AUDITING AND ASSURANCE SERVICES IN MALAYSIA

AUDIT OF PURCHASE AND PAYMENT CYCLE

NUR NAZIHAH BT AZIZI NUR FARIHAH BT IBERAHIM NUR HAKIMAH AQILAH BT PAKHORUDIN NUR AZRA FAKHIRA BT ABDUL RAZAK NURUL ATIKAH BT MHD NOOR IZZATUL HATASYA BT IZHAM 2010660652 2010842246 2010292232 2010869038 2010845212 2010227722

AUDIT OF PURCHASE AND PAYMENT CYCLE

OVERVIEW OF PURCHASE AND PAYMENT CYCLE

SUBSTANTIVE TESTS FOR ACCOUNTS PAYABLE

CLASSES OF TRANSACTION, BUSINESS FUNCTIONS AND DOCUMENTS

MAJOR INTERNAL CONTROL & RELATED AUDIT PROCEDURES

FINANCIAL REPORT ASSERTIONS

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STEP IN PURCHASE AND PAYMENT CYCLE

Recognition of needs

Maintain records

Specify needs
Determine sourcing options

Approval & payments

Receive &

inspects
Expediting
Deliver purchase order

Establish price & terms

Prepare purchase order

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 presented in accordance with generally accepted accounting principles

Classes Of Transactions
1. Acquisition / Purchase of goods & services 2. Cash disbursements 3. Purchase returns and allowances and purchase discounts

CLASSES OF TRANSACTIONS 1. Acquisition /Purchase

ACCOUNTS Inventory Property, Plant & Equipment Prepaid Expenses Leasehold Improvements Accounts Payable Manufacturing Expenses Selling Expenses Administrative Expenses 1. 2. 3.

BUSINESS FUNCTIONS Processing purchase order Receiving goods & services Recognizing the liability

DOCUMENTS & RECORDS Purchase requisition Purchase order Receiving report

Acquisition transaction file Acquisitions journal or listing Vendors invoice Debit memo Voucher Accounts payable master file Accounts payable trial balance Vendors statement
Cheque Cash disbursements transaction file Cash disbursements 6 journal or listing

2. Cash disbursements/ Payment

Cash in bank Accounts Payable Purchase Discount

4. Processing & recording cash disbursements

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

1. Authorization Of Purchases
Purpose: To ensure that the goods & services purchase are for authorized company purposes To avoid the purchase of excessive or unnecessary items E.g. Established approval authority i.e. purchase of capital assets above RM1 million may require approval from BOD
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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 when goods are ordered

2. Separation Of Asset Custody From Other Functions

Separate the receiving department, storeroom unit and accounting function To prevent theft or misuse of goods

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3. Timely Recording
Method of recording: Upon the receipt of the goods & services OR Upon the vendors invoice is received Proper recording involves verifying goods received against relevant documents i.e. details on the purchase order, the receiving report & vendors invoice, to determine all information are correct
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4. Independent Review Of Transaction

Independent party check on information recorded in the system is required to ensure proper procedure of record keeping

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5.Authorization Of Payment
Establish List of Approval authority Different ranking of personnel responsible to approve different amount of payment E.g.
Amount of Payment (RM)
Above RM1,000,000

Approval Authority
Board of Directors

500,000 1,000,000
100,000 500,0000

Senior Managers
Head of Administration Department
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 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

Cont

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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 disclosures
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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 unusual amounts

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Accounts Payable Completeness

To determine: Existing AP are included in the AP list Examples of Audit Tests: Perform out-of-period liability tests

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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

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Accounts Payable Classification

To determine: Account Payable (AP) in the AP list are properly classified Examples of Audit Tests: Review the list and master file for related parties, notes or other interest-bearing liabilities, long term liabilities and debit balances
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Accounts Payable Cutoff

To determine: Transactions in the acquisition and payment cycle are recorded in the proper period Examples of Audit Tests: Perform out-of-period liability tests Perform detailed tests as part of physical observation of inventory Test for inventory in transit

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Accounts Payable Obligations

To determine: The company has an obligation to pay the liabilities included in accounts payable Examples of Audit Tests: Examine vendors statements and confirm accounts payable
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Account Payables Presentation & Disclosure

To determine: Accounts in the acquisition and payment cycle are properly presented and disclosed Examples of Audit Tests: Review statements to make sure material related parties and long-term and interest-bearing liabilities are segregated

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TUTORIAL QUESTION
APRIL 2008

WEAKNESSES 1)The clerk only call the selected vendor to request a price quotation.

RECOMMENDATIONS 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 5)The receiving department officer only keep the document in an open file. 6)The requesting department just be notified verbally to collect the goods.

RECOMMENDATIONS

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 are received.
The document should be save in a secured file to prevent misuse and theft.

8)The pre-numbered document is kept in an open file. 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 2008
Weaknesses 1)Only three prenumbered purchase order is prepared by the employee. Effects Account department may make mistake in order to prepare the payment voucher. Recommendations The employee should prepared four prenumbered purchase order including one for the account department. 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.

2)Materials are issued to factory employees subsequent to verbal request by any of the foremen.

Thefts and misused of the goods may occur.

Weaknesses 3)The prepared cheques are returned to the cashier who puts them in the cheque signing machine

Effects Careful examination of the supporting documents is not conducted as the cheque is put into the signing machine. No segregation of duties. Fraud and errors may arise.

Recommendations The cheque should be sign by an individual with proper authority.

4)The cashier prepared the pre-numbered cheque.

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 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.
Include a cover sheet or folder for containing documents and a package of relevant documents.

Company rely on pre-specified the order points use by the computer to initiate purchase requisitions automatically.

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 vendors invoice

i) Q4(ii,iii)
Weaknesses Possible consequences Improvement Provide a proper order procedure. 1) En. Halim will contact Expose to the loss the suppliers through phone

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 No segregation of duties The duty must be only finance manager control by one person in managed the accounting order to avoid fraud and administrative department 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 later obtains the approval from the managing director after the materials are delivered to the stores.

No proper authorization Acquisitions of raw of purchases material must be approval from the managing director before receipt the material

Q4(iv)
The companys 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.

June 2008 (Part C Question 1)

Q1(a)
Purchase requisition note Payment voucher Is a request for goods and services by Used by organizations to established an authorized employee 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. 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 Include a cover sheet or folder for containing documents and a package of relevant documents. Example : purchase order, copy of the packing slip and vendors 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.
2) As shipments are received, any available 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.

Reports must be submitted to the purchasing department.

Must have a proper authorized person to perform the duties

3) When all shipments listed on the The report must be forwarded to the report have been received, the report accounting department. is returned to the purchasing staff.

Weaknesses

Recommendations

4) Vendors invoices, after a clerical check, are send to the purchasing staff for approval and returned to the accounting department.
5) The treasurers office sent the signed checklists directly to the purchasing staff for delivery to the vendors.

Vendors invoices must be send directly and be approved by the accounting department
The signed checklists must be returned to the accounting department.

Test of control for purchase transactions

Validity - to find out whether there are purchases recorded but not received Completeness- to find out whether there are any incidences where purchases made but not recorded Valuation- to ensure that purchase transaction is recorded at the correct amount Posting & summarization - to ensure correct posting to purchases journal or customers accounts in the Accounts Payables subsidiary ledger, and from purchases journal to the general ledger Timeliness - to ensure that cash payments are not recorded in the wrong period