The control objectives are as follows. To ensure that:

e) Purchased goods/services are ordered under proper authority and using proper procedures

f) Purchased goods/services are only ordered as necessary for the proper conduct of the business operations and are ordered from suitable, approved suppliers

g) Goods/services received are inspected for quality, quantity and description

h) Invoices and related documentation are properly Checked and approved as being valid before being entered as trade creditors

i) All valid transactions relating to payables (suppliers' invoices, credit notes and adjustments), and only those transactions, should be accurately recorded in the accounting records.

Control Procedures over Purchases and Payables

As with the sales system, there are a large number of controls that may be required in the purchases cycle due to the importance of this area in any business and once again, the following list is classified by type of control.

(a) Orders

(i) Requisition notes for purchases should be authorized.

(ii) All orders should be authorized by a responsible official whose authority limits should be pre-defined.

(iii) Major items e.g. capital expenditure, should be authorized at an appropriate level, possibly by the Board of Directors

(iv) All orders should be recorded on official documents showing suppliers' names, quantities ordered and price.

(v) Copies of orders should be retained as a method of following up late deliveries by suppliers.

(vi) Re-order levels and quantities should be pre-set and preferably recorded in advance on the requisition note.

(b) Receipt of goods

(i) Goods inwards areas should be identified to deal with the receipt of all goods.

(ii) All goods should be checked for quantity, quality and description. Goods received notes should be raised for all goods accepted. The GRN should be signed by a responsible official.

(iii) GRNs should be checked against purchase orders and procedures should exist to notify the supplier of under or over-deliveries. GRNs should be sequentially numbered and checked periodically for completeness.

(c) Invoicing and returns

(i) Purchase invoices received should be stamped with an approval grid and given a unique serial number to ensure purchase invoices do not go astray.

(ii) Purchase invoices should be matched with goods received notes and company orders and should not be processed until this is done.

(iii) The invoice should be checked against the order and the GRN, and casts and extensions should also be checked.

(iv) The invoices should be signed as approved for payment by a responsible official independent of the ordering and receipt of goods functions.

(v) Invoice sequential numbers should be checked against purchase day book details.

(vi) Input VAT should be recorded separately from the expense element of the invoice total.

(vii) Invoices should be properly allocated to the nominal ledger accounts, perhaps by allocating expenditure codes. A portion of such coding should be checked independently.

(viii) Batch controls should be maintained over the posting of invoices to the purchases day book, nominal ledger and purchase ledger.

(ix) A record of goods returned should be kept and checked to the credit notes received from suppliers.

(d) Purchase ledger and suppliers

(i) A payables ledger control account should be maintained and regularly checked against balances in the purchase ledger by an independent official.

(ii) Payables ledger records should be kept by persons independent of the receiving of goods, invoice authorization and payment routines.

(iii) Statements from suppliers should be checked against the ledger account.

TESTS OF CONTROL

As already noted, tests of control should be drawn up so as to check that control procedures are being applied and to achieve control objectives. One suggested way to design tests of control for a particular situation is to list the documents in a transaction cycle and generate appropriate tests of control for each document. We shall illustrate this approach here in connection with the purchases cycle (Note that a similar technique could be applied to other transaction cycles!)