Purchases And Creditors.docx

INTERNAL CONTROL WITH REGARDS TO PURCHASES AND CREDITORS Regarding Purchases: The specific internal control procedures for purchase of goods for inventory consists of the segregation of duties at the following points –  Requisitioning the goods – Specified employees from stores department should prepare and approve a purchase requisition for raw materials or goods used in production. The purchase requisition is sent to the purchasing department.  Ordering the goods requisitioned – The purchase department is responsible for negotiating the best prices, fixing delivery dates with suppliers and ensuring that appropriate quality goods are obtained. It prepares a serially numbered purchase order. The original purchase order is sent to the vendor and copies of it are sent to the stores, receiving department and the accounts payable unit of finance department.  Receiving the goods ordered – Goods ordered are inspected and counted by the receiving department. It compares the goods to the detailed description listed on the purchase order copy. If satisfied, it prepares serially numbered receiving report or goods received note and forwards its notification copies to the stores, purchase department and finance department.  Preparing the payment voucher – The accounts payable department of finance department will receive the invoices and should number them and stamp them with the date received. Comparison of prices, discounts and terms of shipment as shown on the purchase order and on the vendor’s invoice is made to safeguard against the payment of excessive price. A voucher is prepared to which are

attached a) purchase requisition copy, b) purchase order copy, c) receiving report, and d) vendor’s invoice. When on comparison, all the documents are found in agreement, an entry is made into the accounts payable journal. Daily voucher summary is prepared by the accounts payable unit.

Regarding Creditors: An internal control for cash payments to creditors should operate at the following points:  Authorizing payments – All payments should be authorized on the basis of validly approved vouchers which are assembled by the accounts payable unit of finance department.  Preparation of cheque – The cashier on the basis of vouchers should draw the cheques and cross them – “account payee only-not negotiable”. The cheque number and date should be entered on the voucher.  Cheque signing and dispatch – The prepared and unsigned cheques along with the supporting vouchers are sent to authorized persons for review and signature. After cheques are signed, vouchers are marked ‘paid’. It is a normal practice to have two signatories on all cheques above a stated minimum amount. The cheque should be dispatched directly to the payee without being returned to person(s) involved in processing payment.  Recording cash payment – The counterfoil of issued cheques or vouchers marked ‘paid’ may be the basis for recording the payments in the cash book by the cashier and debit to the vendors’ account,

will normally be made by the person responsible for maintaining accounts payable ledger.

Reference: Auditing, Aruna Jha, July 2009, Taxmann Publications Ltd. Navin Purohit 1023