An effective internal check system for purchases is essential to ensure that all procurement activities are conducted efficiently, transparently, and in accordance with the organization’s policies. The system helps prevent errors, fraud, and unauthorized purchases by establishing clear procedures and controls for each step of the purchasing process. Here’s how an effective internal check system can be implemented for purchases:
1. Segregation of Duties
Requisitioning: The process begins with the requisition of goods or services. The department that needs the items should submit a purchase requisition form, specifying the quantity, description, and purpose of the requested items. The person raising the requisition should not be the same person who approves it.
Approval of Purchase Requisition: The requisition should be reviewed and approved by a responsible individual or department head who has the authority to approve expenditures. This step ensures that the purchase is necessary and within the department’s budget.
Order Placement: Once the requisition is approved, the purchasing department is responsible for placing the order with a supplier. The person placing the order should not be the same person who approved the requisition, ensuring an additional layer of oversight.
Receipt of Goods: A separate individual or team should be responsible for receiving the goods. They should inspect the items to ensure they match the order specifications and are in good condition. This person should not be involved in the ordering or payment processes.
Payment Authorization: The payment for the purchase should be authorized by someone who was not involved in the earlier stages of the process. This ensures that the payment is legitimate and corresponds to the goods or services received.
2. Purchase Requisition
A formal purchase requisition form should be used for all purchase requests. This form should include details such as the items needed, the quantity, the purpose of the purchase, and the budget code.
The requisition form should be signed by the person making the request and approved by a supervisor or department head before being forwarded to the purchasing department.
3. Vendor Selection and Approval
The purchasing department should select vendors based on criteria such as price, quality, reliability, and service. Competitive bidding or quotations from multiple suppliers should be obtained for significant purchases to ensure the organization gets the best value.
The selection of vendors should be approved by a senior official, and any changes to the approved vendor list should be documented and justified.
4. Purchase Order (PO) System
A purchase order should be issued for every purchase. The PO should include detailed information about the items ordered, the agreed-upon price, delivery terms, and any other relevant conditions. The PO should be pre-numbered and issued in sequence.
Copies of the PO should be sent to the supplier, the receiving department, and the accounting department. The PO serves as a key document for verifying the accuracy of deliveries and payments.
5. Receipt and Inspection of Goods
Upon receipt of goods, the receiving department should inspect the items to ensure they match the purchase order in terms of quantity, quality, and specifications. A goods received note (GRN) should be prepared, documenting the inspection results.
The GRN should be matched with the purchase order and the supplier’s invoice to confirm that the goods received are as ordered. Any discrepancies should be reported and resolved before payment is authorized.
6. Invoice Verification
The supplier’s invoice should be verified against the purchase order and the GRN before payment is processed. This three-way match ensures that the organization only pays for goods that were ordered and received in good condition.
Any discrepancies between the invoice, PO, and GRN should be investigated and resolved before the invoice is approved for payment.
7. Authorization of Payments
Payments for purchases should only be made after the invoice has been verified and approved. The payment should be authorized by a responsible official who was not involved in the earlier stages of the purchase process.
Payments should be made according to the terms agreed upon with the supplier, and any early payment discounts or penalties for late payments should be managed appropriately.
8. Recording Purchases
All purchases should be accurately recorded in the organization’s accounting system. The entries should reflect the total cost, including any taxes, shipping, or other charges, and should be posted to the correct expense or asset accounts.
Regular reconciliation of the purchase ledger with supplier statements and general ledger accounts helps ensure the accuracy and completeness of purchase records.
9. Periodic Review and Audit
Regular reviews and audits of the purchasing process should be conducted to ensure that internal controls are being followed and that purchases are being made in compliance with organizational policies.
Audits should include checking for unauthorized purchases, reviewing vendor selection processes, and verifying that all payments are properly authorized and recorded.
10. Vendor Management
Maintaining an up-to-date and approved vendor list is essential. Vendor performance should be regularly reviewed to ensure they meet the organization’s quality and service standards.
Periodic evaluations of vendor contracts and terms can help the organization negotiate better deals and improve the efficiency of the purchasing process.
An effective internal check system for purchases is crucial for ensuring that all procurement activities are conducted transparently, efficiently, and in compliance with the organization’s policies. By implementing controls such as segregation of duties, proper documentation, regular reconciliations, and independent reviews, organizations can safeguard their resources, prevent fraud, and ensure that they are getting the best value for their purchases. These measures help maintain the integrity of the purchasing process and contribute to the overall financial health of the organization.
