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The purchase cycle is a term used in accounting and business that describes the journey of a purchasing product or service from its beginnings to its payment.  In a purchase cycle, a company issues a purchase order to a supplier for goods, receives the goods, records an account payable, and pays the supplier.  There are several ancillary activities, such as the use of petty cash or procurement cards for smaller purchases. This set of sequential, interrelated activities is known as the purchasing cycle, or expenditure cycle.

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Employee Initiation Purchasing Department Receiving Department Accounts Payable Cash Disbursement

The process generally starts with a purchase requisition that an employee of the company generates.  The purchase requisition is a document that describes the product needed and the quantity required.  The document is then sent to the purchasing department that generates a purchase order.  The purchase order lists the product to purchase, the quantity to order, and the price the company is willing to pay. Typically, employees are only permitted to buy from an approved vendor’s list. Once the ordered goods have been received by the next department, the company issues a receiving report.  The report should reconcile with the purchase order and is sent to the accounts payable team in the accounting department. Here, the employee reconciles the received goods with the vendor invoice, and the journal entry to accounts payable is recorded.  Finally, the payment is processed by treasury, and the cash is actually paid out.

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A payroll cycle is the length of time between payrolls. Thus, if an entity pays its employees every Friday, this is a one-week payroll cycle, whereas paying them once a month is a monthly payroll cycle. In a payroll cycle, a company records the time of its employees, verifies hours and overtime worked, calculates gross pay, deducts taxes and other withholdings, and issues paychecks to employees. Other related activities include the payment of withheld income taxes to the government, as well as the issuance of annual W-2 forms (EA Form) to employees. This cluster of activities is known as the payroll cycle.

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1. Errors may be made due to incorrect calculations 2. The company may use incorrect or unauthorized pay rates, hours or deduction tables during recording 3. Fictitious employees may be included fraudulently

1. The hours recorded on the payroll should be obtained directly from the clock card or computer transaction file 2. The wage rates, deductions should be obtained from personnel records or master file 3. The calculations and castings should be reviewed by an independent person 4. Before payments can be authorized, the senior personnel should inspect the payroll and the week to week reconciliations performed 5. All personnel should sign payroll as proof of functions performed

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Purchase requisition  – a form detailing the request for goods or services by an  authorized  employee of the user department and it is then passed from the user department to the purchase department. For example, order of materials by a factory/storeroom supervisor. Purchase order – a document from a company to the supplier recording the description, quantity and amount of the goods or services ordered and it should be properly authorized by the company. Goods received note – a document prepared by the supervisor of the storeroom/receiving department at the time the goods are received. It shows the description, quantity, condition and date of the goods received. Purchase invoice  – a document received from vendor which indicates the date, description, quantity and the total amount of goods and services the company has received. Purchase journal and ledgers 	(a)A journal (day book) for recording the purchases of goods or services. 	(b)Vendors’ accounts in the purchase ledger will also be updated with the 	remittance advice/receipts when payments are made to vendors.

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Payment Voucher   - an internally generated document that establishes a formal means of recording and controlling cash disbursements.   Cheque/Electronic transfer  – the means of paying the vendors when the payments are due. Remittance advice – a document sent with the  cheque  to a vendor detailing the amount of payment for each corresponding invoice and the total amount paid. Cash book  – it records the authorized disbursements and individual entries are supported by payment vouchers and/or presented  cheques . Vendor’s statement  – a statement prepared by the vendor indicating the opening balance, purchases during the period, payments received by the vendor and closing balances.

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Personnel records  – a document that records an employee’s data such as the date of employment, rates of pay, authorized deductions, performance appraisal and termination of employment, etc. Deductions authorization form  – a form signed by the employee authorizing deduction from his wages or salaries for contribution to retirement plan, loan repayment or others. Rate authorization form  – a document authorizing the rate of pay (per hour, day, month) of the employee by management, or, in the case of top management, by the board of directors. Time card  – a document indicating the starting and the ending time within which the worker works each day. It is usually used for daily or hourly paid worker for calculating the total hours of work each day. Job time card  – a document indicating the particular job on which the worker has spent on during a given period of time.

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Payroll cheque  – It is usually issued for factory workers whose wages are not fixed monthly. Bank transfer advice  – a written advice to the company’s bank showing the names of employees, their respective monthly salaries, bank account numbers and the total amount to be transferred from the company’s payroll account to the employees’ accounts. Payroll journal  – a journal for posting total payroll expense for the period to general ledger account. Payslip /salary slip  – a document prepared individually for all employees for a particular week or month showing the gross pay, deductions and net pay.

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audit objectives for  purchases transactions

Objectives Descriptions Existence All purchases and services recorded are received by the company. Completeness All purchases and services that have actually incurred (received) are recorded in the accounting records. Accuracy All purchases and services made are recorded accurately in the accounting records (e.g. purchases journal). Classification Purchases made are properly classified to the appropriate account. Timing All purchases and services are recorded on a timely basis. Posting and summarization Purchases and services made are included in the vendor’s accounts of accounts payable ledger and properly summarized in the control accounts in general ledger.

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audit objectives for  cash payments transactions

Objectives Descriptions Existence All cash payments recorded in the accounting records (e.g. cash payments journal) are made for goods or services actually received by the company. Completeness Cash payments made for purchases and services have all been recorded in the accounting records. Accuracy Cash payments are recorded accurately in the accounting records (e.g. cash payments journal). Classification Cash payments transactions are properly classified to the appropriate account (e.g. according to the company’s chart of accounts). Timing All cash payments transactions are recorded on a timely basis. Posting and summarization Cash payments made are included in the vendor’s accounts of accounts payable ledger and properly summarized in the control accounts in general ledger.

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Functions Test for: Processing purchase orders Select sample of purchase orders and agree to authorized requisitions (existence). Examine the purchase orders record to ensure that there is a system identifying the orders fulfilled from those unfulfilled (existence). Examine purchases orders for indication of approval (existence and accuracy). Receiving goods and services Discuss the procedures taken by the responsible official for receipt of goods (existence and completeness). Select a sample of goods received notes to ensure that they are  prenumbered  and signed by the responsible official for goods received and examined. Enquire any missing goods received notes if necessary (existence, completeness and accuracy) Observe the goods receiving procedures on a surprise basis to see whether any unrecorded receipt of goods or services and whether the client’s policy is followed (existence, completeness and accuracy).

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Functions Test for: Processing and recording cash payments Examine invoices to ensure the evidence of approval for payment. Ensure that the  cheque  signatories are the officials with proper authorization to sign  cheques  within the authorized limit (existence). Select a sample of paid invoices and ensure the evidence of preventing them from re-use (existence). Account for sequence of  cheques  recorded in cash payments journal, investigating for reasons of any missing number (completeness). Select a bank reconciliation statements on a random basis and examine them for the evidence of review by a senior officer and ensure that all discrepancies have been investigated (accuracy).

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Assertions Substantive procedures 1.   Occurrence Select samples from  purchases journal and trace to purchases requisitions , purchases orders, suppliers’ invoices and goods received notes. 2.   Completeness Trace  good received note/suppliers’ invoices to entries in purchases journal  and accounts payable ledger. 3.   Accuracy Vouch details of  suppliers’ invoices to related purchase requisition, purchase orders , and goods received notes; and Trace suppliers’ invoice to  recorded purchases . 4.   Cut-off Compare dates  of recorded  purchases  transactions with dates on  goods received notes . 5.   Classification Examine supporting documents for purchases transactions and evaluate  whether the transactions are properly classified .

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Assertions Internal Control Procedures Test of control 1.   Occurrence Proper  segregation of duties  between  processing and personnel functions ; adequate personnel files are maintained; and work/time record are  approved  by person of appropriate level. Observe and evaluate proper segregation of duties ; e.g. persons authorizing employee benefits costs are not responsible for recording. Check the authorization  by appropriate for all  additions, changes and deletions  of personnel records and the authorization for payments of employee benefit costs. 2.   Completeness Updated record for starters and leavers  should be  maintained  by personnel office and payroll processing function is provided with updated information about leavers. Check the  numerical sequence of the time/work records  and the  reconciliation  of  payroll summary and starters and leavers recorde d in personnel records.

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Assertions Internal Control Procedures Test of control 3.   Accuracy Internal verification  to ensure that the  calculation of wages and salaries  is in agreement with records of work performed and terms of employment. Examine the  client’s record  to see whether the client has  checked the arithmetical accuracy  of employee benefit costs to ensure the amounts are in accordance with  employment contracts . 4.   Cut-off Notices of  additions, terminations, and changes in pay rates , and deductions reported promptly to payroll processing function. Examine  indication of internal verification  and  test procedures  for processing time/work record and for recording liabilities. 5.   Classification Proper  internal verification  and  approval for accounts charged to payroll . Review  client’s procedures and inspect their records  to verify there has been proper classification of employee benefit costs.

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Types of fraud Substantive procedures 1.   Non-existence employees Tracing the  selected transactions recorded in the payroll journal  to the personnel department to determine whether the  employees were actually employed  during the payroll period. 2.   Terminated employees Selecting several files from the personnel record s for employees  who were terminated  in the current year to determine  whether each received his or her termination pay  in accordance with company policy. Examining the  payroll records in the subsequent period  to ascertain that the employee is  no longer being paid . 3.   Unclaimed wages Requesting a surprise payroll payoff  where each employee must  pick up and sign for his or her cheque  in the presence of a supervisor and the auditor. Investigating those  unclaimed wages  to determine whether an  unclaimed cheque is fraudulent . 4.   Fraudulent hours Reconciling  the total hours paid according to the  payroll record  with an  independent record of the hours worked . Examining evidence of  proper authorization  for payroll since it is ordinarily easier for the client to prevent this type of defalcation by adequate controls than for the auditor to detect it.

CHAPTER 13