Purchases and

Payables cycle

Revenue & Receivables

Cycle
Objectives

At the end of this lecture series, you should

be able to:
• To understand the manner in which the
purchases and payables cycle functions;
• To identify risks in a purchases and
payables cycle; and
• To identify controls that will mitigate these
risks

2
Where Can I find this section in my textbook?

Chapter 11
11.1.1 Introduction
11.1.2 Objective of the section
11.1.3 Characteristics
11.1.4 Basic functions for any acquisitions and payments cycle
11.1.5 Documents used in the cycle
11.1.7 The role of the other components of internal control in the
acquisitions and payments cycle

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Agenda

• Introduction to the cycle

Introduction • Documents used in the cycle

Explanation of the • Overview of the cycle

cycle

Risks • Risks relating to the cycle

• Controls relevant to the cycle to prevent, detect

Controls and correct misstatements

4
Purchases and
Payables cycle –
Introduction to the
cycle
Revenue & Receivables
Cycle
Purpose of the purchases and payables cycle

Companies purchase a variety of goods and services. Such goods can include inventory and
capital assets. Purchases of services can include using a cleaning service company to perform
cleaning services.

The primary purpose of this cycle is to ensure that:

Purchases of goods and services are

recorded correctly;
The correct goods of the correct quality
The outflow of resources is paid to the
and price are acquired and that they are
appropriate service providers; and
received timeously
All related activities are accounted for
correctly.

6
 Activity

• Refer to the different

brands provided to you in class.
For the brands:
• Consider the industries operated in.
• Consider the goods and services
purchased.
• Different types of payment methods

7
What should have been identified?

Different
Different types Different
methods of
of items industries
payments
- Cash
- Inventory -Retail -Credit
- Capital assets -Manufacturing -Credit card
- Services - Construction - EFT

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8
 Cycle
Overview

Recording Payment
Payment
Ordering Receiving of and
Preparation
purchases recording

Note that the cycle may

differ, depending on the
factors noted in the initial
discussion.

9
 Should the

Documents used in the cycle documents listed

correspond?

Purchase
Which Requisition(internal)
documents •Used by any department within an
will apply to organisation when they require a
good or service.(mainly comes from
which part of the warehouse division)
the cycle? •This is sent to the purchasing
manager who will then source
quotes from suppliers.
•Once an appropriate supplier is
identified the purchase order is
prepared.

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Documents used in the cycle
Purchase Order form
• This is prepared by the purchasing
manager once the appropriate
supplier is selected.
• It should record the details of the
goods to be purchased and the
price of the goods.
• The detail on the purchase order is
agreed to the goods received note
when the goods or services are
received.

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Documents used in the cycle

12
Documents used in the cycle

13
Documents in the cycle
Supplier
Statement
• Received from
the supplier
indicating the
transactions
for the
period(mostly
monthly) and
the closing
balance.
• This includes
purchases,
payments and
items
returned.
14
Documents used in the cycle

Supplier Delivery
note(external
document)
-The document is
made out by the
supplier to

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Documents in the cycle
Credit note
• This is a supplier
document that
records any credits to
the purchasing
company’s account
other than a payment
(i.e. when incorrect,
damaged or
unwanted goods are
returned by the
purchasing
company).

16
Risks in the cycle

• The risks in the cycle are heavily dependent on the nature and type of the purchases made by the
organization.
• Some risks are indicated below but this is not a complete list. Through the completion of tutorials and other
questions, this list can be expanded.

Financial Reporting Risks Missappropriation Risks Stolen or damaged Inventory Incorrect cost allocations

Overstatement of
inventory/PPE if Inaccurate inventory or
Risk of fraud Theft of goods theft/damage is not
detected or detected but PPE valuation
ignored

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Control objectives
• Internal controls are the processes designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives (CIMA, 2008).
• Controls implemented by management help to reduce risk and provide comfort that transactions
which are recorded and processed are valid, accurate and complete.

• All transactions are approved and relate to the entity.

Valid

• All transactions that are recorded are correct.

Accurate

• All transactions that have occurred are recorded in the period in

which they occurred.
Complete

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Purchases and
Payables cycle-
Discussion of the cycle

Revenue & Receivables

Cycle
 • Cocoa Fashions (Pty) Ltd (‘Cocoa’) is medium sized
• What are the characteristics of
company that manufactures and sells clothing
the cycle:
products.
• Manufacturer
• Cocoa purchases various materials used in the • How are goods ordered
• Payments are made via EFT
Cycle production of clothing products from both domestic
and foreign suppliers.
• What are the implications?
Example • The production manager will prepare a requisition
based on sales demand for various products. This is
sent to the purchasing manager.

• The purchasing manager selects three quotes for

suppliers and selects the most cost-effective quote.

• The goods arrive at the warehouse and there is a

separate receiving area for the goods. A camera
monitors the loading of goods into the warehouse.

• Payments are made to all suppliers via EFT.

20
What controls can you identify from the above?

21
What controls can you identify from the above?

Internal Physical
policies Access

Access
rights
22
Purchases and
Payables cycle-
Ordering

Revenue & Receivables

Cycle
 Pu rcha se Pu rcha se requ isitions received from
requ isitions vari ou s departments for in ven tory,
capit al assets or services

Pu rcha se order
prep ared b y clerk.

Approved
sup plier l isting

Pu rcha sing
manager reviews
the order
Budgets/
prod uction
sch edules

Pu rcha se is Yes Send to relevant

valid sup plier.

No

Pu rcha sing
manager will Daily open
Ordering send the
requ isition
purchase order
rec on ciliation
back t o the prep ared.
res pective
department
requ iring
motivation as
to why th e
purchase is
requ ired. En d 24
• What documents
would be present in
the “Ordering” sub-
process?

Which document
initiates the
purchases and
payables process?

25
 1.Purchase 2.Purchase
What documents
requisition order
would be present in
the “Ordering” sub-
process?

3.Invoice

26
 What are the risks and controls that you can identify
from the flowchart?(The list is not exhaustive)
Risks Impact Controls

Ordering of incorrect or unnecessary goods. • This may result in an unnecessary outflow of important • Before order clerks place an order, it must be supported by an
resources which may lead to liquidity problems and wastage. authorised purchase order.
• The requisition should be based on an inventory
schedule/sales demand for the company’s products.

Unauthorised purchases being made. • This could result in losses to the company as a result of • The purchasing manager should review all purchase orders
fraudulent payments being made to fictitious suppliers. before being processed by the purchasing clerks.

Risk that purchases are made of inferior goods and/or • This could result in goods being purchased that are inferior • The company should have an approved supplier listing.
are priced too high. resulting in inferior products being produced by Cocoa. This • Quotes should be obtained from a few suppliers before an
could result in inferior products being produced leading to a order placed.
loss of customer goodwill.
• The prices paid for goods may be too high resulting in an
unnecessary outflow of resources.

Orders placed are not fulfilled or acted upon timeously. • This may result in Cocoa running out of production and not • Purchase orders should be sequentially numbered and any
meeting customers' requirements leading to a loss of missing or duplicate numbers should be followed up on to
revenues. ensure that the order is executed.
• Purchases orders should be marked as completed once they
are acted upon. A reconciliation of open purchase orders
should be performed to ensure that all orders are executed.

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Purchases and
Payables cycle-
Receiving

Revenue & Receivables

Cycle
 Goods arrive in the
warehouse receiving
area

Agreed purchase
order to supplier
delivery note

Warehouse
manager will
prepare a goods
Complete and Yes received note
quality correct (GRN). Sequentially A copy of the GRN is sent to the
and prenumbererd. accounting department

No

Send missing
or damaged
items back to
purchasing
Receiving manager who
will follow up
on
discrepancies
and re-order
the goods.

29
What documents
would be present in
the “Receiving” sub-
process?

30
What documents would be present in the “Items
are picked” sub-process?

Supplier Goods
delivery received
note note
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What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls

Goods could be stolen by employees or outside • This could result in an unnecessary outflow of • A separate receiving area should be
third parties. resources as inventory purchased is not sold established in the warehouse.
and the cost not recovered. • The area should be controlled by a security
gate and guard not allowing access to the
area unless they are an approved supplier
or the warehouse staff.

Risk deliveries are accepted that are not full • This could result in incorrect quantities being • Upon receipt of the goods the warehouse staff
deliveries, goods are damaged, or the goods are received leading to Cocoa running out of should agree the quantities and details of
not of the required quality. production and not fulfilling customer's needs. goods received to the quantities and details
• Damaged goods being received could slow per the purchase order.
production down as goods would need to be re- • Once counted, the goods received note should
ordered. This slowdown could lead to a loss of be prepared specifying the quantity of goods
customer goodwill as their demands are not met received.
timeously. • Any differences will be communicated to the
• Inferior quality goods could result in inferior purchasing manager who will reorder the
products being produced leading to a loss of necessary quantities.
customer goodwill. • The goods quality should be inspected as
well to ensure goods are not damaged and are
the appropriate quality.

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Purchases and
Payables cycle-
Recording of purchases

Revenue & Receivables

Cycle
 Journal entry is processed
Purchase order
agreeing the information on
these three documents.
Recording of
purchases
Goods received
note

Dr .Inventory/Capital assets/
All information Yes expenses
Supplier invoice agrees Cr. Accounts Payable/
Accruals

No

Creditors clerk
will
Reconciliation of
understand
daily invoices not
reasons for
processed in a
differences
journal
and then
follow the
process again.

End

34
What documents
would be present in
the “Recording of
purchases” sub-
process?

35
What documents
would be present in
the “Recording of
Supplier
purchases” sub-
process? Invoice

36
 What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls
Risk that not all invoices are recorded. This will result in purchases being • Once the invoice is ready for processing
understated if invoices are not recorded. an automatic journal is processed to
record the purchase.
• A report is generated daily of invoices
that are ready to be processed but the
journal has not been passed.

Risk that the incorrect amounts are • This will result in purchases being • A journal is automatically processed
processed. incorrectly stated if invoices are not based on the initial purchase order that
recorded correctly. was generated.
• It will also lead to the creditor's balance • For each journal processed the system
being incorrect for credit customers. should compare the details on the
• If creditors balances are misstated this purchase order to the goods received
could lead to a loss of supplier goodwill note and the invoice to ensure that
or overpayment to creditors amounts are recorded correctly.(3-way
(unnecessary outflow of resources). match)

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Purchases and
Payables cycle-
Payment preparation

Revenue & Receivables

Cycle
 Supplier Statement Pa yments are supported with
Reconciliation these documents before being
processed.

Payment Invoi ces, GRN s

preparation Purcha se Orders
and supplier
statements Financial Manager
will load the Supplier
relevant Masterfile –
informa tion to banking details.
process and EFT.

CFO reviews all

Note: Masterfiles are covered documentation and
releases the
in 3rd year, and you will not be payment
examined on them this year.

Documents ma rked
as paid

Pa yment made to
sup pliers

39
What documents
would be present in
the “Payment
preparation” sub-
process?

40
What documents
would be present in
the “Payment
Payment
preparation” sub-
process? requisition

41
What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls
Risk that the payments are made to • It will lead to an unnecessary outflow • Controls over the EFT process
fictitious suppliers or unauthorised of resources. would include that all payments
individual bank accounts. are supported by documentation
and a supplier statement
reconciliation.
• Controls over EFT’s would include
a two-level authorisation. The
financial manager could input
the details and the CFO would
then release payment to ensure
that there is segregation of
duties.
• Once documentation is presented
for payment it should be marked
“paid”.

42
Purchases and
Payables cycle-
Recording of payments
made to suppliers
Revenue & Receivables
Cycle
Recording of
payments Invoices, GRN s,
made to purchase orders,
supplier
suppliers statements and
supplier statement
reconciliations

Creditors clerk to prepare

journals for payment.

EFT proof of
payment Supplier statement
reconciliation for the
Match payment following month is
to creditors age updated for this
analysis payment.

44
What documents
would be present in
the “Recording of
payment” sub-
process?

45
 No actual document
What documents
would be present in
– but supplier
the “Recording of
payment” sub-
payment results in
process? the journal being
recorded.

46
What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls

Risk that customers payments are not • If payments are not correctly • When suppliers complete an
correctly allocated or at the incorrect allocated to supplier accounts, this EFT, there is an automatic
amounts. could result in under or over process to match payments to
payment of the creditor. the supplier account.
• Over payment results in an • A supplier's statement
unnecessary outflow of resources. reconciliation should be
• Under payment would lead to a loss prepared on a monthly basis and
of supplier goodwill. reviewed by the financial
manager. This will ensure that
creditors are paid the correct
amount on a monthly basis and
that their balances are reflected
at the correct amount in the
accounting records.

47
Purchases and
Payables cycle-Internal
controls in a cash
payments system
Revenue & Receivables
Cycle
 Supplier payments
are processed Requisition
should be
sequentially
numbered.

Reconcile
Cheque payments, requsistions to Process cash
Cash withdrawn to the cheque bank statement to payment against
pay creditor. resiustion should ensure the cheque the creditors
be completed. has been cashed balance.
Cash bby supplier.

payments Cash withdrawal

Individual who
withdrew the cash
slip
should bring it back
to the premises.

End

Another will count

the cash on hand
and agree it to the
withdrawal slip.

Creditors clerk will

Creditor will collect receive the cash
the cash. collection slip and
capture the
payment in the
accounting records.
The cash should be counted in
an access controlled room with
camera s and only two
individuals should be allowed in
the room.
Upon collection, the creditor will count the
cash along with the treasury manager and Cash Collection slip
a cash collection slip will be completed
detailing the amount of cash collected. 49
What documents
would be present in
the “Cash payments”
sub-process?

50
 Invoice
What documents
would be present in
the “Cash payments”
sub-process?
Cash
withdrawal
slip
51
What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls
Payments made may not be banked Cash/cheques may be misplaced • All cheques made out to suppliers should be recorded on
by suppliers or other service resulting in losses and decrease in the cheque books cheque requisition.
providers due to theft or cash flows (liquidity) and profitability. • The requisitions should be sequentially numbered to
carelessness. identify any missing or duplicate payments.
• The requisitions should be reconciled to the bank
statement on a monthly basis to ensure the cheque was
cashed by the supplier.
• The respective clerk should follow up with suppliers in
instances where the cheque was not cashed.
• The clerk will then process the payment in the
accounting records.
• When the supplier is paid in cash, the invoice for
payment along with the cash withdrawal slip should
be inspected before cash is given.
• A cash transfer slip should be prepared detailing the
amount of cash given to the supplier.
• The treasury manager and supplier should count the
cash to ensure it is the correct amount before the
supplier leaves the premises.
• The creditors clerk will then record all payments made in
cash in the financial records.

52
 What are the risks and controls that you can identify
from the flowchart? (The list is not exhaustive)
Risks Impact Controls
Cash may be stolen when Cash may be stolen or misplaced resulting • The individual responsible for withdrawing the cash should
withdrawn. in losses and decrease in cash flows present the withdrawal slip and another member of staff should
(liquidity) and profitability. agree the amount withdrawn to the slip.
• Whenever cash is transferred from the custody of one
person to another, it should be counted, reconciled,
documented and signed for by both parties in a safe
location.
• Two individuals should then count the cash, total the credit card
slips and cheques and reconcile them to the independent record
which, in this case will be the locked-in till roll that will be
accessible only to the manager.
• If possible a security guard should accompany the staff when
withdrawing the cash.

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