6/17/2023

CHAPTER 7:
PURCHASES SYSTEM
Instructor: Assoc.Prof. Doan Thanh Nga, CPA (Australia)

CHAPTER 7 LEARNING OBJECTIVES

- Describe the business functions in purchases system

- Understand risks and control objectives; controls and apply test of
control in each stage:
+ ordering
+ goods inward and recording of invoices
+ payment
- Identify the deficiencies of purchses system.

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BUSINESS FUNCTIONS IN PURCHASES SYSTEM

There are three main stages in purchases system
1. Ordering
2. Goods inward and recording of invoices
3. Payment

PURCHASES SYSTEM

1. ORDERING Identify Risks

Management
2. GOODS INWARD AND
RECORDING OF INVOICES Controls

3. PAYMENT

Tests of Controls Auditors

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Purchases System

Purchases System - documents

Goods inwards and Cash

Ordering
recording of invoices payments

- Purchase Goods inwards: - Cheque

requisitions - Goods received records - Bank transfer
- Purchase Orders Recording invoices: - Remittance advice
- Invoices (from supplier) - Supplier statements
- Nominal ledger accounts (from supplier)
Return of goods: - Bank reconciliation
- Purchase return notes
- Credit notes (from
supplier)

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1. ORDERING

• Organisations must monitor purchases carefully in order to maintain the

required amount of inventory for the business needs (manufacture, retail,
wholesale etc) but equally, it needs to ensure that the best price is achieved.
Often buying items in bulk can result in higher discounts than when a lower
quantity is ordered, however, this may have an adverse effect on the cash flow.

• There is also the risk that a member of staff purchases items for their own
private use using business funds.

1. ORDERING (cont.)
Risks Controls Tests of controls
• Review a sample of orders for evidence
• Orders should only be raised on that the purchase requisition was
receipt of an authorized purchase authorized and the goods are for
requisition which is approved by business use.
the department manager.
• Check a sample of purchases to
Unauthorised • Authorisation limits for purchases authorisation limits
purchases may • Pre-numbered purchase forms • Check sequence of pre-numbered order
be made for
• Authorisation of order forms forms
personal use
• Review of outstanding orders • Check a sample of order forms are
supported by requisitions
• Order forms only prepared when
pre-numbered requisitions have • Ensure order form number sequence is
been received complete

• Safeguarding of blank order forms • Check that blank order forms are stored
securely
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1. ORDERING (cont.)

Risks Controls Tests of controls

• Orders should only be placed with

Goods and a supplier which is on the entity’s
services might list of preferred suppliers which • For a sample of orders, vouch that the
not be obtained have been approved in terms of suppliers used are on the preferred
on the most cost and quality. supplier listing.
advantageous
terms • For non-standard items, separate
quotations may be required

2. GOODS INWARD (RECEIVED) AND RECORDING OF INVOICES

• Businesses must monitor the goods that are received and check that they
are what has been ordered by the organisation.
• All incoming orders must be checked and verified for quantity, quality
and that it agrees to the original order placed.
• In order to prevent delays to the manufacturing process or in despatching
goods on to customers, any open purchase orders should be reviewed.
• Note that the term 'goods received record’ or GRR could be used
instead of 'goods received note' or GRN but the terms both have the
same meaning.

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2. GOODS RECEIVED AND RECORDING OF INVOICES (Cont.)

Risks Controls Tests of controls

• On receipt of goods the warehouse • Observe the receipt of goods into the
should raise a multi-part, warehouse to ensure all goods are
That goods sequentially numbered goods recorded and a GRN generated.
ordered are not received note (GRN). One part of
received, the GRN should be passed to the • Verify that the GRN is matched to the
purchasing department to be order form by the purchasing
potentially
matched to the order form. department.
leading to stock
outs • Unmatched orders should be • Enquire as to the action taken where
reviewed on a periodic basis and orders are unfulfilled and reperform
suppliers chased this process.

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2. GOODS RECEIVED AND RECORDING OF INVOICES (Cont.)

Risks Controls Tests of controls

Goods are • Recording arrival and acceptance • Check outstanding POs are being
misappropriated of goods reviewed
for private use
• Review outstanding purchase • Agree a sample of invoices to POs and
orders (POs) GRNs

Goods accepted
• Check a sample of GRNs to their
may not have • Comparison of GRN to POs
matched POs
been ordered

Goods accepted
• Examination of goods inwards for • Observe the receipt of goods by staff to
may be damaged
quantity and condition confirm the control is carried out.
or incorrect

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2. GOODS RECEIVED AND RECORDING OF INVOICES (Cont.)

Risks Controls Tests of controls
• For a sample of GRNs trace
through to corresponding invoice
and verify that the invoice has been
• Another part of the GRN should be
recorded in the accounting records.
passed to the accounts department
Invoices may not be • Where no invoice has been received
• Prompt recording of purchases and
recorded, resulting verify that the relevant accrual has
purchase returns
in nonpayment been recorded
• Match invoices to GRNs; review
• Obtain explanations for any old
unmatched GRNs
items, ie unmatched POs,
unmatched GRNs, unrecorded
invoices
• Upon receipt of a supplier invoice, it
That a liability is • For a sample of invoices recorded,
should be matched to the sequentially
recognised for vouch the details back to the GRN
numbered GRN and order form. The
goods which have and order form to verify that the
invoice should be allocated the same
not been received goods were received 13
sequential number.
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2. GOODS RECEIVED AND RECORDING OF INVOICES (Cont.)

Risks Controls Tests of controls

The company may not take

• Review list of suppliers and
advantage of the full period • Monitoring of supplier terms
check a sample to orders made
of credit extended

• Regular maintenance of the

The company may not record payables ledger • Check the completion of supplier
credit notes, resulting in
• Supplier statement statement reconciliations
paying invoices not due
reconciliations

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3. PAYMENT

• All payments need to be verified for accuracy, and to confirm

that the business is paying valid purchase invoices.
• Invoices should be checked back to the original orders (to
verify order prices and confirm that the payment relates to a
genuine business order) and to the goods received by the
entity.
• Any shortfalls in items received must be reflected in the
invoice.

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3. PAYMENT (Cont.)

Risks Controls Tests of controls

• Supporting documentation required • Check supporting documentation to verify
for all invoices prior to payment that the documents have been reviewed and
passed for payment
• Compare paid cheques with supplier records

False • Approval limits for payments • Check that a sample of cheques are signed
invoices are within authorised limits
paid in error • Cheque signing/BACS payment run • Check that BACS payments are processed
limits by approved individuals
• No signing of blank cheques • Confirm that no one, other than authorised
• Password system for BACS individuals, can make BACS payments
payment systems • Ensure that cash advances are authorised by
• Restrictions on cash advances the appropriate individual

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3. PAYMENT (Cont.)

Risks Controls Tests of controls

• All invoices should be authorised
for payment and coded to the
relevant supplier by the appropriate
• Inspect a sample of invoices for
That budget holder. Authorisation/coding
authorisation and appropriate coding.
payments are should be evidenced by a signature.
made to the • • Review a sample of supplier reconciliations
Statements received from suppliers
wrong to ensure that they have been completed
should be reconciled to the relevant
supplier accurately and any resultant changes
purchase ledger account on a
authorised
monthly basis. Any subsequent
changes to the accounting records
must be authorised.

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3. PAYMENT (Cont.)

Risks Controls Tests of controls

• Prior to being paid all invoices
That an should be agreed to the GRN and
invoice is order form and calculations such as
paid twice/ is unit price, sales tax, quantities and • Inspect a sample of invoices for evidence
discounts agreed to the appropriate that calculations have been reperformed and
for the
records. the invoice stamped as ‘paid’.
wrong
amount • Once paid the invoice should be
stamped ‘paid’.

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3. PAYMENT (Cont.)

Risks Controls Tests of controls

• Prompt payment of invoices

Invoices are • Check a sample of payments back to
paid too late • System controls to remind of invoices to confirm payment terms
payment dates
• Check that reconciliations have been carried
Payment is • Bank reconciliations out at regular intervals in the year
not correctly
• Supplier statement reconciliations • Review the reconciliation for unusual entries
recorded
• Reperform reconciliation
• Check that reconciliations have been carried
Credits are • Bank reconciliations out at regular intervals in the year
not correctly
• Supplier statement reconciliations • Review the reconciliation for unusual entries
recorded
• Reperform reconciliation

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3. PAYMENT (Cont.)

Risks Controls Tests of controls

• Check that reconciliations have been carried
Payments are
out at regular intervals in the year
not recorded • Bank reconciliations
in the correct • Supplier statement reconciliations • Review the reconciliation for unusual entries
period
• Reperform reconciliation
• Check that reconciliations have been carried
Payments are out at regular intervals in the year
not recorded • Supplier statement reconciliations
• Review the reconciliation for unusual entries
at all
• Reperform reconciliation

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4. DEFICIENCIES

it is important to be able to identify the deficiencies of systems.

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Summary
Chapter 7. Purchases System

Goods inwards and recording of

Ordering Cash payments
invoices

Risks: Risks: Risks:

• Goods for personal • Goods may be misappropriated • Payments made
use • Invoices may be mislaid leading to non- inappropriately
• Goods not on most payment • Blank cheques (and
advantageous terms • Invoices are paid at wrong time/amount therefore cash) stolen
• Payments/credits not recorded
• Record in wrong period

• Risks
• Control objectives Deficiencies
• Controls
• Tests of controls
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