Understanding the System of internal check with regard to the buying and selling departments of a manufacturing concern

Comprehensive system of internal check with regard to the buying and selling departments of a manufacturing concern:

Internal check as regards purchases:

A separate department for credit purchases is usually maintained in business houses. The efficiency of such a department depends upon its policy of purchasing best goods at the cheapest price.

The Purchases Department should function separately and its work should be sub-divided between small departments, each of which should be headed by a responsible officer. To facilitate its operation, the whole work connected with purchases may be divided into five heads:

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(1) Assessment of Requirements,

(2) Enquiry,

(3) Placing Orders,

(4) Receipt of Goods, and

(5) Recording and Making Payments.

1. Assessment of requirements:

This is the first important job to assess requirements of goods. Requisition Books should be issued to the various departments of a concern. The head of the department which is in need of goods should fill in a requisition slip duly signed and then send it to the Purchases Department.

The details about the quantity, quality, the price (if it can be quoted) and the time by which goods must be supplied, should be entered in the requisition slip. On receipt of similar requisition slips from the various departments, the Purchases Department can know exactly the volume of requirements of different goods to be purchased.

2. Enquiry:

Then, the Purchases Department makes an enquiry about the terms and conditions of purchases from different suppliers. For this, tenders or quotations are invited from them.

The lowest tender should be accepted, and accordingly, a decision be taken by an officer or by a sub-committee of the Purchase Department if the amount of purchase is heavy and involves a huge expenditure.

3. Placing orders:

The Purchases Department places orders which should be recorded in the Purchases Order Book. Three copies of such orders should be prepared -one each for the supplier, the store and the Purchases Department itself.

A responsible officer should sign the order. After putting the number of the order on the requisition slip concerned and vice versa, such requisition slip should be filed in the Purchases Department.

4. Receipt of goods:

On receipt of goods, the gate-keeper should enter the particulars of all goods received in the Goods Inward Book after having checked them properly. The goods then should be sent to the Store where they should be carefully preserved.

The stores Department should prepare a ‘Goods Received Note’ and send a copy thereof to the Purchase Department, the Accounts Department and the Production Control Department.

The goods received note should be prepared with the following details:

(1) The date when the goods were received.

(2) The name of the supplier.

(3) The advice note number.

(4) The description and code number of goods.

(5) The quantity advised.

(6) The quantity received.

Besides, if a part of the goods has been rejected, the goods received note should contain the following additional information:

(7) The quantity rejected.

(8) The rejection note number.

(9) The quantity accepted into store.

(10) Signatures of employees concerned with having entered items on it.

5. Recording and making payments:

Lastly, the Purchases Department should scrutinize the requisition slip, the order; the goods received note and the invoice. Invoices are usually checked by a separate person known as the Invoice Clerk.

The number of the order should be entered on the invoice and so on. All these documents should be marked as checked and signed, if necessary. The invoice should then be handed over to the Accounts Department where steps will be taken to make payments. It is to be seen that the invoices, when checked, have been properly stamped.

The Accounts Department should enter the invoice in the Purchases Book. If the goods are defective partially or wholly, the invoice should not be passed in such cases. It is, however, for the Purchases Department to make correspondence with the suppliers about the return of such goods which are defective.

The aim of an efficient system of internal check is to prevent the following errors and fraud in connection with purchases:

(1) Fictitious purchases may be recorded in Purchases Book so that payments withdrawn from the business may be misappropriated.

(2) The same invoice may be recorded twice so that double payment made may be misappropriated.

(3) Goods purchased may not be entered in that period so as to inflate profits.

(4) Goods not received in one period may be entered as purchases so as to show profits less than the actual.

Internal check as regards purchases returns:

(1) There should be a proper system of control in regard to purchases returns so that full credit may be ensured for all goods returned.

(2) A statement should be prepared by the Stores Department for all goods returned.

(3) The Purchases Department should check such goods and prepare an advice note which should be sent to the Accounts Department.

(4) The Accounts Department should further examine the advice note with original invoice and enter it in the Purchases Returns Book.

(5) All goods returned should be entered in the Goods Outward Book.

(6) A credit note should be obtained from the supplier, i. e., the creditor, for each return of goods which should then be attached to the invoice if it is not yet paid.

It should be remembered that, if the system of internal check is not good, a credit note so received may be suppressed and the correspondence cash payment misappropriated.

Internal check as regards sales:

The whole system of credit sales should be kept under proper control and supervision. There should be a separate Sales Department for the purpose. The Sales Department should have charge of receiving orders, supplying goods to customers, preparing invoices and maintaining accounts of goods supplied.

The Sales Department should function as a composite of some sub-departments. The procedure of its working may be like this:

(1) All orders received should be entered in the Orders Received Book and properly numbered. The original order or its copy should then be sent to the Dispatch Department.

(2) The Dispatch Department should take steps to pack the goods as per the order. It should prepare a statement showing the goods packed.

(3) The statement so prepared by the Dispatch Department should be sent to the Counting House where the list of goods should be checked and rates, etc. entered in it. The invoice will then be prepared in triplicate by means of carbon papers.

(4) Two copies may be sent to the customers who will then return one of them after signing it in token of having received the goods. Thus, it will serve the purpose of delivery note. The third copy will be retained for further reference.

(5) The Accounts Department should prepare documents like Railway Receipt, Bill of Lading, etc.

(6) All goods supplied on order should be entered in the Goods Outward Book which should be checked at frequent intervals with the Orders Received Book.

(7) The Invoice Book should also be compared with the Goods Outward Book and the Orders Received Book.

(8) The Sales Book should be written up with the help of the copies of invoices.

The following type of fraud may be committed in connection with sales:

(1) Sales may be omitted from recording in the Sales Book.

(2) Inflation of sales in the Sales Book in any of the following ways:

(a) Recording fictitious sales;

(b) Treating goods as sales sent on approval or by V. P. P.; but not yet accepted or sent on consignment but not yet sold by the consignee;

(c) Treating sales of fixed assets as sales of goods;

(d) Entering sales of the next year as sales of the current year; and

(e) Treating sales of consignment inward as own sales.

Internal check as regards sales returns:

All goods returned by customers should be recorded in the Goods Inward Book.

The statement of goods so returned when received should be sent to the Dispatch Department which should check it and, then send it to the Accounts Department.

A credit note should then be prepared and signed by a responsible official before it is sent to the customer.

The Sales Return Book should be written up with the help of the copies of credit notes issued. The number and date of credit notes should also be entered in this book.

The aim of such a system is to prevent an improper credit being passed in the books for fictitious returns and to avoid fraud involved in misappropriating equivalent cash.