Internal control in the acquisition and payment of goods

INTERNAL CONTROL TECHNIQUES

Internal control techniques can be slightly classified into prevention and discovery techniques.

Prevention techniques are intended to provide reasonable assurance that only valid transactions are recognized and processed. Examples of prevention techniques include:

• Supervisory authorization of adjustment transactions;

• Password procedures to restrict access to online terminals, computer programs, and files;

• Balancing, transaction by transaction, in an online system;

• Verification and validation (eg, keyboard verification or verification digits) of data entered into a computer system;

• Exploring data to see that it is reasonable before it enters a system;

• Segregation and rotation of entry and processing duties; and

• Clearly defined processing and exception procedures.

Discovery techniques are intended to provide reasonable assurance that errors and irregularities are discovered. Examples may include:

• Reconciliation of batch balancing reports with chronological records maintained by the original departments;

• Reconciliation of inventory cyclical counts with permanent records;

• Keep track of the use of pre-numbered forms;

• Review and approval of maintenance reports (“was and is”) of the master file;

• Internal audit;

• Comparison with plans and budgets of the reported results;

• In accounting transactions, reconciliation with the largest general balance of the largest auxiliaries;

• Reconciliation of the link quantities that leave one system and enter another; and

• Review of transaction logs and online access.

Application Case:

The Acquisition and Payment Cycle

The purchase and payment cycle includes some functions such as:

• Acquisition of goods, merchandise, services and labor

• Payment of acquisitions

• Classification, summaries and reports of what was purchased and what was paid

Main typical purchasing functions

• Supplier selection

• Request purchases

• To buy

Within the acquisition of goods some departments or functional areas such as:

1. Reception

2. Credit and Collections

3. Cash-Payment

4. Accounting

5. Financial

6. Comptroller

7. Shopping

The Purchasing function aims to:

• Reduce inventory level

• Combine small batches into large batch purchase

• Implement quality control in purchases

• Establish procurement and bidding policies

• Keep record of products

The main indicators of the Purchasing Department are:

1. Value of total purchases / Total sales compared to the previous year

2. Total purchases / Number of purchases

3. Percentage of rejected purchases

4. Percentage of production stoppage due to lack of raw material

5. Inventory / Sales

6. Average Cost of Purchase Order

7. Average order delivery time

8. Order number per month compared to the previous year

MAIN TERMS AND / OR DEFINITIONS

ITEMS IN EXISTENCE.- Certain number of files that are kept in individual inventory control records and that are physically kept in stock in the warehouses. WAREHOUSES.- They are the places of storage of goods.

There can be two types of warehouse: central and transit warehouses. These wineries are responsible for the following activities:

• Reception and verification of the status of products delivered by suppliers.

• Location, quality control and custody of products

• Delivery of stored products in optimal conditions to requesting users.

TRANSIT WAREHOUSES.- They are temporary warehouses in which the products are stored in a short period of time. In these warehouses local or imported materials can be found in transit. CENTRAL WAREHOUSES.- They are warehouses that maintain the permanent storage of goods. WAREHOUSE.- Person in charge of managing and registering the transactions of the warehouse. ECONOMIC QUANTITY OF ORDER. economic quantity for which an order is made. This means a profitable request or request for the company.CONTROL.- Tracking, tracking, alerting to ensure that plans and programs are being observed.INTERNAL CONTROL.- Evaluation of method and processes that are interrelated in an entity for the protection of its assets, obtaining accurate and timely information,the measurement of efficiency in operations and the observance of dictated policies as well as the fulfillment of established objectives and goals. COSTS OF ORDERING.- Costs associated with orders, independent of the size of the order. COST OF THE ORDER.- It is equal to the order size by the unit price. It is a variable cost ANNUAL FIXED COST OF ALL ORDERS.- It is the number of orders that are made in the year, which is equal to the annual demand divided by the quantity to order in each order. TOTAL ANNUAL COST OF THE INVENTORY.- It is equal to the total cost of the orders plus the total fixed cost to order, plus the cost of storage. COST OF STORAGE. - It is equal to the cost of maintaining the inventory by the average inventory. MAINTENANCE COSTS. - Costs related to the physical fact to keep inventory. For example,the opportunity cost.DEMANDA.- Actual number of materials requested by a customer or service department in a specific order.WARRANTIES.- The supplier guarantees that the merchandise meets the following characteristics:

to. Correspondence of the good to the purchase order

b. Optimal quality of the delivered goods

c. Merchandise free of any legal domain

d. Merchandise that meets the conditions stipulated in the Purchase Order

INSPECTION.- The merchandise described in the order is subject to inspection by the buyer at its destination. The buyer reserves the right to return all or part of the merchandise if it does not meet the established requirements. MAXIMUM.- Maximum quantity that must be kept in stock, not over-stock.MERCADERIA.- This is the name given to the articles or work done by the supplier under the terms and conditions described in the purchase order.MINIMUM.- Number determined that allows the satisfaction of normal demand.

It is the minimum quantity of an item that must be kept in inventory.

Ideally, the opening inventory for each period should be as close to it as possible.

PACKING LIST.- Document that allows the registration of information on imported products received in the warehouse. CONTRACT.- It is a commitment established verbally or in writing with suppliers of goods. These pre-contracts establish payment commitments in percentages, commitment dates for delivery of goods, discounts for prompt payment, among other characteristics. POINT OF REORDER.- When the inventory level drops to this point, a new order is made that will arrive some time after WAREHOUSE REQUIREMENT AND / OR PURCHASE REQUEST.- This document is a request that must be completed, authorized and approved in order to allow the delivery of stored goods or the purchase of non-existent goods in the warehouses of the company.- Number of additional pieces or materials that are kept in stock in order to prevent any lack of stock. TABLE OF FINANCIAL AUTHORITIES.- It is made up of people who are authorized to sign Warehouse Requisitions and / or Purchase Requests.

This table should be updated by the Purchasing Management, according to the needs.

Goal 1:

Suppliers must be authorized according to management criteria.

For this, the following must be analyzed in the suppliers:

• The current and potential capacity and willingness to provide quality and quantity, timely deliveries and service.

• Competitive prices considering unit prices, volume discounts, transportation costs and credit conditions.

• Legal restrictions

• The entity's policies regarding transactions with related parties, conflict of interest, delicate payments, etc.

Control Techniques:

1. Clear statements of criteria. Purchase Policies and / or Procedures Manual with clearly defined rules. Ex:

Only vendors offering volume discounts will be approved

2. Databases. List of approved suppliers or supplier master file.

3. Procedures established to add, change or delete from the databases.

4. These procedures must include:

to. A description of the documents to be obtained or created with respect to, a potential supplier, and

b. The tests or verifications to be made of the documents and information

obtained.

1. The integrity of the files must be protected with techniques such as:

2. Specify that changes must be approved in writing by specified executives or supervisory employees.

3. Standard pre-numbered forms with pre-coded key fields to document changes, physical controls on access to forms, and reconciliation of forms used with a tabulation of changes actually made

4. Review and approval of change reports and after each update to the databases due to name and address changes.

5. Periodic balancing and reconciliation of the number of names, in the files by a person who does not have responsibilities to initiate or process changes or by a data control group.

6. Periodic internal audit tests of the files.

7. Periodic review of online access activity charts to help determine correctness of changes to master files.

8. Reconciliation of checksum controls over supplier numbers in master file.

9. Limitation of access to the database through the database administration system, passwords or physical controls on terminals.

10. Verification digits on supplier numbers for the maintenance of the master file.

Goal 2:

The types, estimated quantities, prices and conditions of the merchandise and services must be authorized according to management's criteria.

For this you must:

• Specify type of goods and services to be purchased, including quality standards.

• Apply methods to establish the quantities to be purchased

Points to reorder

Quantities for the cheapest order

Approved plan for materials needed

Capitalized expenses budget

• Set prices to be paid

The lowest bidder

Contract price

Supplier Price List

• Determine acceptable conditions

Freight

Discounts

Minimum time for preparation of deliveries

Control Techniques:

1. Only the materials that appear in the list of materials will be ordered. Other orders must be approved by the Head of Purchasing.

2. The quantities of materials ordered must not produce inventories that exceed the established levels.

3. Materials will be ordered only if specified in the approved materials needed plan.

4. All capitalizable disbursements that exceed a certain amount must be approved by the Board of Directors.

5. The quality of the ordered merchandise must meet the stated engineering specifications.

6. Suppliers' price and conditions databases must be approved.

7. Warehouse inventory master file with points to reorder, quantities for the cheapest order, materials plan needed.

8. Established procedures to add, change, delete prices from the database.

9. Reconciliation of checksum controls on supplier prices in the master file.

10. Periodic comparisons of published supplier prices with the price master file.

11. Periodic review of master files by appropriate supervisory personnel.

12. Written statements of acceptable engineering specifications and qualities.

13. Documented and forced procedures to review and approve long-term contracts of ministers before their formalization.

14. Periodic comparison of the prices paid to a supplier with market prices or with prices paid to other suppliers for similar goods and services.

15. Centralized purchasing department to control the issuance of all orders to suppliers for goods or services.

Goal 3:

Adjustments to cash disbursements, vendor accounts, and account distributions must be authorized according to management criteria.

For this you must:

• Control cash received from suppliers

• Control the Returns of merchandise to suppliers

• Make offsets from accounts payable against accounts receivable

• Control debit and credit notes (for purchase volumes, etc.)

• Maintain price renegotiation agreements

• Make settlements of disputed items.

• Maintain partial payments

• Maintain special payments

• Maintain voided checks with non-payment order, returned and reissued.

• Make reclassifications of distributed amounts

Reclassification of an expense account to an inventory account or other asset

Reclassification of a payment

Control techniques:

1. Clear statement of criteria and policies, including policies regarding the return of merchandise, partial payments, settlement of disputed items, taking discounts for prompt payment, etc. Example:

2. Prompt payment discounts will be taken on all invoices paid within a specified number of days.

3. Suppliers will be notified within a certain number of days of any refund made and the corresponding credit note will be charged to the supplier's account.

4. Accounts payable will not be offset with accounts receivable without the respective authorization

5. Orders will be issued not to pay checks that remain uncollected for more than a specified number of months, and cash accounts will be adjusted for such checks.

6. Standard and controlled pre-numbered forms for adjustments with the respective approval.

7. Regular reporting and periodic analysis of trends in the amounts and types of adjustments.

8. Written approval of all account distribution adjustments by a specified executive or supervisor.

Goal 4:

Procurement and payment cycle process procedures must be established and maintained in accordance with Management's criteria.

Control Techniques:

1. Clear statements of the procedures:

Policy manuals

Procedure manuals

Workout routines

Supervision requirements

System and program documentation

2. Verification of required approvals from management and users for new systems and procedures

3. Changes of systems, procedures and programs

4. Periodic verification of the supervisory approvals required to transfer responsibilities, changes in forms, file systems, etc.

5. Periodic tests of reasonableness

6. Procedures that require that all changes to computer programs be authorized, reviewed and approved by the data processing manager and the Head of the user department

Goal 5:

Only requests to suppliers for merchandise or services that meet management's criteria should be approved.

Control Techniques:

1. Documented procedures to initiate, review and approve requests for goods and services.

2. Pre-numbered life forms (eg, purchase requests, purchase orders, etc.) and the accountability of such forms (eg, numerical verification sheets or tipping.

3. File of authorized signatures.

4. Regular internal audits of such things as competition offers on file, purchase order pricing against vendor price lists, accepted terms versus vendor available terms, etc.

5. Inventory control system that produces purchase orders (eg, with a permanent inventory record prepared with the computer, purchase orders can be created automatically when quantities in inventory reach a set point for reordering).

Goal 6:

Only goods and services that have been requested should be accepted.

Control Techniques:

1. Central receiving locations strictly supervised and separate from shipping, purchasing and storage functions.

2. Purchase order forms that have the place of receipt printed in advance and that the supplier is instructed to make the delivery only at that place.

3. Container count (and comparison with bill of lading) and observation of the appearance of containers on the receiving platform.

4. Detailed comparison of goods received with a copy of the purchase order. (Note: Effective use of this technique requires shipments for which there is no order on file at the receiving location to be returned to the supplier or held pending until an order is received.)

5. Periodic review of pending purchase orders for possible cancellations.

6. Automatic cancellation of pending purchase orders after the specified delivery dates.

7. Strict supervision of reception staff.

Goal 7:

Accepted goods and services must be reported accurately and promptly.

Control Techniques:

1. Pre-numbered and controlled receipt documents that are later reported to have been sent to, or received by, an order verification or accounts payable function.

2. Maintenance of a reception chronological record in which each reception document is recorded in your order. (Note: This record can be used later to keep track of the pre-numbered receipt documents. A one-time annotation system can be used to simultaneously produce the record and the receipt document.

3. Documented procedures for reception room outages (daily and end of period).

4. Total control and identification of dates, headings, etc. in the reports

Goal 8:

The amounts owed to suppliers for accepted goods and services and the accounting distribution of those amounts must be accurately calculated and recognized as liabilities promptly.

Control Techniques:

1. Verification of the invoiced quantities, prices and conditions by reference to the purchase order and receipt report and verification of the documentation.

2. Verification and documentation of the multiplications and sums of the invoices. (Note: This can be done by testing.)

3. Standard procedures for accumulations at the end of the period of unprocessed invoices, shipments received but not the invoice, etc.

4. Analysis of differences between physical inventories and permanent records.

5. Distribution of purchase journals or expense distributions to department supervisors for review and analysis.

6. Review of suppliers' account statements (not invoices) to observe overdue past due items.

7. Lists prior to preparing vouchers to establish immediate control over vendor invoices before joining receipt reports and purchase orders that complete the voucher to be prepared.

8. Batch balancing and chronological recording techniques to control invoices with your vouchers to pay.