Review statements to make surematerial related parties and long-term

and interest-bearing liabilities are

segregated 22



TUTORIAL QUESTION

APRIL 2008



WEAKNESSES RECOMMENDATIONS

1)The clerk only call the selected vendor to

request a price quotation.

Company have to submit a proper form to

in order to request for the price quotation.

2)Only verbal confirmation is made with

the vendor.

The company need to have a proper order

form and made confirmation in writing and

if possible by using electronic data

interchange (EDI)

3)The clerk in Purchasing Department have

provide four copies of pre-numbered

purchasing order. One of it should not be

kept for his own file but to be given to the

vendor.

4)The receiving department officer only

matched the pre-numbered purchase order

with the delivery note attached with the

good received.

When goods are received, the officer need

to do adequate control which includes

examination for description, quantity,

timely arrival and condition.



WEAKNESSES RECOMMENDATIONS

5)The receiving department officer only

keep the document in an open file.

6)The requesting department just benotified verbally to collect the goods.

7)The officer note down all the differences

just by using marker.

Company needs to have paper or

electronic documents prepared at

the time the tangible goods arereceived.

8)The pre-numbered document is kept in

an open file.

The document should be save in a

secured file to prevent misuse and

theft.

9) The voucher is then forwarded to En.Mazlan, the Assistant Accountant, for his

approval.

10)The cheque has been counter sign by

En. Azhar, the Accountant.



B) IMPORTANCE SEGREGATION OF DUTIES

• To make sure that no one person is in a position to

record and process a complete transaction.

•Can reduce the risk of fraud and errors.

• The flow of operation in the company is more efficient

and effective.



C) The problems that may exist in implementing

a formal system of internal control in small

companies is :

• The management will loosely monitor or participate in

the operation of the company itself.



OCT 2008Weaknesses Effects Recommendations

1)Only three pre-

numbered purchase order

is prepared by the

employee.

Account department may

make mistake in order to

prepare the payment

voucher.

The employee should

prepared four pre-

numbered purchase order

including one for the

account department.

2)Materials are issued to

factory employees

subsequent to verbal

request by any of the

foremen.

Thefts and misused of the

goods may occur.

Company should make

sure that the goods is

physically control by

independent storeroom

personnel from the time of receiving to storage and

from storage to

manufacturing.



Weaknesses Effects Recommendations

3)The prepared cheques

are returned to the

cashier who puts them

in the cheque signing

machine

Careful examination of

the supporting

documents is not

conducted as the

cheque is put into the

signing machine.

The cheque should be

sign by an individual

with proper authority.

4)The cashier prepared

the pre-numbered

cheque.

No segregation of

duties. Fraud and errors

may arise.

Made segregation of

duties.

5)The employee

indicates approval for

payment by initialing

the invoice which is

then forwarded to the

accounting department.

The employee is the one

who order the goods.

He tends to involve in

intentional

misstatement such as

fraud and error.

Company has to make

sure that those

personnel who record

the acquisitions do not

have access to cash.



IMPORTANCE SEGREGATION OF DUTIES

• To make sure that no one person is in a position to

record and process a complete transaction.

•Can reduce the risk of fraud and errors.



C) Three methods commonly used by auditors to

obtain and document their understanding of

the internal control design :

• Make inquiries of client personnel

• Examines documents and records

• Observe entity activities and operations



May 2012

(Question 4)

i) Q4(i)a b



i) Q4(i)a,b

Function of the documents :Purchase requisition note Payment voucher

Is a request for goods and services by

an authorized employee

Used by organizations to established

a formal means of recording and

controlling acquisitions by enable

each acquisitions transactions to be

sequentially numbered.

Company rely on pre-specified the

order points use by the computer to

initiate purchase requisitions

automatically.

Include a cover sheet or folder for

containing documents and a package

of relevant documents.

Example : form of request for such

acquisitions as materials by a

foreman or storeroom supervisor,

outside repairs by office or factory

personnel and insurance by the vice

president in charge of property and

equipment

Example : purchase order, copy of the

packing slip and vendor’s invoice



i) Q4(ii,iii)

Weaknesses Possible consequences Improvement

1) En. Halim will contact

the suppliers through

phone

Expose to the loss Provide a proper order

procedure.

2) En. Halim only

prepares the purchase

order in triplicate after

the material are

delivered to the stores

Expose to the high risk He has to send four

copies of purchase

order which is to

supplier, requisition

department, store

department and

receiving department



Weaknesses Possible consequences Improvement

4) Puan Amira, the

finance manager

managed the accounting

and administrativedepartment

No segregation of duties The duty must be only

control by one person in

order to avoid fraud

5) Puan Amira also

updates the purchase

journal, accounts

payable ledger and

reconcile monthly the

general ledger control

acconts.

No proper authorization

duties

The duties must be

performed by the

accountant.

3) En. Halim laterobtains the approval

from the managing

director after the

materials are delivered

to the stores.

No proper authorizationof purchases

Acquisitions of rawmaterial must be

approval from the

managing director

before receipt the

material



Q4(iv)

• The company’s store keeper verify the quality,

quantity and specification of the goods

delivered with the shipping document

• Maintaining the bin cards for all the materials

and updates weekly.



Q1(a)Purchase requisition note Payment voucher

Is a request for goods and services byan authorized employee

Used by organizations to establisheda formal means of recording and

controlling acquisitions by enable

each acquisitions transactions to be

sequentially numbered.

Company rely on pre-specified theorder points use by the computer to

initiate purchase requisitions

automatically.

Include a cover sheet or folder forcontaining documents and a package

of relevant documents.

Example : form of request for such

acquisitions as materials by aforeman or storeroom supervisor,

outside repairs by office or factory

personnel and insurance by the vice

president in charge of property and

equipment

Example : purchase order, copy of

the packing slip and vendor’s invoice



Q1(b)i,ii

• (i) Purchasing functions and receiving

functions

Theft of goods and possible payment for

unauthorized purchases.

• (ii) Disbursement functions and account

payables

Theft of cash



Q1(c)

Weaknesses Recommendations

1) Each purchasing staff submits a

daily report of purchases to the

plant supervisor.

Reports must be submitted to the

purchasing department.

2) As shipments are received, anyavailable plant employees count the

number of each type of chick and

feed received and places a check

mark besides this quantity on the

purchasing report.

Must have a proper authorizedperson to perform the duties

3) When all shipments listed on the

report have been received, the report

is returned to the purchasing staff.

The report must be forwarded to the




Weaknesses Recommendations

4) Vendors’ invoices, after a clerical

check, are send to the purchasing

staff for approval and returned to the


Vendors’ invoices must be send

directly and be approved by the

accounting department

5) The treasurer’s office sent the

signed checklists directly to the

purchasing staff for delivery to the

vendors.

The signed checklists must be

returned to the accounting

department.



Test of control for purchase

transactions

• Validity - to find out whether there are purchasesrecorded but not received

• Completeness- to find out whether there are anyincidences where purchases made but not recorded

• Valuation- to ensure that purchase transaction isrecorded at the correct amount

• Posting & summarization - to ensure correct posting topurchases journal or customer’s accounts in theAccounts Payables subsidiary ledger, and frompurchases journal to the general ledger

• Timeliness - to ensure that cash payments are notrecorded in the wrong period

topic 9 ziha audit of purchase and payment cycle + acc payables (1)

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