An effective inventory internal control procedure enhances Return on inventories (ROI) and that in turn pushes revenue upwards for the overall benefit of the entity. A general and summarized Inventory internal control procedure is described as under:
Segregation of duties in purchases and stores
The basic rule of internal control of separation of authorization of transactions, the recording of transactions, and custody of inventory needed to follow very strictly.
- The functions of authorizing purchases, receiving goods purchased, and recording the receipt and issue of inventory should be segregated.
- The cash function should be segregated. Authorizing payment for purchases, recording payments, access to checks/authorizing e-transfers, and reconciliation of the bank account should be segregated. Similarly, authorization of issues of material and actual disbursement to departments or customers be segregated.
- Individuals with the authority to approve payments should not have the authority to issue purchase orders.
Purchase of Inventory
- The person requesting the goods prepares a purchase requisition. The requisition is approved as to price, quantity, and quality by an authorized employee and forwarded to the purchasing department.
- Based on a purchase requisition, the purchasing department prepares a purchase order and negotiates the terms with the vendor. Copies of the purchase order are sent to the vendor, stores (receiving department), and accounts payable. Copy of purchase order sent to stores or receiving department should have quantity ordered obliterated.
Receipts of goods
- Stores or receiving department inspect the goods on receipt, counts the goods, and prepares a receiving and inspection report.
- Receiving report is sent to the accounts payable department.
Accounts Payable
- The accounts payable department compares the vendor’s invoice with receiving report and purchase order and also recomputes the vendor’s invoice.
- The accounts payable department prepares a payment voucher, records the accounting transaction, and sends a package of all documents to the treasurer for payment.
Treasurer
- The treasurer reviews all documents for propriety and prepares a check or remittance advice.
- Once the check is prepared it should be mailed immediately and all the supporting documents should be stamped ‘paid’.
Issue of goods
- Stores should issue material only on basis of duly authorized material requisition slips of production/ sales/dispatch departments.
- The dispatch department should verify the quantity on basis of copies of material requisition slips, a copy of challan that is required to be sent to transport and to the customer along with the invoice.
- Record the issues immediately and verify the calculations of balance recorded quantity.
Physical verification
- Depending upon the nature of material/ goods, a periodicity is predetermined for physical verification of store quantity with recorded quantity.
- A deficiency report needs are prepared and a copy is sent each to the administration and internal audit department.
- If deficiency or evaporation of material is more than the prescribed limits, a red alert is sent to administration for immediate suitable action.
- The year-end physical verification date should not be predetermined. The program should be made in consultation with internal auditors.
Importance of Internal Control procedures
- It provides clear responsibility of personnel as well as enhances and establishes reliability.
- Segregation of duties reduces the chances of fraud.
- Accurate and reliable financial statements are generated for the benefit of users.
- Assets are safeguarded.
- The statutory laws and regulations are properly complied with.
- Internal control promotes effectiveness and efficiency of operations
Effect on Economy
“When doubts are raised about the sustainability of economic growth, it is crucial for organizations to ensure that their internal controls are strong and that risks are managed.” (Moore Stephens). From the point of an economy internal controls are important because of the following reasons:
- Effective and regular adherence to the laws of the nation promotes discipline among citizens.
- The faith of investors gets enhanced and thereby capital mobilization and its effective investment bring in speedy economic growth.
- New economic growth plans get a boost as internal controls ensure their successful implementation. The economy gets stronger and wealthy.
References
Moore Stephens, The importance of robust controls in an uncertain economic environment, 2008, Web.