FACULTY OF COMMERCE, ADMINISTRATION AND LAW

DEPARTMENT OF ACCOUNTING AND AUDITING

2023 SEMESTER TWO

PURCHASES AND PAYMENTS

QUESTION BANK

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QUESTION 5

You are the auditor of High Heels Ltd (High Heels), a shoe manufacturer. You identified the
following weaknesses in the purchases and payments cycle during the audit of High Heels:

1. There is not a process in place to determine which inventory is required for the
production process before orders are placed. Rush orders are sometimes placed at
additional cost.
2. Not all orders are placed using a written order form.
3. Not all orders placed are authorised.
4. Orders are placed with only one supplier.
5. A pre-numbered goods received note is not completed upon receipt of the goods by
the receiving department.
6. There is insufficient segregation of duties, as the departmental manager places
orders, receives goods and makes payments to suppliers.
7. Goods delivered are not reviewed, nor is a comparison made between what was
ordered and what was received.
8. Invoices received from suppliers are not compared with what was ordered and what
was received.
9. Creditors’ reconciliations are not performed between monthly statements received
from creditors and the creditor control account.
10. The cheque is submitted to the accountant and managing director for signing
without any supporting documentation accompanying the payment.

YOU ARE REQUIRED TO: M

1. For each of the 10 weaknesses, identify the resulting risk(s) on 17
the financial statements. Note: Number each risk clearly

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SUGGESTED SOLUTION 5

1. • An out-of-stock situation might occur, which could lead to financial loss if

customer orders cannot be filled.

• Financial losses can occur when more has to be paid in order to deliver
rush orders.

2. • No documentary records are available to review the validity,

completeness, and accuracy of purchases and to track them.

3. • Invalid orders may be placed, leading to incorrect type of inventory,

incorrect amounts or ordering for private use, resulting in financial losses
for the company.

4. • There is the possibility that prices at which items are purchased are not
the most favourable and therefore the company might be overpaying for
stock.

• Service and quality might deteriorate, as there is no competition.

5. • Not all goods received may be recorded.

• Goods received may be stolen.

• Outstanding deliveries cannot be tracked.

6. • An unauthorised order may therefore be placed and stolen by the

departmental manager, while the company pays for it.

• Mistakes may be made and will not be identified.

7. • Incorrect goods may be delivered (i.e. they differ from what was ordered
and will not satisfy the needs of the company).

• Goods are received that were not ordered.

• Too little or too many goods are received, resulting in too little or too much
inventory.

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8. • Faulty invoices can be received and cause financial loss for the entity, for
example:

o Invoices may be made out for the wrong price, description, quantity
or items.

o Adding mistakes or mistakes in prices, quantities or type of goods

could be made and will not be identified.

9. • Double payments to a specific supplier can occur.

• Adding mistakes or mistakes in prices, quantities or type of goods could

be made and will not be identified.

10. • Double payments can occur.

• Payments could be made for fictitious suppliers.

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QUESTION 7

You are the internal auditor on the audit of Protector (Pty) Ltd (Protector), a company that
manufactures a wide range of protective cases and screens for mobile devices. Protector
sells the cases and screens to a number of wholesalers and retailers around the country.
The company has a February year-end.

The following is an extract of the key points obtained during a discussion held with Mr
Sijeke, the inventory controller; Mr Jordan, the chief buyer; and Ms Carter, the financial
accountant in September of the current year:

Extract

The company is considering implementing a new inventory system as it has not always
been able to meet the demands of its customers. It attributes this primarily to the company’s
running out of inventory on a regular basis, which results in it not being able to process
additional orders.

When an employee working on the production line notices that it is running out of a
particular item of inventory, the employee calls Mr Jordan and informs him of the need for
the inventory. Mr Jordan identifies three suppliers on the approved supplier list that are
located closest to the factory and calls them to establish how quickly they would be able to
deliver the inventory required. An order is placed with the supplier that is able to deliver the
inventory the fastest. If the supplier requires a purchase order, Mr Jordan completes one
and faxes or emails it to the sales representative at the supplier.

There have been times when the production of certain products has been stopped
temporarily while the company waited for the inventory to arrive at the factory.

FOR ORDERS WHERE THE PRODUCTION HAS STOPPED AS A RESULT OF

RUNNING OUT OF INVENTORY

The inventory is received in the west wing of the warehouse by Mr Sijeke. The inventory is
offloaded from the delivery vehicle and Mr Sijeke performs a quick inspection of the
inventory to make sure that it is not damaged. The employee who informed Mr Jordan of
the inventory needed is contacted and told to collect the inventory immediately so that
production can continue.

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FOR NORMAL ORDERS

The inventory is received in the west wing of the warehouse by Mr Sijeke. The inventory is
offloaded from the delivery vehicle and Mr Sijeke performs a thorough check to see if the
inventory is not damaged. The inventory is stored in specific locations in the warehouse
until a request for the inventory is received. The employee who identifies the need for the
inventory contacts Mr Sijeke, who in turn has the inventory picked up and delivered to the
section of the factory where the employee who contacted Mr Sijeke is located.

RECORDING

The creditors clerk records the credit purchase in the accounting records using the
information noted on the invoice that is received from the supplier. Where a purchase order
was used, the creditors clerk compares the information on the purchase order to the
information on the invoice. If a difference is noted, the creditors clerk contacts the supplier
to identify the cause for the discrepancy. If a discrepancy is still noted after the call, the
creditors clerk records the credit purchase in the accounting records using the information
located on the purchase order.

PAYMENT OF CREDITORS

The creditors clerk performs a creditor’s reconciliation on a monthly basis and uses the
reconciliation as the basis to determine the amount to be paid to the supplier. The creditor’s
reconciliation as well as supporting documentation is presented to Ms Carter for review. If
Ms Carter is satisfied that the creditor’s reconciliation has been performed properly and if
she agrees with the amount to be paid to the supplier, she signs the creditor’s reconciliation
and a cheque made out to the supplier. The supporting documentation and the creditor’s
reconciliation are returned to the creditors clerk who is responsible for cancelling the
supporting documentation and posting the cheque to the supplier.

The company intends moving away from cheque payments to electronic funds transfers in
the next financial year.

YOU ARE REQUIRED TO: M

1. Describe the business risks affecting the purchases and payments 19
cycle at Protector (Pty) Ltd.

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SUGGESTED SOLUTION 7

1. The company runs out of inventory regularly.

Risk – the company does not always identify the need for inventory early enough,
which results in a delay in production.

2. Employees call Mr Jordan to inform him that they are running out of inventory.

Risk – unauthorised inventory may be requested, or the incorrect inventory may be

requested.

3. Mr Jordan does not have the employee repeat what inventory it is that they
require.

a) Risk – invalid or unauthorised orders may be placed with suppliers.

b) Risk – employees may have Mr Jordan place orders for personal reasons
and misappropriate inventory.
4. Mr Jordan places an order with the closest supplier that is able to deliver the
product the quickest.

a) Risk – the quality of the products ordered may be substandard.

b) Risk – the price paid may be unnecessarily excessive.
5. Mr Jordan creates a purchase order based on information the employee
requested from him on the telephone.

Risk – the purchase order created may not agree with the inventory requested by
the employee, resulting in the wrong inventory (and amount) being ordered.

6. Mr Sijeke does not always have a purchase order available to verify the goods
delivered.

Risk – items of inventory not ordered are accepted and recorded in inventory.

7. Mr Sijeke receives the inventory and either has it delivered to the employee that
requires the inventory or has it stored in the warehouse.

a) Risk – the inventory is received but not recorded on source documents. OR

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 b) Risk – Mr Sijeke does not have records of the amount of stock, which results
in out-of-stock situations.
8. Mr Sijeke performs a quick review of the goods to determine if they are
damaged.

Risk – inferior quality or damaged inventory may not be noticed and may be
accepted as a result of Mr Sijeke not performing a thorough inspection of the goods
received.

9. When an employee requires inventory, they call Mr Sijeke, who has the inventory
delivered to them.

a) Risk – it will be difficult to isolate who has access to the inventory as none of
the parties sign any form of documentation.
b) Risk – the inventory may be stolen and there will be no record of where the
actual inventory is.
c) Risk – the incorrect inventory may be dispatched to the employee resulting
in a delay in production.
10. The credit purchase and corresponding accounting entry is based on the
information located on the invoice received.

a) Risk – the invoice may be inaccurate, resulting in an incorrect credit

purchase being recognised.
b) Risk – invoices may be captured twice in the system, resulting in double
counting.
c) Risk – if invoices arrive late, the credit purchase may be recognised in the
incorrect financial year.

11. The capturing of the invoices in the accounting records is not reviewed.

a) Risk – the recognition of the credit purchase in the accounting records is not
reviewed and may result in errors.
b) Risk – fictitious invoices may be recorded for inventory that has not been
received.
c) Risk – the purchases may be captured to the incorrect accounts.

12. Where there is a difference between the invoice and the purchase order, the
purchase order is used to recognise the credit purchase.

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Risk – if the purchase order is incorrect, the purchase recognised will be incorrect
too.

13. The supporting documentation is not cancelled by Ms Carter.

Risk – the creditors clerk that prepared the creditors reconciliation may use the
same supporting documentation in the future in order for unauthorised payments to
be made to the creditors clerk.

14. The cheque is returned to the creditors clerk that prepared the cheque.

Risk – the creditors clerk may alter the cheque and have the money paid into their
personal bank account.

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QUESTION 8

You are one of the internal auditors of Africa Flight Delight Ltd (AFD), a company
distributing food to airlines throughout South Africa. The company is fully computerised.
One of the directors, Mr T. Mofokeng, approached you to evaluate their purchase cycle
(excluding recording of payments). He informed you that, despite the overall effective
internal controls that are in place, the company is still facing difficulties concerning its
purchasing system, which has resulted in substantial financial losses to the company.

On request of a detailed system description on the purchases cycle of AFD, you received
the following working paper:

PREPARED BY: D.J. MOLEFE (AUDIT SENIOR)

REVIEWED BY: A. DU PLESSIS (AUDIT MANAGER)

COMPANY: AFRICA FLIGHT DELIGHT LTD

SUBJECT: SYSTEM DESCRIPTION ON PURCHASES

PURCHASE REQUISITION

Mr Naidoo (storeman) is responsible for preparing the purchase requisitions every month.
Previously, he would telephonically request from the three airlines to which food is
distributed the number of food packages required. Mr Naidoo has now simplified the
process by using budgets based on market research. As a result, he completes the
purchase requisition based on these budget figures, files the original requisition in a
pending file and sends the other copy to the procurement department. Owing to Mr
Naidoo’s workload, he sometimes allows junior warehouse staff members to fill in the
purchase requisitions and send them to the procurement department on his behalf.

Mr Naidoo commented that, although the process has been simplified, AFD still
overestimates the quantity of food required, which results in an excess number of food
packages being prepared, not sold and eventually exceeding their sell-by date.

ORDERING GOODS FROM SUPPLIERS

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Ms Stumke (buying clerk) electronically processes a purchase order based on the
requisition received from Mr Naidoo or the junior staff member. All calculations on the
purchase order are automatically performed by the computer, which also performs edit
checks on the input of data and automatically addresses the purchase order to the correct
suppliers based on the list of pre-approved suppliers stored in the supplier masterfile. The
computer also assigns sequential numbers to all system purchase orders thus created by
Ms Stumke, who then files the purchase order sequentially so as to allow a senior staff
member to follow up on any missing purchase orders on a regular basis. The other copies
of the purchase order are then distributed as follows:

• Copy 1 is sent to the supplier.

• Copy 2 is sent to the receiving bay of the warehouse.
• Copy 3 is filed as mentioned above.
• Copy 4 is sent to the accounting department.
• Copy 5 is sent to the requisition department.

RECEIVING GOODS FROM SUPPLIERS

Mr Swart (goods receiving clerk) is authorised to receive goods at the receiving bay of
AFD, which is a separate, fenced-off area manned by a security guard at the main
entrance who inspects every delivery vehicle that enters or exits. Accompanied by the
delivery personnel, he also inspects supporting documentation. Recently, security
cameras were installed to mitigate the theft of goods.

Once they have delivered the goods, the supplier’s delivery personnel hand the delivery
note to Mr Swart. He scrutinises the note for the reference number of the purchase order,
which he enters into the computer. Once the computer has generated an on-screen goods
received note (GRN) with standing data of the order, Mr Swart scans all the boxes
received from the supplier, whereupon the computer automatically indicates any
outstanding items, which are indicated as ‘not received’ on the electronic purchase order.
Mr Swart also writes ‘not received’ next to the relevant items on the supplier’s delivery
note. If any items scanned do not match the purchase order, the computer raises a
warning and Mr Swart does not accept these items. As an additional check, Ms Stumke
assists Mr Swart in checking a sample of the boxes scanned in order to perform a quality
check and to ensure agreement between the description on the box and its contents. Ms
Stumke also has access to the inventory system and can generate a GRN if necessary
(e.g. if Mr Swart were off sick).

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Mr Swart is also responsible for distributing goods received notes to the relevant
departments:

• Copy 1 is sent to the receiving bay.

• Copy 2 accompanies the goods during transfer to the warehouse.
• Copy 3 is sent to the accounting department.
• Copy 4 is sent to the procurement department.

RECORDING OF PURCHASE

Mr Louw is responsible for reviewing the recording process of purchases in the purchases
journal after it has been generated electronically by the computer. The computer
application implements the recording of a purchase based on the purchase order and
goods received note generated electronically once Mr Swart and Ms Stumke have
scanned in the goods received.

The computer application automatically uses quantities on the system-stored GRN and
the price per unit entered by Mr Louw (obtained from supplier-approved price lists) in order
to record final prices in the purchase journal. Nobody checks the values entered by Mr
Louw, as they feel he is intelligent and would notice any error.

Mr Louw reviews the electronic recording of the purchase and the corresponding liability
(creditor), and ensures that the computer system matches the following documents:

• The purchase order

• The delivery note from the supplier, which has been scanned in
• The goods received note
• An invoice from the supplier, which has been scanned in

PAYMENT PREPARATION

Mr Vosi, the accounts payable clerk responsible for payment preparation, files all
statements received from suppliers in a pending file, which task he leaves until the end of
the month, if possible, or otherwise until he finds himself with time on his hands. Mr Vosi
then performs a creditors reconciliation on-screen, where he enters the balance
outstanding, as per the supplier’s statement, into the computerised system, where it is
compared to the supplier’s balance as per the computerised masterfile. Mr Vosi follows
up manually on reconciling the items.

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He is aware that most of the time AFD forfeits the discount that they would have received
had they paid within 30 days but has explained that he is struggling with the work overload
and believes the problem will be resolved in the future.

Mr Vosi then accesses the supplier payment module on the computer in order to create
the payment. He manually types in the name of the supplier that needs to be paid, based
on the creditors statements received. The computer subtracts this amount from the
creditors reconciliation saved in the masterfile, whereupon it automatically creates a
remittance advice for each supplier needing to be paid.

Ms Barnard (senior bookkeeper), who obtains all the relevant documentation received
from Mr Vosi, performs the necessary checks. She then accesses the suppliers payment
module on the computer system with her own password and indicates that the supplier is
ready for payment.

Mr Vosi then prints the payment schedule, attaches the supplier’s statements and
reconciliation, as well as the relevant goods received note, the supplier invoice, the
supplier delivery note and the purchase order for each purchase, making up the balance
represented for payment.

PAYING THE SUPPLIER

Mrs Botha (financial manager) receives the relevant documentation from Ms Barnard once
the latter has created the ready-for-payment notice. Mrs Botha then reviews the relevant
documentation of the payment that needs to be made. If she agrees with it, she logs onto
AFD’s bank account using her username and password and creates an ad hoc payment.
She then manually types in the details of the supplier, the supplier’s bank account details
and the amount that needs to be transferred and clicks on ‘pay’.

YOU ARE REQUIRED TO:

1. Identify and explain the weaknesses in the above purchases system. For each
weakness identified, you should also recommend improvements to be
implemented by Africa Flight Delight. Your report should address computerised
controls only. Provide your solution using the following tabular format:

NUMBER IDENTIFY AND EXPLAIN WEAKNESS RECOMMENDATION

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SUGGESTED SOLUTION 8

NO. IDENTIFY AND EXPLAIN WEAKNESS RECOMMENDATION

1 a) Failure to identify the appropriate • Pre-programmed limit checks

quantity of food that needs to be should be installed in the
purchased for the food packages could inventory system of the company
lead to food exceeding its sell-by date, in order to warn warehouse staff
which could lead to financial losses for or sales personnel if certain
the company. minimum inventory levels have
been reached.
• The inventory system should
allow the printing of a reorder
report that could serve as a
supporting document for
purchase requisition.

1 b) Failure by the company to ensure a • The company should implement

senior staff member authorises the an online authorisation by a
purchase requisition (whether prepared senior staff member, without
by which a requisition cannot be
generated by those staff
Mr Naidoo or a junior staff member)
members who have requested
could result in errors on the purchase
the goods.
requisition. This error could contribute to
• The computer system should
further financial losses, as goods might
maintain a log of rejected
be ordered and then not needed by the
requisitions. Logs should be
entity.
followed up by management for
reasonability.

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2 Unauthorised purchase orders could be
sent to suppliers, which could lead to
inappropriate or unnecessary goods
being received, or goods being ordered
for personal use.
NO. IDENTIFY AND EXPLAIN WEAKNESS RECOMMENDATION
3 a) Ms Stumke (ordering clerk) having
access to the inventory system and
being able to generate a GRN could
result in her ordering goods for her
personal benefit, thereby adding to
further financial losses for the company.
3 b) Management does not follow up on
purchase orders that do not have
corresponding GRNs. This could lead to
goods not being received, resulting in
losses for the company and client
dissatisfaction.
4 a) Suppliers invoices could be inaccurately
recorded in the accounting records,
because nobody checks Mr Louw’s price
per unit entered onto the computer.
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• The computer system should
require the number of authorised
requisitions to be furnished
before allowing the user to initiate
a purchase order on the system.
• The computer system should
automatically cross-reference
purchase order to requisition by
printing reference numbers on
the order form.
• Not all buying staff (including Ms
Stumke) should be given write-
access to the inventory system or
the authority to generate GRNs.
• The computer system should
match the GRN number to the
purchase order number.
• The computer should enable a
senior staff member to print a log
of all purchase orders without a
corresponding GRN, for follow-
up purposes.
• The computer system should
perform reasonability checks on
prices keyed in by Mr Louw
according to the suppliers’ price
list. The system should be able to
request supervisor override if the
prices fall outside the
programmed ranges.
NO. IDENTIFY AND EXPLAINRECOMMENDATION
WEAKNESS

4 b) Management does not follow up on • The computer application should

GRNs for which no purchase enable the review function to
transaction has yet been recorded in print a report on GRNs for which
the purchase journal. no purchase transaction has
been recorded in the purchase
Senior members also do not perform a
journal.
creditor reconciliation. This could result
• The computer application should
in fines (losses for the company), as
enable a senior staff member to
purchase transactions are not recorded
print in review function a
and therefore suppliers are not paid
creditor’s reconciliation in order
timeously.
to help identify any discrepancies
among the purchase journal, the
creditors ledger, and the general
ledger account.

5 a) Mr Vosi’s leaving the creditors • The company should program its

statement until he has time on his
hands might result in financial losses,
as the company might thereby forfeit its
settlement discounts and could be
charged penalties by the creditors for
late payment.
computer system in such a
manner that, in order to qualify
for a discount, the payment
schedule automatically reflects
those invoices in the creditors
masterfile that have fallen due for
payment.

5 b) Mr Vosi manually types in the names of • The company should program its
creditors needing to be paid. This could computer system to provide a
lead to fraud, as he could type in drop-down list linked to the
fictitious creditors whom he has approved supplier database.
invented for his personal benefit. Payments should not be made to
suppliers not recorded in the
database. Mr Vosi’s access rights
on the system should not allow
him to add the names of

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 suppliers to, or make changes to
suppliers on, the data list.

6 a) Mrs Botha manually types in the
information obtained for the payment
application when transferring the funds
electronically, which could lead to
errors, fraud and financial losses for the
• Mrs Botha should transfer the
information (encrypted) on the
payment schedule to the online
EFT facility.

company.

NO. IDENTIFY AND EXPLAIN RECOMMENDATION

WEAKNESS

6 b) Instead of the two recommended • The company should program its

authorised senior personnel (namely, computer system to request
the financial manager and the financial authorisation (by means of
director), Mrs Botha processes the passwords) from the financial
payment. This could lead to errors, manager and financial director
fraud and financial losses for the before the EFT may be
company. processed.

6 c) No proof of payment report is printed • A proof of payment report should

from the EFT facility so that Ms Barnard be printed from the EFT facility as
can confirm that each supplier on the soon as payments are
payment application has been paid processed, so that Ms Barnard
correctly. can confirm that each supplier on
the payment application has
been paid correctly.

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 NOTES

Lecture Example – Ms Lepasa Gonzalez

- Will be done in class during Lecture times.

QUESTION 1& 3

- Solution provided - prescribed Question Book.

- This is in Addition to the Question Bank provided.

MOTIVATION BOX

“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice

and most of all, love of what you are doing or learning to do.”
Pelé, Brazilian pro footballer

“Recipe for success: Study while others are sleeping; work while others are loafing;
prepare while others are playing; and dream while others are wishing.”
William A. Ward, motivational writer

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