Payments and Payables Cycles

Question 1

ISA 500 describes what?

Answer 1

Audit Evidence including Audit Procedures

Question 2

ISA 520 describes what?

Answer 2

Analytical procedures

Question 3

What are the main components to an audit procedure?

Answer 3

1. Inspect
2. Observe
3. External Confirmation
4. Recalculation
5. Reperformance

Question 4

Define the basic functions of a payments and payables cycle:

Answer 4

1. Ordering of goods
2. Receiving of goods
3. Recording of purchases
4. Payment preparation
5. Actual payment and recording of payment

No two functions should be done by the same staff member - if so - they need to implement segregation of duties.

Question 5

Documents used in the purchases and payables cycle:

Answer 5

1. Requisition
2. Purchase order forms
3. Supplier’s delivery note
4. Goods received note
5. Purchase invoice
6. Credit note
7. Creditors statement
8. Remittance advice
9. Receipt
10. Logs, variance reports, etc.

Question 6

Define the purpose of a requisition form.

Answer 6

This document is used to convey to the buying department that goods are required.

This usually comes from the warehouse department.

Requires the use of production schedules that indicate when particular inventory items are required or by request by a specific department.

Question 7

Define the purpose of a purchase order form.

Answer 7

Purchase order forms completed by the buying department record the detail and price of the goods to be purchased and are addressed to the supplier.

Should be signed by the chief buyer

Question 9

Define goods received note.

Answer 9

This document is completed by the purchasing company when the goods are delivered by the supplier.

It records the actual goods received and will be cross referenced with the supplier’s delivery note.

Question 10

Define Purchase Invoice.

Answer 10

This document is sent by the supplier to the purchasing company to inform them of the goods for which it is being charged, the price, any discounts and VAT.

Question 11

Define credit note:

Answer 11

This is a supplier document that records any credits to the purchasing company’s account other than a payment.

Returned goods should be accompanied by a returned goods voucher.

Question 12

Define creditors statement.

Answer 12

Produced by the supplier on a monthly basis, the document summarises the transactions between the supplier and purchasing company for the month, in terms of the supplier’s records.

Question 13

Define Remittance advice:

Answer 13

A document sent by the purchasing company to the supplier that contains a breakdown of the invoices that are being paid by the accompanying bank transfer.

Question 14

Define receipt.

Answer 14

A document provided by the supplier to acknowledge that a payment of so much has been received.

Question 15

State the following in regards to the function of initiating an order:
Documents Recorded
Risks
Manual Control
Control Objective
Assertion

Answer 15

Documents Recorded:
- Requisition
- Purchase Order Form

Risks:
- Requisition not acted upon, or orders not placed in a timeously manner.
- Incorrect items are requisitioned.

Manual Control
- Pre-set reorder levels and reorder quantities are used as the basis of the requisition.
- Each requisition should be signed by the inventory or production personnel.

Control Objective:
- Operational Control to make sure that the demand for goods are recognised timeously.
- Operational control to ensure that only the goods which are needed by the entity are requisitioned.

Assertion:
- Not applicable as this is an operational control.

Question 16

State the following in regards to the function of Purchase order is created and sent to the supplier:
Documents Recorded
Risks
Manual Control
Control Objective
Assertion

Answer 16

Documents Recorded:
- Requisition
- Purchase Order Form

Risks:
- Ordering of incorrect goods, resulting in liquidity problems and wastage.
- Orders placed with supplier are not filled in timeously.

Manual Control
- Before the order is placed a supervisor should:
Check the order to the requisition for accuracy and authority. The supervisor should sign the form as proof of the checks.

Control Objective:
- Only an accurate purchase order is sent out to the supplier.
- All purchase orders sent out to the suppliers lead to a delivery of ordered inventory.
No transactions has taken place yet, no inventory has been delivered by the supplier yet.

Assertion:
- Not applicable as this is an operational control.

Question 17

State the following in regards to the function of Accept and acknowledge deliveries of valid orders from suppliers and to record the delivery:
Documents Recorded
Risks
Manual Control
Control Objective
Assertion

Answer 17

Documents Recorded:
- Supplier delivery note
- Goods received note

Risks:
- Acceptance of items not ordered.

Manual Control
- On arrival of delivery vehicle, goods should be offloaded in the presence of a receiving clerk who should:
Check the quantity and description of goods delivered against the purchase order and the customer delivery note and reject any incorrect deliveries and clearly identify them on both documents.

Control Objective:
- All items received has been ordered in terms of the approved purchase order (validity)

Assertion:
- Occurrence of expenditure

Question 18

State the following in regards to the function of Invoice is received from a supplier, purchase is recorded:
Documents Recorded
Risks
Manual Control
Control Objective
Assertion

Answer 18

Documents Recorded:
- Purchase invoice
- Credit note
- Purchase journal
- Allowances journal
- Creditors ledger
- General ledger

Risks:
- The recording of incorrect amounts arising from incorrect purchase invoices.
- Calculation errors
- The raising of fictitious purchases/creditors by the introduction of invoices that are for goods which were never ordered.

Manual Control
-Purchase invoice should match with the corresponding goods received note and delivery note.
- All casts, extensions and calculations on the invoice should be re-performed.

Control Objective:
- All the purchases are based on the correct quantities and prices which agree with the supplier.
- All the purchases recorded pertain to actual orders and purchase transactions which took place.

Assertion:
- Accuracy of expenditure
- Accuracy, valuation and allocation of accounts payable
- Occurrence of expenditure
- Existence and obligation of accounts payable

Question 19

Define the creditor’s masterfile.

Answer 19

It is central to a Purchases and Payables Cycle. It contains all information relating to the creditors of the entity.

Question 20

Describe the controls used when recording the masterfile amendments on a source document.

Answer 20

• ALL amendments to be recorded on hard copy masterfile amendment forms MAFs (no verbal instructions).
• MAFs need to be pre-printed, sequenced and designed in terms of sound document design principles.

Question 21

Describe the controls used to authorise MAFs.

Answer 21

The MAFs should be:
- signed by two reasonably senior creditors or accounting personnel.
- must be cross-referenced with the supporting documentation.

Question 22

Describe the controls used to enter only authorised masterfile amendments onto the system accurately and completely.

Answer 22

1. Restrict write-only access to the creditors masterfile to a specific member of the section by the use of a user ID and passwords.
2. All masterfile amendments should be automatically logged by the computer on sequenced logs and there should be NO write access to the logs.
3. Use screen aids to help eliminate human error and to complete the amendment form.

Question 23

Which controls are needed to review the masterfile amendments to ensure they occurred, were authorised and were accurately and completely processed?

Answer 23

1. Logs should be reviewed regularly by senior staff (financial manager).
2. The sequence of the logs themselves should be checked (for any missing logs).
3. Each logged amendment should be checked to confirm that it is supported by a properly authorised MAF.
4. The MAFs themselves should be sequence checked against the log to confirm that all the MAFs were entered.

Question 24

Substantive procedures to do with Purchases:

Answer 24

1. Occurrence
   - Inspect the supporting documentation
   - Inspect the Cash Payments records
2. Accuracy
   - Confirm the mathematical accuracy of the invoice by recalculating all extensions, casts and discounts.
   _ Inspect the invoices to confirm the trade discounts and VAT amounts.
   - By inspection confirm the VAT number of the supplier as well as their name.
3. Cut-off
   - Inspect the date on the suppliers delivery note, goods received note and invoice to confirm that the goods were received during the accounting period under audit.
4. Classification
   - Inspect the purchase order to determine the classification account to which the purchase should be allocated to and trace the posting from the journal to the designated account.
   - Establish a description of the goods purchased to confirm that the classification is appropriate.
5. Completeness
   - The auditor will have to test from a document recording the receipt of the item purchased to the recording of the purchase in the records. The auditor may choose a random sample of GRN from the sequenced GRNs and trace them through the corresponding invoices.

Question 25

Substantive procedures to do with payments:

Answer 25

**Occurrence** - Obtain the invoice supporting the payment - Inspect the invoice to confirm that: it is made out to the correct supplier and that the supplier is on the approved suppliers list. - Inspect the authority for the payment. **Accuracy** - Reperform the casts and calculations on the invoice. - Agree the amount of the invoice to the amount in the cash payments journal. **Cut-off** - Inspect the dates on the payment, the invoice and supporting documentation to confirm the fall within the the period under audit. **Classification** - Trace the payments to the general ledger and creditors ledger to confirm that the posting has been made to the creditors control account and to the correct creditor in the creditors ledgers. - Where the purchase has not gone through the purchases journal, confirm by inspection of the description on the invoice or payment requisition, that the amount has been allocated and posted with the correct account in the general ledger. **Completeness** - When a payment is made but has not yet been recorded this should be revealed through inspection or reperformance of the bank reconciliation statement. - Test of detail can also be run on a sample of payments

Question 26

Assertion: Obligation in the trade and other payables account

Answer 26

The trade and other payables represent obligations pertaining to the company. - Evidence is obtained through inspection of the supporting documentation, statements and invoices to confirm they are: 1. made out in the name of the company 2. in respect of the purchase of goods that are used by the company. Inspection will take place when creditor's reconciliation are audited at year end valuation procedure and when any test of transactions are conducted.

Question 27

Assertion: EXISTENCE in the trade and other payables account

Answer 27

Trade payables included in the balance actually exist, they are not fictitious. - This is usually a *low risk* assertion as companies do not usually wish to overstate their liabilities.

Question 28

Assertion: ACCURACY, VALUATION AND ALLOCATION in the trade and other payables account.

Answer 28

Trade payables are included in the financial statements at *appropriate* amounts and related disclosures have been appropriately measured and described. - Agree the list of individual creditor balances to the balance on the creditors control account. - Agree a sample of individual creditor's balances on the list to the individual creditor accounts in the creditors ledger. - Agree the total of the accrual and creditors control accounts in the general ledger to the trial balance. - Re-perform casts of the creditors control account and the creditors list.

Question 29

What information is to be included in the documentation in accordance with SAAPS 4?

Answer 29

1. Name of the entity 2. Management’s description of the matter 3. Management’s assessment of the possible outcomes of each litigation matter. 4. Management’s estimate of the financial implications. 5. External legal practitioner confirmation of the reasonableness of management’s conclusion. 5. If the information is deemed to be incorrect that the external legal practitioner provide further information.

Question 30

Which ISA handles litigations?

Answer 30

ISA 501

Question 31

When discussing the substantive procedures relating to litigations and claims, mention the following:

Answer 31

1. Inspection of all the documentation 2. SAAPS 4 schedule and all its underlying principles 3. If it is unlikely that a present obligation existed - mention accuracy of the contingent liability 4. If it is likely that a present obligation existed - mention the inspection of the correspondence between the two parties, inspecting the financial statement to see that the amount was included as a provision and relevant disclosures were recorded correctly in accordance with IAS 37.

Question 32

Assertion is _______ Agree the opening balance from the schedules of the prior year financial statements to ensure the schedules are complete and accurate

Answer 32

Completeness Valuation

Question 33

Assertion is ________ Inspect the schedules for unusual items such as debit balances to ensure the schedules are accurate.

Answer 33

Valuation Classification

Question 34

Assertion is _______ Obtain a detailed local and foreign creditors age analysis for the current year and using CAATs compare the balance for creditors to the prior year as this will identify any significant movements in creditors which could be an indication of the creditors being incomplete.

Answer 34

Completeness

Question 35

Assertion is _______ Agree the balances to the creditors age analysis and the suppliers statements to ensure the reconciliations are complete.

Answer 35

Completeness

Question 36

Assertion is _______ Inspect the address on the supplier statement and perform. Background check to ensure that the address and company exist.

Answer 36

Existence

Question 37

Assertion is _______ Where a reconciling item arise, the auditor needs to compare the supporting documentation such a contracts and bank statements.

Answer 37

Valuation Completeness

Question 38

SAAPS4 includes the following:

Answer 38

*Letter of Enquiry* for ISA 501 - Name of the entity - Managements description of the matter - Management’s assessment of possible outcomes of each identified litigation. - Management’s Estimate of the financial implications. - External legal practitioner’s confirmation of the reasonableness of management’s assessment. - External legal practitioner confirms if the information in the schedule is correct or incorrect and to provide further information. This forms part of the substantive procedures over a legal claim.

Question 39

When do most substantive procedures take place?

Answer 39

On or after year-end.

Question 40

What are roll-forward tests?

Answer 40

Roll-forward testing in auditing involves confirming that controls tested earlier in the year remain effective throughout the period, particularly near the end of the financial year. It addresses the gap between interim testing and the final audit by performing additional tests, often using a smaller sample size than interim testing, to provide assurance about the ongoing effectiveness of controls.

Question 41

Substantive procedures over management’s expert:

Answer 41

1. Inspect the CV to confirm competencies, capabilities and objectivity . 2. Discuss with management in the expert has any interests or relations which could pose a threat. 3. Obtain an understanding of the work which the expert should be doing. 4. Obtain the calculations and assess whether they adhere to IFRS ___ . 5. Recalculate the workings of management’s expert. 6. Inspect the independence confirmation from the expert to confirm that there are no relations or interests which could affect their objectivity.