Question

The principal business objectives of the acquisition process are acquiring goods and services at the lowest cost consistent with quality and service requirements and effectively using cash resources to pay for those goods and services. Explain the entity’s four control activities of the purchase cycle using specific examples. Provide at least two examples for each control activity.

Answer 1

Answer:

Purchase order cycle means keep purchase free from disputes and from Abnormal losses. To make purchase order free from disputes The business should apply following controls on the purchase order

1. Separation of duties To make controls on purchase cycle it is very important to separation of duties No single person has complete control on puchase order. In puchase order there are different activities like

• Approve purchases
• Receive ordered materials
• Approve invoices for payment
• Review and reconcile financial records
• Perform inventory counts

All these activity should be separated among different person.

Example. If Mr. Tom is doing work of receiving order than he should not review inventory and reconcile financial records

If Mr. John is review and reconcile financial records then he should not perform inventory counts.

2. Security of assets: Another work is to securing the goods that are purchased. For securing goods following are the best practices

• Secure goods received in a restricted area.
• Restrict inventory access to appropriate staff.
• Lock goods and materials, and provide key or combination to as few people as possible.
• Keep inventory records and periodically calculate beginning and ending inventory amounts

Example:

In the business of gold things thats are of major valuable keep in locker

Record all inventory daily basis and report them to appropriate authority

3. Review and reconciliation:

Practice timely review of supplier’s invoice, packing slips, and purchase orders. Check accuracy of the information for prior payment, correct quantity ordered, and price charged. Monthly ledger reconciliation enables you to find improper charges and validate appropriate financial transactions.

• Best practices:
  • Review supplier invoices for accuracy by comparing charges to purchase orders.
  • Verify that the goods and services purchased have been received.
  • Perform monthly reconciliations of operating ledgers to ensure accuracy and timeliness of expenses.

Examole: 1. Inventory should be reviev on timely basis.

2. If there are normal losses during the production then inventory ledger should be reconcile.

4. Accountability, authorization, and approval: You have maintain accountability when you authorize, review, and approve purchases based on signed agreements, contract terms, and purchase orders. For this process followings are the best practice

Examples: 1. All the purchase orders should be passed or approved from authorisd person

2. Accounting entries of all the goods purchased shold be passed or audited.

• Comply with ethical buying practices and policy.
• Review and update signature authorizations periodically.
• Obtain pre-approval of consultant agreements by Purchasing.
• Verify receipt of goods and services against contract/ purchase order and invoice information.
• Reconcile ledgers for accuracy of recorded transactions.
• Monitor to ensure that invoices are paid in a timely manner.