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Lesson#25
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TESTING THE PURCHASES SYSTEM
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TESTING THE PURCHASES SYSTEM
Control Objectives
Purchases are often made on credit and so the purchases cycle
includes payables. You also need to bear in
mind that 'purchases' has a wide meaning in terms of the
purchases cycle as purchases will include not only
inventory items but also all types of expense and the purchase
of non current assets.
The control objectives are as follows. To ensure that:
e) Purchased goods/services are ordered under proper authority
and using proper procedures
f) Purchased goods/services are only ordered as necessary for
the proper conduct of the business
operations and are ordered from suitable, approved suppliers
g) Goods/services received are inspected for quality, quantity
and description
h) Invoices and related documentation are properly checked and
approved as being valid before
being entered as trade creditors
i) All valid transactions relating to payables (suppliers'
invoices, credit notes and adjustments), and
only those transactions, should be accurately recorded in the
accounting records.
Control Procedures over Purchases and Payables
As with the sales system, there are a large number of controls
that may be required in the purchases cycle
due to the importance of this area in any business and once
again, the following list is classified by type of
control.
(a) Orders
(i) Requisition notes for purchases should be authorized.
(ii) All orders should be authorized by a responsible official
whose authority limits should
be pre-defined.
(iii) Major items e.g. capital expenditure, should be authorized
at an appropriate level,
possibly by the Board of Directors
(iv) All orders should be recorded on official documents showing
suppliers' names,
quantities ordered and price.
(v) Copies of orders should be retained as a method of following
up late deliveries by
suppliers.
(vi) Re-order levels and quantities should be pre-set and
preferably recorded in advance on
the requisition note.
(b) Receipt of goods
(i) Goods inwards areas should be identified to deal with the
receipt of all goods.
(ii) All goods should be checked for quantity, quality and
description. Goods received
notes should be raised for all goods accepted. The GRN should be
signed by a
responsible official.
(iii) GRNs should be checked against purchase orders and
procedures should exist to
notify the supplier of under or over-deliveries. GRNs should be
sequentially
numbered and checked periodically for completeness.
(c) Invoicing and returns
(i) Purchase invoices received should be stamped with an
approval grid and given a
unique serial number to ensure purchase invoices do not go
astray.
(ii) Purchase invoices should be matched with goods received
notes and company orders
and should not be processed until this is done.
(iii) The invoice should be checked against the order and the
GRN, and casts and
extensions should also be checked.
(iv) The invoices should be signed as approved for payment by a
responsible official
independent of the ordering and receipt of goods functions.
(v) Invoice sequential numbers should be checked against
purchase day book details.
(vi) Input VAT should be recorded separately from the expense
element of the invoice
total.
page
92
(vii) Invoices should be properly allocated to the nominal
ledger accounts, perhaps by
allocating expenditure codes. A portion of such coding should be
checked
independently.
(viii) Batch controls should be maintained over the posting of
invoices to the purchases day
book, nominal ledger and purchase ledger.
(ix) A record of goods returned should be kept and checked to
the credit notes received
from suppliers.
(d) Purchase ledger and suppliers
(i) A payables ledger control account should be maintained and
regularly checked
against balances in the purchase ledger by an independent
official.
(ii) Payables ledger records should be kept by persons
independent of the receiving of
goods, invoice authorization and payment routines.
(iii) Statements from suppliers should be checked against the
ledger account.
TESTS OF CONTROL
As already noted, tests of control should be drawn up so as to
check that control procedures are being
applied and to achieve control objectives. One suggested way to
design tests of control for a particular
situation is to list the documents in a transaction cycle and
generate appropriate tests of control for each
document. We shall illustrate this approach here in connection
with the purchases cycle (Note that a similar
technique could be applied to other transaction cycles!) |
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