Auditing

Problem 10-43

Expenditure Cycle

* Internal Control- Purchases

The following functions in a purchase transaction should be segregated:

1. Purchase Requisition

The purchase requisition starts the purchasing cycle. The department in need of the asset or services sends a properly approved, serially numbered requisition to the purchasing department. The requisitioning department should not have the authority to actually place the purchase order. This would indicate a weakness in internal control.

2. Purchase Orders

The purchasing department should place the order only after giving proper consideration to the time to order and the quantity to order. The purchasing department should also obtain competitive bids from various suppliers to make sure that the best price is obtained. The purchase order is issued only after proper approval. For internal control purposes, it is best that pre-numbered purchase orders can be used. There should be multiple copies that will be sent to: (i) the requisitioning department; (ii) the vendor; (iii) the receiving department; and (iv) the accounting department. If the purchase order is canceled, all copies should be recalled and filed so that every purchase order number is accounted for.

3. Receipt of Goods or Services

The copy of the purchase order sent to the receiving department serves as an authorization to accept the goods when they arrive. It is preferable that the copy not indicate the quantity ordered. Thus, the receiving department is forced to count the goods upon arrival. A receiving report is prepared by this department and forwarded to the accounting department. The goods are forwarded to the requisitioning department

B. Internal Control – Accounts Payable

The accounting department has three functions: (i) to record the payable, (ii) to approve the invoice for payment; and (iii) to record the payment after it is paid by the...