Question

Let's say that we are analyzing internal controls for a purchasing-to-payables cycle (the cycle that occurs when the purchasing department places an order, the order is received, the invoice is sent to accounts payable, and accounts payable ultimately issues the check). Class, what sort of controls might you expect to see in this cycle?

Answer 1

Ans:

Internal Control in an organisation plays an important role. It may be defined as controls applied by managment to ensure its operation are operating effectively and all applicable laws and regulations are followed correctly in gernal as well as while preparing its financial statements for the year.

While analyzing internal controls for a purchasing to payables cycle following internal controls are expected to be in place:

In Purchasing Department:

1. Order:

Controls must be available to check that order placed by purchasing department is for the requisitions made by production department.

2. Quality Check:

Control must be available to ensure that orders are placed from such vendors which meets the quality requirements of goods set by the organisation.

3. Cost effectiveness:

Order must be placed to vendors who correctly charged the price for quality products.

4. Goods Received:

When goods received at the warehouse, control must be there to ensure that correct goods are received and no goods is of poor quality which does not meet the set standards. Warehouse area must be properly secured to ensure safety of goods stored.

In Accounts Department:

1. Invoice Received:

Controls must be there to check that price charged in invoice is matched with price quoted by vendor in quotation.

Also goods listed in the invoice are same as received in warehouse. Invoice does not contain the goods which are not received in the warehouse.

2. Accounting of Invoice.

Control must be there to check invoice is posted in accurate ledger of vendor and good is properly recorded in purchase.

3. Goods Returned.

Goods returned to supplier must be recorded as purchase return and properly posted in purchase ledger and supplier ledger.

Any credit note received from supplier must be properly accounted.

4. Payments to Suppliers:

Payment made to suppliers must be reconciled with the supplier statement and outstanding balance must be tallied with the supplier on periodical basis.

All payments cleared and confirmed by supplier must be properly accounted to reflect the true balance of accounts payable.

Note: All documents used in this cycle must be pre numbered in sequence.