In general, the objective of an internal audit is to assess the risk of material misstatement in financial reporting. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. As such, testing the validity of various implicit managerial assertions is a key objective of an internal auditor.
While this applies to all financial cycles, this article is the first in a series focusing on the General Control Activities for the Purchasing cycle. The most important general control areas for Purchasing include:
- Performance Management
- Supplier Selection
- Purchase Commissions
- Goods and Services Received
- Invoice Verification
- Master Data Purchasing
In this post, we’ll focus on the General Control Activities for Goods and Services Received.
As goods are received it is important that they are recorded in the system immediately following receipt and that quality and quantity is as expected. The following should be included in any audit:
- Verify that goods are booked into stock on a timely basis, and goods awaiting booking in are stored separately from recorded stock, and are clearly distinguishable.
- Validate that quality checks are performed on goods received at the point of acceptance. Where weight bridges are not used at the point of acceptance of bulk products, make sure there is monitoring in place of stock count differences to ensure there are no significant quantity differences for the products.
- Make sure that quality certificates have been obtained from suppliers where applicable.
- Confirm there is clear monitoring and root cause analysis of production problems caused by poor quality raw materials.
- Verify that the staff receiving deliveries can provide evidence on the delivery note that they have counted stock quantities and lines received agree to the delivery note.
Return of Goods
It is critical that goods requiring return or faulty goods are not inadvertently sold or used in manufacturing. It is also important that credit notes are received from suppliers for returned or faulty goods in a timely fashion. The following should be included in any audit:
- Confirm that there is a procedure for handling returns and that is has been communicated to all appropriate individuals.
- Verify that there is a process for segregating rejected/defective goods from other goods.
- Validate that all returns are recorded in the system and each record is unique and sequentially numbered.
- Check system configuration to make sure it requires a reason code when a goods receipt is reversed. This allows to keep an audit trail of goods receipt reversal.
- Make sure that all goods are approved by responsible manager.
- Validate that shipping documents for returned goods are matched with supplier credit note.
- Verify that unmatched shipping documents for returned goods are investigated on a timely basis.
- Confirm that there is an appropriate liaison between the purchasing department and the warehouse staff to ensure credit notes for returned/faulty goods are chased with suppliers on a timely basis.
In conclusion, auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key objectives to these assertions are; Existence and Completeness, Rights and Obligations, Valuation or Allocation, and Presentation and Disclosure.