VI 31 Annex E SAMPLE TRANSACTION TEST AUDIT PROGRAME CASH RECEIPTS

A. TO CONFIRM THAT ALL CHAS RECEIVES AND ACCOUNTED FOR

1. Select certain receipt from throughout the year and check a) Entry in the cashiers record b) That the receipt is signed by the cashier and does not contain any alternations or erasures. 2. Perform block sequence tests on copy receipts and inspect original copy of cancelled receipts. B. TO VERIEY CORRECTNESS OF ACCONTS RECORDING 3. Select cashiers records for certain days of the year and: a) Vouch with copy receipts/cash sales invoice. b) Check numerical sequences of receipts/cash sales invoices. c) Vouch with bank deposit slips and ensure that all cash collected deposited intact. d) Check casts and cross-costs of cashiers records. e) Check posting to control accounts. f) Check postings from copy receipts to subsidiary ledger accounts. g) Examine evidence that cashiers records have been independently checked. 4. Scrutinize cashiers records for integrity of the numerical sequences of cash receipts. C. TO ENSURE ADEQUATE CONTROL EXERCISED OVER CASH RECEIPTS 5. Observe that cash receipts kept in safe custody by a responsible official. 6. Verify numbers of receipt pads printed during the year with printers invoices and check to register of receipts.

7. Scrutinize register of receipts for evidence that new pads issued in strict numerical sequence only in replacement for a completed pad returned. 8. Physically verify unused receipt pads on hand and agree with register. (If not already undertaken during cash count procedures.)

VI 31 Annex E SAMPLE TRANSACTION TEST AUDIT PROGRAME CASH RECEIPTS

A. FORM TO CONFIRM THAT ALL CASH SALES ARE PROPERLY ACCOUNTED

1. Select certain cash sales invoices and check. a) Entry on the cashiers cash sales summary. b) Approval and cashiers signature for receipt of the cash. c) Prices, extensions and additions on the invoices. d) Discharge of goods sold on the stock cards. 2. Perform block sequence tests on copy cash sales invoices. Inspect original copy of cancelled invoices. B. TO VERIFY CORRECTNESS OF ACCONTS RECORDING 3. Select cash sales summaries for certain days of the year and: a) Vouch with copy cash sales invoices checking analysis and numerical sequences. b) Examine evidence that summaries independently checked. c) Check casts and cross-casts. d) Check posting to subsidiary and control ledger accounts. e) Check total cash takings with main cashiers receipt. 4. Scrutinize cash sales summaries for integrity of the numerical sequences of cash sales invoices. C. TO ENSURE ADEQUATE CONTROLEXERCISEE OVER CASH SALES INVOICES. 5. Observe that sales invoices kept in safe custody by a responsible official other than the cashier. 6. Verify number of cash sales invoices printed during the year with printers invoices and check to register of cash sales invoices. 7. Scrutinize register of cash sales invoices for evidence that new pads issued in strict numerical sequence only in replacement of completed pads returned.

8. Physically verify stocks of unused cash sales invoices and agree with register. (If not already undertaken during cash count procedures.) 6. Transaction Tests Purchases 6.1 Introduction Purchases may be local purchases, i.e. goods purchased in birr from a supplier in Ethiopia, or foreign purchases, i.e. goods imported by the enterprise itself from abroad. 6.1.1 Local Purchases Local purchases may be cash purchases in which case the point of recording of the transaction will be the cheque payment voucher to which will be attached the suppliers receipt and invoice and copy of the goods receiving report as evidence that the goods concerned have been received and taken into stock. Cash purchases are likely to be only of minor items, major supplies being purchased on credit. Credit purchases will be recorded either individually direct from suppliers invoices after they have been checked with the purchase orders for correctness and matched with the goods receiving report as evidence of receipt of the goods or else periodically from the totals of purchase journals which comprise a listing and analysis of suppliers invoices received. 6.1.2 Foreign Purchases The feature of foreign purchases is that the cost of the goods purchased comprises not only the charge by the supplier but also the other costs incurred in bringing the goods concerned to Ethiopia, such as, insurance, bank charges, sea freight, customs, transit charges, transport and unloading. Such costs will extend over a considerable period

of time and will usually be largely incurred in advance of the actual receipt of the goods. Although costs will be incurred prior to the arrival of the goods, delays will often occur before the receipt of the actual invoices, particularly in the case of transit charges. Care must accordingly be taken to ensure that all costs relating to a particular order have been recorded before the cost of the goods received is transferred to purchases. This will be of particular significance at the year end which provision will have to be made for costs for which invoices have not been received, in order that goods in transit accounts are closed to purchases in the period in which the goods were received. Import costs should, therefore, be charged to separate goods in transit accounts until actual receipt of the goods which the total cost will be transferred from goods in transit to foreign purchases. A further factor of foreign purchases is the on arrival goods will often be found to be missing due to pilferage, or the cost of the goods should be claimed from the insurance and debited to claim from the insurance and debited to claims receivable, only the cost of those items received in good condition being included in purchases. Where the volume of foreign purchases is not great, they may be more efficiently verified during the validation procedures of goods in transit as reviewed in chapter IX sections 3 rather than b undertaking transaction tests. 6.2 Objectives of Tests The objectives of the audit of purchase transactions are to ensure that:

Only goods required by the client are ordered and such orders are subject to proper checking and approval procedures.

6.3

Purchases reflect only goods that have actually been received and taken into stock. The liability to suppliers for goods received is correctly reflected in the accounting records.

Internal Control The fundamentals of a sound system of internal control over purchases are as follows: 6.3.1 Orders Goods Such required should be requisitioned be checked by the by the department which requires them or central stores. requisitions should purchasing department who will prepared a prenumbered purchase order after ruling prescribed procedures regarding obtaining proforma invoices, quotations or tenders. Purchase orders must be approved by a senior official and adequate records maintained so that orders not fulfilled can be identified and necessary follow up action taken. 6.3.2 Goods received Goods received should be checked by a storekeeper with the appropriate purchase order and copy of suppliers invoice or delivery order as to quantity and description of the goods and a pre-numbered goods receiving report prepared. Damaged or missing items should be disclosed separately on the goods receiving report and should not be taken into stock. Recording of the quantities received on the stock records should be made by someone other than the

storekeeper who received the goods and completed the goods receiving report.

6.3.3 Suppliers Invoices Suppliers invoices should be numbered consecutively upon receipt and recorded in a register giving a reference to the related purchase order number and goods receiving report. The posting reference whereby the invoice was entered in the accounting records should also be shown. The numbering ad recording of suppliers invoices in such a register will facilitate reference and obviate the risk of their being mislaid or omitted from the accounting records. Suppliers invoices should be checked with the related purchase orders as to quantity, description and price and with the goods receiving reports as to quantities received, before being approved by a responsible official for entering in the accounting records. Suppliers invoices should be cross-referenced to the related purchase orders and goods receiving reports and vice versa. Good receiving reports and purchase orders for which suppliers invoices have not been received should be kept in pending files ad regular follow-up made as to the reasons for the delays. This is particularly significant at the year end in order to ensure that purchases includes the cost of all goods that have been received and taken into stock and vice versa. 6.3.4 Accounts Recording

Whatever the method of entering suppliers invoices in the accounting records, they should be pre-listed to determine the control account postings. The accounts clerks involved in the posting to the subsidiary ledger accounts should not have access to the control accounts, the balances on which should be regularly agreed with the total of the subsidiary account balances. Suppliers statements, where available, should be checked with the subsidiary ledger accounts by a responsible official and any differences immediately followed up. 6.3.5 Foreign Purchases The significant feature of foreign as compared to local purchases is that there has to be an adequate system of accumulating the cost of each order while it is in transit and to ensure that the full cost of the goods received, including all charges, is transferred to purchases after the goods they have been taken into stock. Effective procedures must be in operation to ensure that insurance claims are made for items received damaged or not received at all and that the proportional cost of such items is charged to a claims receivable account and not included in the cost of purchases. Cost of good received must be computed using a system that allocates the transport, customs, insurance 6.4 Audit Procedures Transaction tests of purchases will normally include the following: and other charges equitably to the individual items.

6.4.1 Orders Ascertain by observation and reperformance that purchases are only made on the basis of prenumbered purchase orders prepared from signed requisitions and approved by a responsible official. Check that the required procedures regarding quotations or tenders are complied with and review records of purchase orders to ensure that outstanding orders are being followed-up. 6.4.2 Goods Received Match goods receiving reports with related suppliers invoices and purchase orders to ensure that goods received were those ordered and invoiced by supplier. Test check the recording of quantities and value of goods received in the stores records and financial stock cards. Ensure by sequence tests of the goods receiving reports that purchases have been recorded in the accounting records for all goods that have been taken into stock. 6.4.3 Accounts Recording Verify the validity of the accounts recording with suppliers invoices observing that adequate control exercised over suppliers invoices received and that invoices agree with the purchase orders and goods receiving reports. Check the recording in the suppliers subsidiary ledger accounts and that the quantities and values of purchases are recorded in the stores records and financial stock cards. 6.4.4 Import purchases Verify receipt of imported goods by reference to goods receiving reports and vouch make up of total

cost transferred to purchases ensuring that such cost is complete and and includes costs. all customs, transit, the transport other Ascertain that

proportional cost of any damaged or sort landed items is segregated from total cost and debited to claims receivable accounts and that adequate follow-up action is taken. Check the costing of goods received and the recording of quantities, and quantities and values, in the stock records and financial stock cards respectively. Observe that goods in transit accounts are subject to regular review and follow-up by a responsible official. A sample audit program in respect of purchases is included as Annex H to this chapter.

VI Annex G (1) SEPARATION OF FUNCTIION PURCHASES SEPARATION OF FUNCTION 1. Is there separation of function between? Requisitioning of goods? Authorization of orders? Checking and receipt of goods? Checking of suppliers invoices for correctness and to ensure that invoices have been received for all goods received and vice versa? The recording in the accounting records? ORDERING Control Objective To ensure that goods are only ordered after proper authorization and that a record is maintained of pending orders. 1. Are goods required requisitioned by the department that required them or central stores and signed by a responsible official?

2. Are orders evidenced by pre-numbered purchase orders approved by a responsible official after tenders, solicitation of quotations, etc.? 3. Are adequate records maintained to identify orders fulfilled and not fulfilled? 4. Are there adequate follow-up procedures in respect of long outstanding orders? GOODS RECEIVED Control Objective To ensure the proper checking and recording of goods received. 1. Are goods received checked das to condition and as to quantity and description with the appropriate purchase order, before being taken into stock? 2. Are pre-numbered goods receiving reports prepared by the storekeeper for all goods received? 3. Are broken and damaged items separately identified on the goods receiving report? VI 38 Annex G (2) 4. Are such items kept physically separate pending survey by the Insurance Corporation? 5. Is there an adequate system for ensuring that damaged and missing items are claimed? 6. Is the recording on the stock cards of goods received made by someone other than the storekeeper who received the goods? ACCOUNTS RECORDING Control Objective To ensure that goods received are correctly recorded as purchases and that liability thereon to suppliers is reflected in the accounting records. 1. Are suppliers invoices immediately numbered consecutively upon receipt and recorded in a register of purchase invoices?

2. Is a reference to the appropriate purchase order and goods receiving report included both in the register and on the invoice itself? 3. Are there adequate procedures for identifying and following-up goods receiving reports for which suppliers invoices have not been received? 4. Are invoices checked with purchase orders for correctness of goods supplied and price? 5. Are invoices checked with goods receiving reports for correctness of goods received? 6. Are invoices approved by a responsible official for recording only after procedures 4 and 5 above have been completed? 7. Are approved invoices pre-listed to determine the control account total before ledger posting is undertaken? 8. Are adequate cut-off procedures in operation to ensure that all goods received before the year end is included as purchases? 9. Are subsidiary ledger accounts balances of purchases and suppliers regularly agreed with the control accounts by a responsible official? 10. Are suppliers accounts checked and agreed with suppliers statements and immediate enquiry made into any differences? 11. Are the values of damaged or lost items separated from purchases and debited to separate claim accounts? 12. Are such claim receivable accounts subject to regular review and follow-up? VI 39 Annex G (3) IMPORT PURCHASES Control Objective To ensure that proper records are maintained of goods in transit and that the cost of goods received is transferred to purchases.

1.

Are separate subsidiary ledger accounts maintained

for every order in transit to which all payments and expenses relating to the order are debited? 2. 3. Are the balances on such accounts regularly agreed Is the full amount of the letter of credit debited to with the control account balance by a responsible official? goods in transit and the unpaid margin credited as a liability when goods ordered have been shipped? 4. 5. Is the cost of goods imported only transferred to Is the completeness of costs including accrual for import purchases on the evidence of a goods receiving report? transit expenses, reviewed by a responsible official before such transfer is made? 6. 7. Is the cost of damaged or lost items segregated and Are goods in transit accounts subject to regular debited to claim receivable accounts? review by a responsible official and full enquiry made into all long outstanding orders? 8. 9. 10. Are separate files maintained for each order containing all relevant documentation? Is an adequate costing system in operation for Are adequate cut-off procedures in force to ensure that, at the year end the full cost of all gods received has been included as purchases? VI 40 Annex H (1) SAMPLE TRANSACTION TEST AUDIT PROGRAMME PURCHASES A. ORDERS costing individual items received?

TO CONFIRMTHAT PURCHASES ONLY MADE ON THE BASIS OF APPROVED PURCHASE ORDERS. Select certain purchase orders from throughout the year and check: 1. goods. 2. Approval of the purchase order by a responsible official after compliance with clients procedures regarding tendering, solicitation off quotations, etc. 3. 4. B. GOODSRECEIVED TO CONFIRM THAT GOOD RECEIVED AND TAKEN INTO STOCK ARE REFLECTED AS PURCHASES 1. Select certain goods receiving reports from throughout the year and check. a) Signature of storekeeper for receipt of the goods. b) Reference to the purchase order and that the goods receiving report number recorded in the register of purchase orders. c) Reference to suppliers invoice or goods in transit number and that the goods receiving report number recorded in the register of suppliers invoices. d) Quantities and description of goods received with purchase order and suppliers invoice. e) Posting of quantities of goods received to stock records. f) Posting of quantities and cost of goods received to the financial stock cards (via costing sheets in the case of import purchases). Record of details of purchase order n register of purchase orders. Scrutinize record of purchase orders and enquire into unfulfilled items. Detail of goods ordered with the signed requisition of central stores or the department requiring the

2.

Verify posting of related suppliers invoices to purchases and suppliers subsidiary ledger accounts.

3. Check inclusion of such invoices in control total and verify control accounts posting. 4. If goods received resulted from a foreign purchase check transfer of cost of goods from goods in transit account to purchases. VI 41 Annex H (2) 5. If any goods short landed or damaged check cost included on a claims form or debit notes. 6. Check posting of claims form or debit note to claim receivable or supplier account as applicable. 7. Undertake sequence tests on goods receiving reports ensuring that all referenced to a suppliers invoice or goods in transit number. C. ACCOUNTS RECORDING TO CONFIRM THAT AMOUNTS RECORDED AS PURCHASES WERE AS ORDERED AND ARE REPRESENTED BY GOODS RECEIVED AND TAKEN IN TO STOCK. 1. Select certain local purchases from the accounting records, and: a. Vouch with the suppliers invoice, checking approval. b. Check details of the quantities and prices of the goods per suppliers invoices with purchase orders. c. Check details of the quantities of goods per suppliers invoices with goods receiving reports. d. Check posting of suppliers invoices to suppliers subsidiary ledger accounts 2. Select certain import purchases from the accounting records, and: a. Check cost with total of goods in transit account. b. Scrutinize goods in transit account for completeness and vouch as necessary.

c. Verify receipt of goods with goods receiving reports. d. Check costing sheets and test check posting of quantity and value of individual items to financial stock cards. 3. Scrutinize register of suppliers invoices to ensure that all invoices referenced to a purchases order and goods receiving report. 4. D. IMPORT PURCHASES TO CONFIRM THAT GOODS IN TRANSIT ACOUNTS PROPERLY REFLECT ALL EXPENSES RELATING TO IMPORTS AND THAT THE FULL COST IS TRANSFERRED TO PURCHASES ON RECEIPT OF THE GOODS Select certain goods in transit accounts for goods received during the year and check: 1. Validity of items debited with supporting documentary evidence. 2. Completeness of G.I.T. account i.e. that all expenses such as insurance; charges; full amount of L/C or IBC; transport and transit charges included. VI 42 Annex H (3) 3. Goods receiving reports to substantiate transfer of cost of import to purchases. 4. Posting to purchases account, subsidiary and control. 5. Details of goods received with suppliers invoice and purchase order. 6. Costing of goods received via costing sheets. 7. Posting of quantities received from goods receiving reports to stores records. 8. Posting of quantities and cost of goods received to financial stock cards. 9. Posting of cost of goods short landed or damaged to claim receivable account via claims form or debit notes. VI 43

7. Transaction Tests Cheque Payment 7.1 Introduction Payment by cheque is the most common means of settling obligations for goods and services obtained and consequently a substantial part of the disbursements recorded in an enterprises accounts will be by this means. 7.2 Internal Control The control objectives of a sound system of internal control over cheque payments is that disbursements from bank accounts should be made only in respect of valid transactions. 7.2.1 Cheque books must be kept in safe custody by a responsible official. 7.2.2 The numbers of cheques received from the bank should be immediately recorded in a cheques register. When each cheque is signed the following information should be entered in the appropriate column. Date of the cheque. Name of the payee. Reason for payment. Amount of cheque. Cheque payment voucher number

Such a register provides a permanent record of both the un issued cheques that should be on hand at any time and immediate reference to any cheque that has been issued. 7.2.3 Spoiled or voided cheques should be cancelled and retained in the cheque book as evidence that they have not been issued. If already signed, the signatures must be obliterated or torn-off to reduce the opportunity of their being fraudulently copied. 7.2.4 Dual signatures should be required on all cheques and signatories are subject to defined limits of authority.

7.2.5 The signing of cheques in blank should be specifically prohibited. 7.2.6 Cheques should preferably be made payable to a person, company or enterprise and crossed A/C payee only to ensure that only the designed beneficiary can receive payment and fraudulent endorsement is not possible. 7.2.7 Cheque payments should be supported by pre-numbered cheque payment vouchers accompanied by full supporting documentary evidence as to the validity of the payment. The cheque payment voucher and supporting documents should be checked and approved by a responsible official be for preparation of the cheque. Persons who approve documents for payment should not be involved in The handling or recording of cash. Posting to the accounting records. Approving transactions which originate

disbursements. 7.2.8 The payment voucher and supporting documentary evidence should be checked and initialed by both cheque signatories who should also complete and initial the cheque book counterfoil. The payment voucher and supporting documents must be stamped PAID at the time of signature of the cheque to prevent fraudulent re-use. 7.2.9 Persons who sign cheques should not be involved in the handling or recording of cash, posting to the accounting records, approval of documents for payment or the initiation of transactions which originate disbursements. 7.2.10 Accounts coding on cheque payment vouchers should be verified by a responsible official before posting to the ledger accounts is made.

7.2.11 Bank ledger accounts should be checked with the bank statements and reconciled monthly and immediate follow-up made into out-standing items. The procedures for the verification of bank reconciliations are reviewed in detail in chapter XII section 4. It may however often be found that, in practice, such a division of duties is not possible. For example a chief accountant will often be both a cheque signatory and responsible for checking and approving documents for payment and also for the accounts recording. In such a situation the auditor should recognize the potential control weakness and ensure by enquiry and observation that the other signatory is thoroughly checking the supporting documents and not merely replying on the approval of the chief account. An internal control questionnaire in respect of cheque payments is included as Annex I to this chapter. 7.3 Audit Procedures Procedural tests on cheque payments should cover the following points: 7.3.1 Custody, issue and usage Observe physical control over unused cheques and review cheque register for evidence of control over numerical sequences. Enquire into any missing numbers and test check existence of void cheques. Physically verify and agree unused cheques on hand. 7.3.2 Examination of evidence Verify by reperformance and observation that cheque payments are properly approved, supported by adequate documentary evidence as to the validity of the payment and stamped PAID and initialed as having been reviewed by the cheque signatories. Observe that details of the payment entered in the cheques register and cheque book counterfoil.

7.3.3 Accounts Recording Examine payment vouchers for evidence that accounts codlings have been checked and vouchers posted and test check actual posting of vouchers to subsidiary and control ledger accounts. A sample audit programme for cheque payments is included as Annex J to this Chapter. INERANL CONTROL QUESTIONNAIRE CHEQUE PAYMENTS SEPARATION OF FUNCTION Are persons who sign cheques and/or approve vouchers for payment prohibited from: Having access to cash or petty cash? Recording cash received? Posting to the cash or accounting records? Approving transactions which initiate disbursements?

CUSTODIAL Control Objectives To ensure that proper safeguards exist over the custody of cheques. 1. Are unused cheques kept in safe custody by a responsible official? 2. Are cheque numbers entered in a cheques register when received from the bank? 3. Are details of each cheque issued entered in the register when it is signed? 4. Are spoiled and voided cheques marked Void, the signatures cancelled and the spoilt cheque retained in the cheque book? APPROVAL AND SIGNATURE

Control Objective To ensure that cheques and bank transfers are only prepared and issued for valid transactions. 1. Are dual signatures required on all cheques? 2. Are cheque signatories subject to established limits of authority? 3. Is the split up of payments to avoid approval by higher authority prohibited? 4. Is the signature of blank cheques specifically prohibited? 5. Are all cheque payments supported by pre-numbered payment vouchers? 6. Are payment vouchers accompanied by full supporting documentary evidence as to the validity of the payment? 7. Are such documents checked and approved for payment before being presented to the cheque signatories? 8. Do both cheque signatories check the payment voucher and supporting documents for correctness and initial them? 9. Are cheque payment vouchers and supporting documents stamped PAID either before, or at the time of signature of the cheque? 10. Are cheques always crossed before issue? 11. Are cheque counterfoils completed with details of the payment and a reference to the payment voucher number? 12. Do both signatories initial the cheque book counterfoil? ACCOUNTES RECORDING Control Objective To ensure that cheque payments are fully and correctly entered in the accounting records. 1. Is the accounts coding independently checked before posting? 2. Is posting made independently to bank control and detailed accounts and such balances regularly agreed? BANK RECONCILIATIONS Control Objective To ensure that bank records are independently reconciled with the bank statements.

1. Are all bank accounts reconciled monthly by someone other than the cashier or a cheque signatory? 2. Are bank reconciliations reviewed and approved by a responsible official? 3. Is immediate follow-up made with the bank regarding outstanding deposits and debits and credits shown in the bank statements for which advices not recorded?