Lecture Notes: Segregation of Duties in the Purchasing Process

Key Concepts:

• Segregation of Duties (SoD):

  • A primary internal control aimed at providing checks and balances.
  • Protects against errors and fraud within the purchasing process.
  • Involves separating key components to safeguard data and resources.

• Purpose of Internal Controls:

  • Designed by companies to safeguard assets and ensure accurate processing of company information.
  • Important for auditors to ensure financial statements are properly stated due to effective internal controls.

Segregation in the Purchasing Process:

1. Purchasing vs. Requisitioning & Receiving:

   • Risk: The same individual could manipulate processes to approve fictitious purchases, leading to theft.
   • Solution: Separate roles; purchasing should be distinct from requisitioning and receiving functions.

2. Invoice Processing vs. Accounts Payable:

   • Risk: Invoices could be processed at incorrect prices or terms, leading to unauthorized payments.
   • Solution: Ensure different individuals handle invoicing and accounts payable functions.

3. Disbursement vs. Accounts Payable:

   • Risk: Unauthorized checks may be issued if disbursement and accounts payable roles are combined.
   • Solution: Segregate cash disbursement from accounts payable records.

4. Accounts Payable vs. General Ledger:

   • Risk: One person in charge could falsify records, escaping detection during reconciliation.
   • Solution: Separate accounts payable record-keeping from general ledger maintenance.

Key Functions and Their Responsibilities:

• Purchasing: Preparation and approval of purchase orders.
• Receiving: Receipt, counting, and inspection of purchased items.
• Accounts Payable:
  • Matching vendor invoices with supporting documents.
  • Checking account disbursements and updating records.
  • Reconciliation of voucher register to general ledger.
• IT Department: Creation of vendor checks, managing voucher register.
• Cashier: Signing and mailing of checks.

Challenges in Smaller Organizations:

• May not have staff to fully separate duties.
• Still important to maintain key controls like check signing and bank reconciliations.

Summary:

• Segregation of duties helps prevent fraud and errors.
• Control systems should be designed to remove opportunities for fraudulent activities.
• Even in small companies, critical controls such as the separation of check signing should be maintained to ensure financial integrity.

These notes outline the importance and implementation of segregation of duties in the purchasing process as a means to strengthen internal controls and prevent fraudulent activities.