Acquisition And Payments Cycle
2.1 Introduction
In this Unit we will be taking a closer look at the acquisition and payments cycle, and what
makes up their component parts. We will also be looking at the different types of controls
that companies put in place during the different stages of the acquisition and payments
cycle that could have an impact on the amount of substantive audit procedures that will
need to be performed. In the unit we will look at the revenue and receipts cycle, but from
the other side, i.e.: we are now the customers purchasing the goods.
2.2 Accounting system and control activities
Getting the acquisition cycle of a company’s business right is extremely important. Why?
Well if goods are purchased are captured at the wrong purchase price it could render the
goods being sold too expensive. If goods are too expensive they won’t sell and this could
result in the business closing down. The accounting standard IAS 12 – Inventory also strictly
governs stock and the way it is accounted for and valued in the accounting records. A lot of
what this standard says will need to be incorporated into the audit program.
The same can be said of the payments cycle, if the company continuously pays late or pays
the incorrect amount this could lead to a potential reputational risk, thereby making it
extremely difficult to purchase goods in the market.
Basic process flow for the acquisition and payments cycle
Although each company will have its own unique process flow surrounding the acquisition
and payments process, the functions can be broadly categorised into the following:
Ordering of goods: how are order placed? Is there a department that handles the ordering
of stock or are orders placed by everyone in the company when stock is needed?
Receiving of stock ordered: are the staff receiving the stock the same as those that placed
the order? Do they know when stock is being delivered?
Capturing the stock into the system: when stock is received and captured into the
accounting system has it been allocated to the correct stock code and subsequent creditor
code?
Creditor payment: when paying creditors are the payments made in time? Is the correct
amount being paid, i.e.: is payment being made for actual goods received
The above functions can be a manual process or it can be automated / computerised. For
example, the ordering of goods can be done by:
Stock can be physically counted every day to determine whether more stock needs to be
ordered. If it is found that more stock needs ordering a manual order form is filled out and
submitted to the buying department
, If the stock system is computerised then when a stock item drops below a pre-set minimum
level an automatic notification is sent to the buying department indicating the stock item
that needs to be ordered.
Documents in the cycle
Requisition: this is the piece of paper that get informs the buying department / person
responsible for replenishing the stock that stock is required
Purchase order: the purchase order indicates the exact type and quantity of stock that is
required. For example, a corner shop might order 24 x 900g of Lancewood Cheddar Cheese
Suppliers’ delivery note: when the goods that have been ordered arrive at the company the
suppliers’ delivery note is signed to indicate that the correct goods have been received, the
correct quantity has been received and that the goods are not damaged
Purchase / creditors invoice: invoice from the supplier indicating how much to pay and
when payment is due. It might also indicate if there is any early settlement discount given
Credit note: if the goods delivered are incorrect / damaged they are returned. When goods
are returned a credit note is issued by the supplier
Creditors’ statement: lists the outstanding balance as at a month end. It will list all the
invoices issued during the month, together with the payments made
Receipt: is issued by the supplier if goods are purchased for cash.
Control activities within the cycle
As mentioned in Unit 1, the control environment and risk assessment procedures over the
acquisition and payments cycle will need to be taken into account when designing the audit
programme, the substantive audit procedures in particular. The robustness of the control
environment over the acquisition and payments cycle will have a direct bearing on the
amount of substantive audit procedures that need to be performed in order to obtain
reasonable, not absolute assurance, of the balances, accounts and transactions within the
cycle.
Strong controls should surround the payments cycle as this is one of the areas where money
is leaving the business. These strong controls should also be strictly adhered to. Certain
substantive audit procedures will need to be designed to deal with this specific risk.
2.3 Narrative description of the acquisitions and payments cycle
In Unit 1 we introduced Tyres R Us (Pty) Ltd and how their revenue and receipts cycle
operated. Below we will build on this and delve into their acquisition and payments cycle.
In the previous unit we saw that the company purchases their stock from both local and
foreign suppliers and that the company uses i90 as there back-end system which feeds into
2.1 Introduction
In this Unit we will be taking a closer look at the acquisition and payments cycle, and what
makes up their component parts. We will also be looking at the different types of controls
that companies put in place during the different stages of the acquisition and payments
cycle that could have an impact on the amount of substantive audit procedures that will
need to be performed. In the unit we will look at the revenue and receipts cycle, but from
the other side, i.e.: we are now the customers purchasing the goods.
2.2 Accounting system and control activities
Getting the acquisition cycle of a company’s business right is extremely important. Why?
Well if goods are purchased are captured at the wrong purchase price it could render the
goods being sold too expensive. If goods are too expensive they won’t sell and this could
result in the business closing down. The accounting standard IAS 12 – Inventory also strictly
governs stock and the way it is accounted for and valued in the accounting records. A lot of
what this standard says will need to be incorporated into the audit program.
The same can be said of the payments cycle, if the company continuously pays late or pays
the incorrect amount this could lead to a potential reputational risk, thereby making it
extremely difficult to purchase goods in the market.
Basic process flow for the acquisition and payments cycle
Although each company will have its own unique process flow surrounding the acquisition
and payments process, the functions can be broadly categorised into the following:
Ordering of goods: how are order placed? Is there a department that handles the ordering
of stock or are orders placed by everyone in the company when stock is needed?
Receiving of stock ordered: are the staff receiving the stock the same as those that placed
the order? Do they know when stock is being delivered?
Capturing the stock into the system: when stock is received and captured into the
accounting system has it been allocated to the correct stock code and subsequent creditor
code?
Creditor payment: when paying creditors are the payments made in time? Is the correct
amount being paid, i.e.: is payment being made for actual goods received
The above functions can be a manual process or it can be automated / computerised. For
example, the ordering of goods can be done by:
Stock can be physically counted every day to determine whether more stock needs to be
ordered. If it is found that more stock needs ordering a manual order form is filled out and
submitted to the buying department
, If the stock system is computerised then when a stock item drops below a pre-set minimum
level an automatic notification is sent to the buying department indicating the stock item
that needs to be ordered.
Documents in the cycle
Requisition: this is the piece of paper that get informs the buying department / person
responsible for replenishing the stock that stock is required
Purchase order: the purchase order indicates the exact type and quantity of stock that is
required. For example, a corner shop might order 24 x 900g of Lancewood Cheddar Cheese
Suppliers’ delivery note: when the goods that have been ordered arrive at the company the
suppliers’ delivery note is signed to indicate that the correct goods have been received, the
correct quantity has been received and that the goods are not damaged
Purchase / creditors invoice: invoice from the supplier indicating how much to pay and
when payment is due. It might also indicate if there is any early settlement discount given
Credit note: if the goods delivered are incorrect / damaged they are returned. When goods
are returned a credit note is issued by the supplier
Creditors’ statement: lists the outstanding balance as at a month end. It will list all the
invoices issued during the month, together with the payments made
Receipt: is issued by the supplier if goods are purchased for cash.
Control activities within the cycle
As mentioned in Unit 1, the control environment and risk assessment procedures over the
acquisition and payments cycle will need to be taken into account when designing the audit
programme, the substantive audit procedures in particular. The robustness of the control
environment over the acquisition and payments cycle will have a direct bearing on the
amount of substantive audit procedures that need to be performed in order to obtain
reasonable, not absolute assurance, of the balances, accounts and transactions within the
cycle.
Strong controls should surround the payments cycle as this is one of the areas where money
is leaving the business. These strong controls should also be strictly adhered to. Certain
substantive audit procedures will need to be designed to deal with this specific risk.
2.3 Narrative description of the acquisitions and payments cycle
In Unit 1 we introduced Tyres R Us (Pty) Ltd and how their revenue and receipts cycle
operated. Below we will build on this and delve into their acquisition and payments cycle.
In the previous unit we saw that the company purchases their stock from both local and
foreign suppliers and that the company uses i90 as there back-end system which feeds into
