Purchases and Payments Cycle – PART 1 INTRODUCTION

Auditing and Internal Control 2023

Semester 2 – Learning Unit 2

Learning Outcomes
Learning Outcomes
You will be assessed on:
• Understanding of the functions, personnel and
documents relating to the Purchases and Payments Cycle
• Understanding of the Risks in the cycle
• Ability to explain and apply concepts and principles of risk
assessment and internal control for the cycle
• Your ability to identify and understand the assertions
relating to the cycle.
• NOTE: You do NOT need to know control activities in this
cycle (but you must know what you learned in Unit 1 relating
to control activities)

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Introduction & Characteristics of the Cycle
Introduction

Cycle deals with two main activities:

• The ordering and receiving of goods and services
(Remember – context is everything)
• The payment of amounts due for goods and services
received

Main aims:
• The company orders and receives only goods /
services that it requires and the goods / services
are of a suitable quality and price

• Only goods / services that have been validly ordered

and received are paid for; payment is authorised,
accurate and timeous

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Characteristics of the Cycle

Importance of the cycle: Goods purchased are often

used for manufacturing or for resale

• Poor purchases will have a negative impact on

manufacturing, sales and on customer relations

• Purchasing goods that cannot be resold due to poor

quality or lack of demand will result in losses

Risk of fraud in the cycle:

• The cycle deals with the payment of creditors (cash
outflow) and thus fertile ground for theft of cash

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Characteristics of the Cycle

• Suppliers may offer bribes to company officials in

order to be awarded tenders to supply goods /
services. Suppliers may supply goods / services at
inflated prices and pay parts of their profits as
bribes (kick-backs) to officials of the company

• Recommended additional reading: Chapter 7,

sections 7.1.1 – 7.1.3

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Synonyms
Word Synonyms Word Synonyms
e.g. Personnel People
Procurement Buying
Acquisition

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Basic Functions in the Cycle