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.

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. 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
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. 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.