THE PURCHASING CYCLE (a) Control objectives. (b) Business considerations. (c) The questionnaire

Control objectives To ensure that: Purchased goods/services are ordered under proper authorities and procedures Purchased goods/services are only ordered as necessary for business operations and are ordered to suitable suppliers Goods/services received are effectively examined for quality, quantity and condition Invoices and related documentation are properly checked and approved as being valid. All transactions relating to trade payables are valid (suppliers invoices, credit notes and adjustments), and only those valid transactions should be accurately recorded in the accounting records.

Business considerations

Criticism on ICQs ICQs represent an attempt at a formalized, systematic, approach to the audit of large complex organizations. Such questionnaires can become too complex, lengthy and detailed for meaningful evaluation of accounting systems.

Internal Control Evaluation Checklists To overcome the above discussed possible shortcomings, many auditing practices have amended their approach to internal control evaluation by the adoption of a different type of document, Internal Control Evaluation Checklists (ICEC). The ICEC is designed to determine; whether desirable internal controls are present?, using key control questions to ascertain where specific frauds or errors are possible. It is normally employed where system’s information has already been recorded (usually in the form of flowcharts). Key questions are asked in an ICEC, the answers to which prompt further supplementary questions.

Cont.…….. Reference is made to support the flowchart which means of determining the existing systems. This makes the ICEC document shorter and less complex, but it may require more skill and judgment on the part of the auditor to interpret the completed form. Note that virtually all the rules applicable to the construction of an ICQ apply to the construction of an ICEC.

Limitations of the effectiveness of Internal Control It is possible to reduce the volume of transaction testing required in conducting an audit if the internal controls are sound and are operating effectively, but it is not likely that an auditor will be able to rely on internal controls entirely. This is because all control systems have inherent limitations such as: a) The need to balance the cost of the control with its benefits

Cont.….. The fact is internal controls are applied to regular, frequent transactions, not one off year end adjustments or unusual transactions, which are often large and subject to error. The potential for human error The possibility of fraud collusion (two or more persons operating together) to ‘get round’ controls that segregate duties. For example; the supervisor is responsible for checking and authorizing overtime claims, to enable excess overtime payments to be claimed.

Cont.….. The abuse of authority and override of controls by senior managers or the owners of the business. Abuse of authority might involve ordering personal goods through the firm. It is very easy for directors and managers of organizations of any size to instruct staff to bypass normal procedures such as the requirement for authorization for payments. The uselessness of controls which have not changed to reflect changes in the business activities or organization.