Question

What control procedures would firms commonly use for the acquisition and payment activities?

Answer 1

The control procedures commonly used by firms for acquisition and payment activities are as follows:

1. Separation of duties
2. Accountability, authorization & approval
3. Security of assets
4. Review and reconciliation

These activities are elaborated as under

1. Separation of duties

This means to ensure that payment documents are processed correctly by having different people involved in the payment process. This principle is called separation of duties.

• Best practice is to have different people:

Approve purchases

Receive ordered materials

Approve invoices for payment

Review and reconcile financial records

• Potential consequences if duties are not separated:

Erroneous or fraudulent invoices approved for payment

Unauthorized payments made to non-existent vendors

2. Accountability, authorization, and approval

Accountability ensures that you authorize, review, and approve invoices for payment based on signed agreements, contract terms, and purchase orders.

• Best practices:

Review and update signature authorizations periodically.

Obtain pre-approval of consultant agreements from Purchasing.

Verify receipt of goods and services to against contract/ purchase order and invoice information.

Reconcile ledgers for accuracy of recorded transactions.

Monitor that invoices are paid in a timely manner.

• Potential consequences if accountability does not exist:

Unauthorized, unnecessary, or fraudulent payments or purchases

Unauthorized work performed by vendors

Loss of supplier discounts due to late payments

Improper charges to incorrect account/ funds

Conflict of interest when paying a UCSD employee for unauthorized outside work

3. Security of assets

Once you receive your purchased goods, secure the materials in a safe location. To account for resources, periodically count your inventory and compare the results with amounts shown on control records.

• Best practices:
  

Secure goods received in a restricted area.

Restrict inventory access to appropriate staff.

Lock up 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.

• Potential consequences if your assets have not been secured:

Theft of goods

Inventory shortages

Additional costs incurred for replacement of goods

4. Review and reconciliation

Your reconciliation activities confirm that you're paying for approved purchases and are being billed correctly. Perform monthly ledger reconciliations to catch improper charges and validate transactions.

• Best practices:

Review vendor 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 assure accuracy and timeliness of expenses.

• Potential consequences if review and reconciliation is not performed:

Improper charges made to your department budgets

Disallowances resulting from costs charged to incorrect accounts/funds

Payments made for items or services not provided.

If these activities are properly implemented, it ensure the safeguarding of assets and future viability of the firm. On the other hand, non implementing or improper implementation results disastrous for the entity.