Review of Purchasing Operations - Review of Internal Control, Auditing & Secretarial Practice | Auditing and Secretarial Practice - B Com PDF Download

Introduction

The Assessment of internal control has gained much priority now days for its numerous advantages both to the auditor and auditee. After review of internal control system in an organisation, the auditor ascertains the depth of audit required while the auditee gets aware about the weakness in present system. This provides an opportunity to the auditee to improve upon the existing system and implement better system for ensuring accuracy in recording and reporting, safeguarding of assets, compliance of laws etc. Here in this section we will cover review of purchase operation, management information system, selling and distribution policies and programs, manufacturing operations, HR system and management decisions.

Review of Purchasing Operations

Purchase is one of the most important functions in a manufacturing organisation. In most of the manufacturing and trading organisation, purchases constitutes about 50-70% of the cost. So it becomes very important to have an efficient internal control over the purchasing activities of an organisation.

Objectives of Review of Internal Control over Purchasing Operations

The objectives of review of internal control system includes to ascertain

1. Whether controls are in place in the process to ensure that accountability is established as early as possible at all points along with the accountability chain.
2. Whether segregation of duties, risk mitigating controls, exists within transaction processing authorization. Whether separation of duties exists between various types of transaction processing (e.g., procurement, accounts payable, disbursements).
3. Whether the quantity and quality of goods and services received is documented and agrees with the requisition and performance expectations such as service level agreements, contract terms, and vendor performance.
4. Whether transactions are properly verified before disbursement, transactions and activities are properly authorized, transactions and events are properly recorded.
5. Whether accountability for refunds and credits are maintained. Whether staff understands their duties, responsibilities, and accountabilities.
6. Whether procurement practices and procedures are documented, and in compliance with central and state laws and other requirements such as contract terms and conditions. Procurement records for authorizations and transactions are maintained in accordance with established requirements.
7. Whether accounting records are protected from theft, obsolescence, or destruction. Whether assets are safeguarded from loss through watchful and responsible care and reconciliation functions

Different Procedural Aspects Relating To Review of Purchase Operations 

Segregation of duties in purchase operations

To ensure proper separation of duties, assign related buying functions to different people. Ensure proper segregation, no single person has complete control over all buying activities.

It is always preferable to have different people who –

I. Approve purchases

II. Receive ordered materials

III. Approve invoices for payment

IV. Review and reconcile financial records

V. Perform inventory counts

If segregation of duties does not exist in purchases operations, this may result into unauthorized or unnecessary purchases, improper charges to department budgets, purchase of goods at excessive costs, use of goods for personal purposes

Accountability, authorization, and approval mechanism

In an efficient purchase system, the mechanism of authorization, review, and approval should exist. All purchases should be made on the basis of signed agreements, contract terms, and purchase orders.

It will always be advisable to –

(i) Comply with ethical buying practices and policy.

(ii) Review and update signature authorizations periodically.

(iii) Obtain pre-approval of consultant agreements by Purchasing.

(iv) Verify receipt of goods and services against contract/ purchase order and invoice information.

(v) Reconcile ledgers for accuracy of recorded transactions.

(vi) Monitor to ensure that invoices are paid in a timely manner.

In case the mechanism of ascertaining accountability does not exist. it may result into unauthorized or unnecessary purchases, purchases at higher rate, misappropriation of funds.

Physical control over of assets

Once the purchases are done, it is necessary to secure the materials in a safe location. To ensure that the resources are accounted for, it is necessary to periodically verify the inventory and compare the results with the books.

To ensure security of assets, it is advisable to –

(i) Secure goods received in a restricted area.

(ii) Restrict inventory access to appropriate staff.

(iii) Lock goods and materials, and provide key or combination to as few people as possible.

(iv) Keep inventory records and periodically calculate beginning and ending inventory amounts.

If physical control over assets does not exists, it may result into theft of goods, inventory shortages, additional costs incurred for replacement of goods

Review and reconciliation

Review and reconciliation is a very important part of purchase internal control system. Timely review of supplier’s invoice, packing slips, and purchase orders is very necessary to ensure accuracy of the information for prior payment, correct quantity ordered, and price charged. Monthly ledger reconciliation enables to find improper charges and validate appropriate financial transactions.

It is advisable to –

(i) Review supplier invoices for accuracy by comparing charges to purchase orders.

(ii) Verify that the goods and services purchased have been received.

(iii) Perform monthly reconciliations of operating ledgers to ensure accuracy and timeliness of expenses.

In case review and reconciliation process is missing, it may result into improper charges to the department budgets, Disallowances resulting from costs charged to incorrect accounts/funds, payments made for items or services not provided