All businesses must rely on a series of controls to ensure that their purchases system is being accounted for correctly.
Depending on the nature and size of the business these controls can range from very basic to very thorough.
Summarised below are some of the basic key controls that should be in place in a purchases system.
Assessment of suppliers
Businesses should take the time to assess potential suppliers and ensure that their needs will be catered for. Particular emphasis should be placed on the reliability, quality and value for money offered by the supplier. Where practicable, an approved
list of suppliers may be used.
A purchase order system helps to correctly account for bulk orders. When a delivery is made the purchase order should be agreed to a goods received note to ensure the goods ordered and delivered are the goods being invoiced for.
There should be approved purchasing limits for certain grades of staff members, with larger purchases needing more senior approval.
Approval of invoices
A series of checks should be in place before an invoice is approved for payment. If there is a purchase order system in place then the invoice should be agreed to the purchase order/goods received note. Once the series of checks have been satisfied then the invoice should be approved.
Controls should be in place to ensure credit terms are used to assist cashflow in the company. This should be done by managing the aged creditors listing to identify when credit has been extended to. This can also be used to ensure early payment discounts have not been unnecessarily lost.
Separation of duties
Where it is practical, different stages of the purchases process should be carried out by different people. For example, the roles of placing orders, posting invoices to the accounting system and approving payments should be done by different people.
Where purchases relate to stock, there should be sufficient physical controls in place to ensure that the items are adequately safeguarded.
Regular reviews of creditor balances should take place. Suppliers should be requested to provide statements on a monthly or quarterly basis. Any unreconciled amounts should be investigated.
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