School of Accounting Sciences

Study Unit 12
Purchase and Payment cycle
Financial statement assertions
Tests of controls / control tests
Substantive procedures

AUDT271
2018

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AUDF221 CT3 2015 – Purchase & payment cycle: Multiple choice (VARIOUS)

REQUIRED:

Select ONE alternative which you consider as correct. Select the letter and indicate it next to the question number in your answer
book. YOU MUST USE CAPITAL LETTERS.

1.1 Which assertion(s) are addressed by the following procedure (performed as part of the audit of the purchases and payment
cycle)?
“Inspect the financial statements and confirm that trade creditors are presented and disclosed in accordance with a recognised
accounting framework”
A. Valuation and allocation
B. Presentation and disclosure
C. Existence
D. Rights and obligations
E. All of the above-mentioned (1)

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AUDT221 All 1st opportunity 2015 – Purchase & payment cycle: Audit procedures (PICTURE PERFECT
BANNERS)

You are a senior on the audit of Picture Perfect Banners (Pty) Ltd, a company that sells standardised & customised banners to the
public. The company was started by a few art students in 2011 and has grown significantly over the last few years. You have been
assigned to the audit of the acquisition & payment cycle for the financial year ending 28 February 2015.

You recently had a meeting with the purchase manager, Mr. Bubbly and the credit manager, Mrs Perfect, of Picture Perfect Banners
(Pty) Ltd, and have summarised the important information as follow:

 As Mr. Bubbly reviewed the purchases for the year he noticed that some purchases were not accurately captured. He
believes that the effect is minor and there is no need for concern.
 The total accounts payable as at 28 February 2015 is R1 291 290 (2014 – R1 916 090 as per the annexure).
 You were informed that the largest supplier to the company is Design Unique (Pty) Ltd with an outstanding balance of
R950 000 at 2015 year-end.
 Mrs Perfect also informed you that the company recently appointed a new credit clerk who enhanced the internal controls of
Picture Perfect Banners (Pty) Ltd by drawing up a list of goods received notes unmatched to supplier invoices, ensuring all
material purchases are recorded effectively and performing creditor’s reconciliation regularly.

You also obtained important supporting documentation from Mrs Perfect to assist you in conducting the audit procedures with regard
to creditors. (Refer to annexure A):

Annexure A: Supporting documentation

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1. CREDITORS’ LIST
Creditors 2015 2014

Design Unique R950 000 R1 590 000

Benchmark Material Suppliers R300 290 R200 590

Skylink Stands R25 000 R15 000

Vaal University of Technology

Art department R1 000 R500

Sparkling Box R15 000 R10 000

Innovation Deluxe R0 R100 000

Total amount due R1 291 290 R1 916 090

2. LIST OF GOODS RECEIVED NOTES UNMATCHED TO SUPPLIER INVOICES

Goods received Supplier name Amount (R) GRN linked to
note number supplier invoice

GRN 23869 Design Unique R12 000 NO

GRN 23970 Skylink Stands R500 NO

GRN 23990 Sparkling Box R300 NO

GRN 24101 Benchmark Suppliers R550 NO

GRN 24105 Sparkling Box R1 500 NO

Total R14 850

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3. BANK STATEMENT AFTER YEAR-END
BLABSA BANK

ACCOUNT NUMBER: 12578102

Date Description Debit Credit Balance

(payment)
(income)

27/02/2015 Design Unique 22 270 3 532 400

01/03/2015 Mugg in a cup 380 3 532 020

01/03/2015 Design Unique 740 000 2 792 020

02/03/2015 Vaal University – open day 100 000 2 892 020

02/03/2015 Advertising – extreme 190 000 2 702 020

02/03/2015 Petrol - Fireon 1 500 2 700 520

03/03/2015 Spaar - groceries 3 600 2 696 920

03/03/2015 Stationery pains 5 600 2 691 320

03/03/2015 Ernst & Old banners 450 000 3 141 320

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 4. CREDITORS RECONCILIATION OF DESIGN UNIQUE
Balance per Design Unique’s statement at 28/02/2015 R960 270

Add: Invoice 5720 relating to goods received note 23869 R12 000 Note 1

Less: Payment for invoice 5672 (R22 270) Note 2

Balance as per creditors list at 28/02/2015 R950 000

Note 1: Invoice 5720 relates to goods that were received at 26/02/2015. Refer to GRN
23869.

Note 2: This payment made on 27/02/2015 by electronic transfer was not reflected on
the supplier statement

REQUIRED:

1.1 Describe the audit procedures you would perform in response to Mr. Bubbly’s comment, in order to obtain audit evidence on
the accuracy assertion of purchases. (3)

1.2 Describe the audit procedures you would perform on creditors by using only the supporting documentation provided under
annexure A for the following assertion:
Completeness (make use of supporting documentation under annexure A number 1 - 3). (6)

1.3 Refer to the creditor’s reconciliation of Design Unique presented to you under annexure A and describe the audit procedures
that you will perform on the creditor’s reconciliation. (7)

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AUDF221 PC CT3 2015 – Purchase & payment cycle: Audit procedures (EXCLUSEEVE BOOKS)

You are on the audit team of Excluseeve Books (Pty) Ltd (“Excluseeve”), a wholesaler of books and have been assigned to the year-
end audit of the acquisitions and payments cycle. During the course of the year, Excluseeve had implemented recommendations
your firm had made to address certain weaknesses in their acquisitions and payments cycle. Your audit senior has requested that
you carry out audit procedures on the acquisitions and payments cycle of Excluseeve.

REQUIRED:

a) Describe the substantive procedures that you will conduct on the creditors balance at year-end 30 September 2015, by only
referring to the completeness assertion. (8)

AUDT221 CT2 2016 – Purchase & payment cycle: Audit procedures (VARIOUS)

It's easy for things to go wrong in a company's purchase and payment cycle. Companies can overstate the value of the inventory
they purchase, which makes assets look bigger than they actually are. Management can omit or undervalue their accounts payable,
which exaggerates financial strength. To prevent this from happening, management and auditors closely monitor internal controls
and key acquisition accounts.

SUB
REQUIRED: TOTAL TOTAL
4.1 Describe the detail substantive audit procedures that you as the auditor will perform to
address the accuracy assertion of a company’s purchases. 4x1 4
4.2 Describe the detail substantive audit procedures that you as the auditor will perform to
address the occurrence assertion of a company’s payments. 2x1 2
TOTAL MARKS FOR QUESTION 4 6 6

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AUDT221 VC CPD SU5 2015 – Purchase & payment cycle: Audit procedures (AIRPLANE SPARES)

You are the auditor of Airplane Spares. The company manufactures and repairs small passenger planes and helicopters. The
company’s major client is the South African Star Alliance and other small airline companies. The recession experienced
internationally had a negative impact on the industry. The repairs of aircrafts, however, still remain very profitable and therefore the
procurement of the right spares at the right price, quantity and quality at the right time is considered very important.

An extract of the system description with regards to the purchasing of spares was prepared by the company’s accountant was
presented to you (the audit manager) for your review. The system description is as follows:

1. Approximately 60% of the spares are imported from Germany.

2. The computer provides a daily printout of all inventory items that have dropped below the minimum inventory levels.

3. The chief store man, Mr Lubbe, issues requisitions for items that appear on the above printout. These pre-numbered requisitions
are then sent through to the purchasing department where the chief buyer, Mr Stumke, approves each requisition and completes
an order for each. The order note gets the same number as the requisition.

4. Goods which are imported from Germany sometimes take as long as 100 days from the order date to arrive at Airplane Spares
(Pty) Ltd. To save time Mr Lubbe sometimes authorise the requisition himself and issue order forms for spares that are imported
from Germany.

5. Contracts, which are negotiated at the beginning of the year, exist for all spares which are imported.

6. Local spares are purchased from the supplier identified as being the cheapest at the beginning of the year. For the next two years
orders will then be places with the supplier.

7. As soon as spares have been received, Mr Lubbe compares them against the order to ensure that the correct quantities and
items have been received. If he is satisfied, he issues a goods received note (GRN) in triplet for the items and sign it. Then
inventory items are then locked up in a receiving store and the inventory records are updated.

8. As soon as the supplier’s invoice is received, miss Pelser, the creditors clerk, compares the invoice to the signed GRN to ensure
the invoice is correct with regard to quantity, type, price, in the name of the company and calculations. She initials the invoice if
she is satisfied. She then files it in alphabetical order, together with the relevant order and GRN.

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REQUIRED

2.1 Name the audit procedures you would perform to obtain audit evidence with regards to the purchases of Airplane Spares for
the year. (Analytical procedures are not required) for the following assertions:
- occurrence
- accuracy

Part A (10 marks)

You are the auditor of Vision Construction (Pty) Ltd, a construction company. The company head office is in Potchefstroom. Site
offices are erected at each construction project and are situated country wide in South Africa.

The accounting functions of the company are performed from the head office in Potchefstroom. Ordering of building materials is the
responsibility of the purchases department at head office. Suppliers of building material deliver the goods at the different site offices
where it is received.

All creditors’ payments are done by cheque, which is signed by two staff members. The processing of invoices and payment thereof
is done at head office.

REQUIRED

2.2 Briefly explain what the direction of the audit test would be regarding purchases transactions – i.e. from where would you
select your transactions, what audit objective is being tested, and what is the main audit risk that is being addressed? (3)

Part B (10 marks)

The company handed you a detailed creditors listing at 30 June 2009, which agrees to the creditors control account in the general
ledger.

It was ascertained that recurring expenses were provided for the full 12 months.

REQUIRED

2.3 Name the additional audit procedures you would perform to ensure all creditors are on the creditors listing. (10)

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AUDT221 2nd opp 2016 – Purchase & payment cycle: Audit procedures (MUSCAT)

Muscat (Pty) Ltd sells clothing to retail stores in South Africa and Namibia. The company’s financial year-end is 31 October 2016.
You are the third year audit clerk and have been assigned to the audit of Muscat (Pty) Ltd.’s purchase and payment cycle.
The following information has been provided to you:
Creditors’ list of Muscat (Pty) Ltd at 31 October 2016
Edgaars (Pty) Ltd R550 920
Jetty (Pty) Ltd R425 989
Total of creditors’ list R976 909

Unmatched goods received notes (GRN’s) of Muscat (Pty) Ltd at 31 October 2016
GRN 364 – Edgaars (Pty) Ltd R12 582
GRN 365 – Jetty (Pty) Ltd R10 217
Total of unmatched goods received notes R22 792

SUB
REQUIRED: TOTAL TOTAL
4.1 Describe the substantive audit procedures that you will perform on the creditor’s list of
Muscat (Pty) Ltd at 31 October 2016, as provided above, to address the completeness
assertion.
Please note that you should not describe any other procedures for the completeness
assertion. 2x1 2
4.2 Describe the substantive audit procedures that you will perform on the list of unmatched
goods received notes of Muscat (Pty) Ltd at 31 October 2016, as provided above, to
address the completeness assertion.
Please note that you should not describe any other procedures for the completeness
assertion. 3x1 3
TOTAL MARKS FOR QUESTION 4 5 5

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