Question

Must all purchases be approved or authorized by the Purchasing Department head? Explain.

Answer 1

Purchases authorizations are an important area of internal control for a company since large volumes of money are involved in purchasing supplies, inventories, etc. Requests for creation of purchase orders of goods and services therefore, need to be documented properly and approved by an authorized manager. However, this does not mean that all purchases must be approved or authorized by the Purchasing Department Head only. Depending upon the size of operations of a company and number of purchase orders needed to be handled, some amount-based delegation is usually made by the Purchasing Department Head to the managers working under him in the department. The Purchasing Department Head reviews all such authorizations to check whether the purchase requisitions authorized by such managers comply with the purchasing policy of the company and are within the approved budgets.

Further, even the authorization powers of the Purchasing Department Head may be subject to a specified limit and he may not be authorized to approve very large purchase orders beyond that limit. Such purchase orders are usually approved by a committee of the senior management and Purchasing Department Head too, is a member of such committees.

Every company formulates a purchase policy to suit its own peculiar needs depending upon the nature and size of its operations. This policy is documented by the top management and circulated for compliance by all the managers concerned. Hence, the need for the Purchasing Department Head authorizing all the purchases could differ from company to company. Some companies give authority to all departmental heads to authorize purchases upto a certain amount within the budgets approved for their department. Such purchases authorizations are subject to review either by Purchasing Department Head or a senior executive in the Finance Deptt. to ensure that these authorizations are in order and conform with the purchase policy of the company.