EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES IN PT XYZ
SKRIPSI
By
AMALIA WAHYU SAVITRI
008201000109
Presented to
The Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Economics, Major in Accounting
PRESIDENT UNIVERSITY
Cikarang Baru – Bekasi
Indonesia
2014
i
EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES IN PT XYZ
SKRIPSI
By
AMALIA WAHYU SAVITRI
008201000109
Presented to
The Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Economics, Major in Accounting
PRESIDENT UNIVERSITY
Cikarang Baru – Bekasi
Indonesia
2014
ii
PANEL OF EXAMINERS APPROVAL SHEET
Herewith, the Panel of Examiners declares that the skripsi entitled “EVALUATION
OF INTERNAL CONTROL OVER PURCHASING PROCEDURES IN P T XYZ”
submitted by Amalia Wahyu Savitri, Accounting Study Program, Faculty of Business,
has been assessed and proved to pass the Oral Examination on February 25th 2014.
Chairman, Panel of Examiner,
Dr. Sumarno Zain, SE, Ak, MBA
Examiner 1
Misbahul Munir, MBA, Ak, CPMA
Examiner 2
Drs. Umar Subandijo, Ak, MBA
iii
RECOMMENDATION LETTER OF SKRIPSI ADVISOR
The skripsi prepared and submitted by
Name : Amalia Wahyu Savitri
Student ID : 008201000109
Faculty : Business
Study Program : Accounting
Skripsi Title : EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES IN PT XYZ
has been reviewed and found to have satisfied the necessities for Oral Defense as partial
fulfillment of the requirements for Bachelor Degree in Economics – Major in
Accounting.
Cikarang, Indonesia, January 27th 2014
Acknowledge Skripsi Advisor,
Dr. Sumarno Zain, SE, Ak, MBA Misbahul Munir, MBA, Ak, CPMA
Head, Accounting Study Program
iv
DECLARATION OF ORIGINALITY
I hereby declare that the skripsi entitled “EVALUATION OF INTERNAL
CONTROL OVER PURCHASING PROCDURES IN PT XYZ” is originally
written by myself based on my own research and has never been used for any other
purpose before. I, therefore, request for Oral Defense of the skripsi.
Cikarang, Indonesia, January 27th 2014
Researcher,
Amalia Wahyu Savitri
008201000109
v
EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES IN PT XYZ
ABSTRACT
PT XYZ is a manufacturing company that has tight purchasing activities to support the production and sales activity. Its main customers are big companies that require on-time delivery. The raw materials should be purchased in the best price, according to company’s need, and received in a proper time in order to fulfill customers’ requirements. Therefore, the company needs an appropriate internal control system on purchasing activities. The scope covered by this research is focused on the control activities of purchasing on metal sheet. The research method used in this evaluation is qualitative method using study case model. Meanwhile, the data gathering and processing are done through literature review and field research. During the research process, researcher found several weaknesses of internal control. First, the Purchase Requisition document is not authorized by production supervisor and checked by Warehouse. Second, Purchase Requisition does not state the delivery date. Third, the written Quotation is only requested to one selected supplier. Fourth, the Purchase Requisition and Purchase Order are both signed by General Manager. Fifth, the Purchase Order is not sent to Warehouse and Production Department. Sixth, Finance (Accounting) Department receives the Purchase Requisition, Quotation, Purchase Order, and Packing Slip only after the invoice is received. Last but not least, the Purchase Requisition and Purchase Order are not pre-numbered. For the better improvement in the internal control system, there are several actions that should be taken. The company should prepare Material Request/Purchase Requisition that authorized by production supervisor and checked by Warehouse, revise Purchase Requisition form by adding column for the date of materials needed, ask at least three suppliers to send written quotation, prepare four copies of Purchase Order, send the Material Request/Purchase Requisition, Quotations, Purchase Order, and Packing Slip right away to Finance (Accounting) Department after the documents are prepared, and create pre-numbered in each document. Key words: Internal control, control activities, purchasing, metal sheet.
vi
ACKNOWLEDGEMENT
First of all, I would like to express my gratitude to my Almighty God, ALLAH SWT.
Without His guiding and encouragement, I neither embark nor accomplish upon this
research properly. Furthermore, because of the support and kindness, my big pleasure,
appreciation, and thankfulness also would be addressed to the following parties:
1. My beloved Mama; Tri Sulasmi, My greatest Papa; H. Unang, My lovely sisters;
Novania Puspa and Rahmadhani Haya, for supporting and accompanying me in
developing my future success,
2. President University’s management, Dean of Business Faculty, Head and
Secretary of Accounting Study Program, and all President University’s
accounting lecturers,
3. My advisor, Mr. Misbahul Munir, M.B.A., Ak., CPMA, for his guidance and
stimulating suggestions,
4. PT XYZ company, especially Mba Ary and Mr. Edi Permana, for giving me
permission to do the necessary research work,
5. Bulek Tanti and Om Heri, for supporting me during my life in Cikarang,
6. Elvan Dwiwijaya, for being the best partner for these 3 years,
7. Rizqi Azizy, Widyawaty Lamtiur, and Inov Grasita, for the great friendship,
8. D-6 Family, Tudung Saji Co., and Accounting PUMA 2011/2012,
9. My internship supervisors and friends, for the knowledge and experience,
10. All accounting students batch 2010, especially my classmate.
Thank you very much for all of your willingness to become a part of my motivation.
It is a really great honor for me and I will never forget it.
vii
TABLE OF CONTENT
TITLE i
PANEL OF EXAMINERS APPROVAL SHEET ii
SKRIPSI ADVISOR RECOMMENDATION LETTER iii
DECLARATION OF ORIGINALITY iv
ABSTRACT v
ACKNOWLEDGEMENT vi
TABLE OF CONTENTS vii
LIST OF TABLES ix
LIST OF FIGURES ix
CHAPTER I: INTRODUCTION 1
I.1. Research Background 1
I.2. Problem Identification and Statement 2
I.3. Research Scope and Limitation 2
I.4. Research Objectives 2
I.5. Research Benefits 3
I.6. Research Method 3
CHAPTER II: LITERATURE REVIEW 4
II.1. Internal Control 4
II.1.1. Components of Internal Control 5
II.1.2. Limitation of Internal Control 12
II.1.3. Understanding of Internal Control 14
II.2. Purchasing 15
II.2.1. Documents in Purchasing 18
II.3. Internal Control over Purchases 20
II.3.1 Consideration of Internal Control Components 20
viii
CHAPTER III: DATA PROCESSING METHOD AND COMPANY’S
EXISTING CONDITION 23
III.1. Data Collecting and Processing 23
III.2. Company’s Existing Condition 28
III.2.1. Company’s Background 28
III.2.1.1. Vision and Mission 28
III.2.1.2. Organizational Structure 29
III.2.1.3. Job Description 31
III.2.2. Company’s Purchasing Activities 33
CHAPTER IV: EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES 39
IV.1. Findings 39
IV.2. System Redesign 49
CHAPTER V: CONCLUSION AND RECOMMENDATION 55
V.1. Conclusion 55
V.2. Recommendation 57
BIBLIOGRAPHY 58
APPENDICES 59
COMPANY’S CONFIRMATION LETTER 67
ix
LIST OF TABLES
Table 2.1 Functions of the Purchasing Process 17
Table 3.1 Internal Control Questionnaire for Purchasing and Warehouse
Department 25
x
LIST OF FIGURES
Figure 3.1 The Organizational Structure of PT XYZ 30
Figure 3.2 The Flowchart of Internal Control System on the Existing Procedures
of Purchasing in PT XYZ 34
Figure 3.3 The Flowchart of Internal Control System on the Existing Procedures
of Purchasing in PT XYZ (Continuation) 35
Figure 4.1 The Flowchart of Internal Control System on the Redesigned
Procedures of Purchasing in PT XYZ 50
Figure 4.2 The Flowchart of Internal Control System on the Redesigned
Procedures of Purchasing in PT XYZ (Continuation) 51
1
CHAPTER I
INTRODUCTION
I.1. Research Background
The business competition in Indonesia is getting tighter. A company is
established to make profits as much as possible in order to maintain its viability.
Business’ continuity can be achieved if the products offered can be accepted in the
market. Companies are competing each other to give their best quality of product
with the competitive price. Therefore, professional management is needed in defining
business strategy.
Sales, as the source of income, play an important role in the business’ life.
In order to fulfill the sales demand, a company should maintain its production process.
Therefore, inventory is one of the important factors. It should be available in certain
quality and quantity in order to ensure the continuity of production and sales activity.
Defining the quantity and quality of inventory to be purchased and the schedule of
when it should be received is a criticized activity. If the quantity of inventory
received is less than it’s needed; and if the delivery from supplier is delay,
it will obstruct the company’s operation. Therefore, a company needs internal control
to ensure that purchasing process is in line with production and sales process.
PT XYZ runs the business in manufacturing metal stamping parts for
automotive industry. In its operational activities, the company has tight
purchasing activities of raw material needed to produce the products ordered by
the customers. Some of its main customers are big companies in automotive industry,
such as PT Trimitra Citra Hasta, PT Adyawinsa Dinamika Karawang, and
PT Inti Polymetal, which require the company to deliver the goods ordered as
2
scheduled. In order to maintain good relationship with its main customers, the company
needs internal control in the purchasing activities to ensure the production process can
run as it planned to fulfill sales demand.
Realizing how purchasing activities affect company’s survival in the
tight competition, a company needs internal control in its operation. Based on those,
the researcher raises the topic of “EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES IN PT XYZ”.
I.2. Problem Identification and Statement
This research focuses on answering the following questions:
1. Does PT XYZ purchase materials according to its need?
2. Does PT XYZ purchase materials in the best price?
3. Have the material purchased been received in a proper time?
4. Have the purchasing transactions been recorded properly?
I.3. Research Scope and Limitation
Discussion of purchasing is limited on the purchasing of raw material which
is metal sheet. The discussion is emphasized on the process of requisitioning,
purchasing, receiving, and recording the purchasing transaction. Discussion of internal
control focuses on control activities which are emphasized on segregation of duties,
authorization, documentation, and physical control of purchasing activities.
I.4. Research Objectives
The researcher intended to achieve these following outcomes:
1. To evaluate how internal control is implemented in purchasing activities.
2. To assess whether there is any weakness in the purchasing procedure.
3. To formulate recommendations to overcome the weakness.
3
I.5. Research Benefits
For the company:
• Getting input about the importance of internal control over purchasing
activities,
• Getting recommendations considered to be implemented to overcome
the weaknesses of its current internal control system.
For the researcher:
• To gain understanding in the application of internal control system
especially in purchasing activities.
For potential users:
• As reference materials, to contribute to other researchers who wish to
make observation in internal control, especially in purchasing activities.
I.6. Research Method
This is qualitative research using study case model. Qualitative research is
a type of research to describe or to define the condition being researched, such as who,
what, when, where, and how, in order to know the difference between practice and
theory and opportunity to improve performance. The data gathering and processing are
done through literature review and field research. In literature review, the researcher
chose some relevance theories from text book. In field research, collecting and
evaluating data are done by using types of evidence approach which are:
• Observation,
• Questionnaire,
• Interview, and
• Documentation.
4
CHAPTER II
LITERATURE REVIEW
II.1. Internal Control
Messier (2003) mentioned that, “Internal control is a process effected by
an entity’s board of directors, management, and other personnel that is designed
to provide reasonable assurance regarding the achievement of objective in the following
categories: (1) effectiveness and efficiency of operations, (2) reliability of
financial reporting, and (3) compliance with applicable laws and regulations
(AU 319.06).” (p. 211).
Gelinas, Sutton, & Hunton (2004) defined internal control is as follows,
“Internal control is a system of integrated elements people, structure, processes,
and procedures in concert to provide reasonable assurance that an organization
achieves it business process goals. The design and operation of the internal control
system is the responsibility of top management and therefore should:
• Reflect management’s careful assessment of risks.
• Be based on management’s evaluation of costs versus benefits.
• Be built on management’s strong sense of business ethic and personal
integrity.” (p. 237).
Warren, Reeve, & Fess (2005) wrote, “Internal controls are the policies
and procedures that protect assets from misuse, ensure that business information is
accurate, and ensure that laws and regulations are being followed.” (p. 183).
Arens, Elder, & Beasley (2012) described internal control system is
as follows, “A system of internal control consists of policies and procedures designed to
provide management with reasonable assurance that the company achieves
5
its objectives and goals. These policies and procedures are often called controls, and
collectively they comprise the entity’s internal control .” (p. 290).
Stuart (2012) explained that, “The internal control function in a company is
a process designed by management and others charged with governance to provide
reasonable assurance that the financial statements are prepared in accordance with
the applicable financial reporting framework.” (p. 51).
Louwers, Ramsay, Sinason, Strawser, & Thibodeau (2013) referring to
the COSO Report defined internal control is as follows, “Internal control is a process,
effected by an entity’s board of directors, management and other personnel, designed
to provide reasonable assurance regarding the achievement of objectives in the
following three categories:
• Reliability of financial reporting.
• Effectiveness and Efficiency of operations.
• Compliance with applicable laws and regulations.” (p. 170).
Based on descriptions above, internal control is a system consists of policies
and procedures designed to provide reasonable assurance regarding the achievement
of organization’s objectives in compliance with applicable laws and regulations.
II.1.1. Components of Internal Control
Referred to Louwers, et al (2013); the COSO Report stated that management
should enact the components related to each objectives of internal control. There are
five components of internal control which are control environment, risk assessment,
control activity, information and communication, and monitoring.
6
Control Environment
Arens, et al (2012) described that control environment is the umbrella for
the other four components. An effective control environment will affect the other four
components.
Louwers, et al (2013) described control environment is as follows,
“The control environment sets the tone of the organization. It is the foundation for all
other components of internal control. It provides discipline and structure to all
participants and stakeholders. Control environment factors include the integrity,
ethical values, and competence of the entity’s people.” (p. 176).
Based on Messier (2003), control environment influences the control
consciousness of its people. As the foundation for all other components of
internal control, it provides discipline and structure. Factors that affect the
control environment are as follows:
• Integrity and Ethical Values
The function of the integrity and ethical values of the individuals who create,
administer, and monitor the controls is to ensure the effectiveness of
an entity’s internal control. The best way to communicate integrity and
ethical behavior within an entity is through the use of policy statements and
codes of conduct.
• Commitment to Competence
Competence is the knowledge and skill needed to accomplish the tasks that
define an employee’s job. Management must specify the standard level
of competence for a particular job and translate it into the required level
of knowledge and skills.
7
• Participation of the Board of Directors or Audit Committee
The board of directors and its audit committee significantly influence
the entity’s control consciousness. The board of directors and the
audit committee must take their responsibilities seriously and actively oversee
the entity’s accounting and reporting policies and procedures.
• Management’s Philosophy and Operating Style
Establishing, maintaining, and monitoring the entity’s internal control are
the responsibilities of an entity’s management. Management’s philosophy and
operating style can significantly affect the quality of internal control.
• Organizational Structure
The organizational structure defines how authority and responsibility are
delegated and monitored. It provides a framework for planning, executing,
controlling, and monitoring operations.
• Assignment of Authority and Responsibility
This factor includes the policies regarding acceptable business practices,
the knowledge and experience of key personnel, and the resources provided
for carrying out duties. It also includes policies and communications directed
to ensure that all personnel understand the entity’s objectives.
• Human Resource Policies and Procedures
The quality of internal control is related with the quality of the personnel
operating the system. The entity should have personnel policies for hiring,
orienting, training, evaluating, counseling, promoting, compensating, and
taking remedial action.
8
Risk Assessment
Arens, et al (2012) wrote, “Risk assessment for financial reporting
is management’s identification and analysis of risks relevant to the preparation
of financial statements in conformity with appropriate accounting standards.” (p. 297).
According to Louwers, et al (2013), management should identify risks, and
estimate their significance and likelihood in order to minimize errors and fraud.
Referred to Messier (2003), business risks can arise or change due to
the following circumstances:
• Changes in the operating environment,
• New personnel,
• New information systems,
• Rapid growth,
• New technology,
• New business models, products, or activities,
• Corporate restructuring,
• Expanded foreign operations, and
• New accounting pronouncements.
Control Activities
Louwers, et al (2013) described control activities is as follows,
“Control activities are specific actions a client’s management and employees take
to help ensure that management’s directives are carried out.” (p. 178).
Based on Arens, et al (2012), control activities are the policies and procedures
which ensure that the necessary actions are taken to address risks in the achievement
of organization’s goals.
9
Referred to Arens, et al (2012), the control activities generally fall into
the following five types, which are:
1. Adequate separation of duties
a. The person who performs to custody company’s assets must
be different with the person who performs accounting function.
b. The person who authorized the transactions must be different with the
person who custody the related assets.
c. The person who has operational responsibility must be different with
the person who has record-keeping responsibility.
d. The person who has IT duties must be different with the
user departments.
2. Proper authorization of transactions and activities
a. General authorization.
b. Specific authorization.
3. Adequate documents and records
a. The documents must be pre-numbered.
b. The documents and records must be prepared at the time of
transaction is happened.
c. The documents and records must be designed for multiple uses.
d. The construction of documents and records must be designed
to encourage correct preparation.
4. Physical control over assets and records
a. Physical control over assets and records is important to safeguarding
company’s assets and records.
10
5. Independent checks on performance
a. Internal control tends to change overtime. Unless there is a mechanism
for frequent review of company, it is necessary to conduct
independent verifications.
According to Messier (2003), the following activities are included in
the control activities:
• Performance Reviews
A strong accounting system should have controls that independently check
the performance of the individuals or processes in the system.
• Information Processing
The two broad categories of information system control activities are
general control an application control. General controls relate the overall
information processing environment and include controls over data center and
network operations and application system acquisition, development, and
maintenance. Application controls apply to the processing of
individual applications and help to ensure the completeness, accuracy,
authorization, and validity of transaction processing.
• Physical Control
These controls include the physical security of assets. Physical control
includes adequate safeguards, such as security facilities and periodic counting
of assets and comparison to control records.
• Segregation of Duties
It is important for an entity to segregate the authorization of transactions,
recording of transactions and custody of the related assets.
Independent performance of these functions reduces the opportunity for
11
any one person to conceal errors or fraud in the normal course of his or her
duties.
Information and Communication
Referred to Arens, et al (2012), the purpose of information and communication
system is to initiate, record, process, and report the entity’s transactions in order to
maintain the related access’ accountability.
Louwers, et al (2013) explained that, “Information system should be devised
to identify data from external sources such as suppliers, customers, economic databases,
and so on, as well as internal sources. …… Management evaluates the quality
of information by determining whether the content is appropriate and the information is
timely, current, accurate, and accessible. Note that these sometimes are contradictory.
For example, waiting to ensure that information is accurate can cause it not to
be timely.” (p. 183).
Messier (2003) described information and communication is as follows,
“An information system consists of infrastructure (physical and hardware components),
software, people, procedures (manual and automated), and data. ……………………….
Communication involves providing an understanding of individual roles and
responsibilities pertaining to internal control over financial reporting. It includes
the extent to which personnel understand how their activities in the financial reporting
information system relate to the work of others and the means of reporting exceptions
to an appropriate higher level within the entity.” (p. 227-228).
Monitoring
Arens, et al (2012) wrote, “Monitoring activities deal with ongoing or
periodic assessment of the quality of internal control performance by management
to determine that controls are operating as intended and that they are modified as
appropriate for changes in conditions.” (p. 301).
12
Louwers, et al (2013) explained that in order to allow for continuous
improvements in the operations, it is necessary to monitor its internal control systems.
The fundamental principles of monitoring include the ongoing and separate evaluations,
and the reporting deficiencies.
Messier (2003) wrote, “Monitoring can be done through ongoing activities or
separate evaluations. Ongoing monitoring procedures are built into the normal,
recurring activities of the entity and include regular management and supervisory
activities.” (p. 229).
II.1.2. Limitation of Internal Control
Boynton and Johnson (2006) mentioned that, “The COSO report
also emphasized that the following fundamental concepts are embodied in the
foregoing definition:
• Internal control is a process that is integrated with, not added onto,
an entity’s infrastructure. It is a means to an end, not an end in itself.
• People implement internal control. It is not merely a policy manual and
forms, but people at every level of an organization.
• Internal control can be expected to provide only reasonable assurance,
not absolute assurance, because of its inherent limitations.
• Internal control is geared to the achievement of objectives in the
overlapping categories of financial reporting, compliance, and operations.
Implicit in the last bullet is the assumption that management and the board do in
fact formulate and periodically update entity objectives in each of the three categories.”
(p. 392).
According to Louwers, et al (2013), internal control provides reasonable
assurance, not absolute assurance. Breakdowns can occur, because it was people,
who operate the controls. Internal control can help prevent and detect errors, but
13
it cannot guarantee that they will never happen. There are several limitations in the
internal control, which are human error, deliberate circumvention by people in
the system, management override, and collusion among people that can lead into
a failure in the achievement of relevant internal control objectives.
Messier (2003) wrote, “The concept of reasonable assurance recognizes that
the cost of an entity’s internal control system should not exceed the benefits that are
expected to be derived. The necessity of balancing the cost of controls with the related
benefits requires considerable estimation and judgment on the part of management.
The effectiveness of any internal control system is subject to certain inherent
limitations, including management override of internal control, personnel errors or
mistakes, and collusion.” (p. 231-232).
Boynton and Johnson (2006), referring to AU 319.16-18, Consideration of
Internal Control in a Financial Statement Audit, explained the following inherent
limitation of internal control, which are:
• Mistakes in judgment
Management and other personnel may exercise poor judgment in making
business decisions because of inadequate information, time constraints,
or other procedures.
• Breakdowns
Breakdowns may occur when personnel misunderstand instructions
or make errors owing to careless, distractions, or fatigue. Temporary or
permanent changes in personnel or in systems or procedures may also
contribute to breakdowns.
14
• Collusion
Individuals acting together, such as an employee who performs important
control acting with another employee, customer, or supplier, may be
able to prevent fraud detection by internal control.
• Management override
Management can overrule policies or procedures for illegitimate purposes
such as personal gain or enhanced presentation of an entity’s
financial condition. Override practices include making deliberate
misrepresentations to auditors and others such as by issuing false
documents to support the recording of fictitious transactions.
• Cost versus benefits
The cost of an entity’s internal control should not exceed the benefits that
are expected to ensue. Because precise measurement of both costs
and benefits usually is not possible.
II.1.3. Understanding of Internal Control
Based on Messier (2003), a number of tools are available for documenting the
understanding of internal control which includes these following:
1. Procedures Manuals and Organization Charts
Many organizations prepare procedures manuals that document the
entity’s policies and procedures. The entity’s organizational chart presents
the designed lines of authority and responsibility.
2. Narrative Description
This documentation approach is most appropriate when the entity has
a simple internal control system because a narrative description will
be difficult to follow and analyze for a more complex entity.
15
3. Internal Control Questionnaires
Questionnaires provide a systematic means to investigate areas such as
internal control. An internal control questionnaire is generally used
for entities with more complex internal control. It contains questions
about the important characteristics of the components of internal control.
4. Flowcharts
Flowcharts provide a diagrammatic representation of the entity’s
internal control system. The flowchart outlines the configuration of
the system in terms of functions, documents, processes, and reports.
This documentation facilitates an analysis of the system’s strengths and
weaknesses.
II.2. Purchasing
According to Johnson, Leenders, and Flynn (2011), purchasing and
procurement are used interchangeably to refer to the integration of related functions
in the organizations. Managers may have identical responsibilities but substantially
different titles.
Leenders, Fearon, Flynn, and Johnson (2002) wrote, “In general usage,
the term purchasing describes the process of buying: learning of the need, locating and
selecting a supplier, negotiating price and other pertinent terms, and following up to
ensure delivery. Procurement is a somewhat broader term and includes purchasing,
stores, traffic, receiving, incoming inspection, and salvage.” (p. 6).
Johnson, et al (2011) defined the differences between purchasing and
procurement is as follows, “Thus, purchasing or supply management is not only
concerned with the standard steps in the procurement process: ………………................
16
Further responsibilities of supply may include receiving, inspection,
warehousing, inventory control, materials handling, packaging scheduling, in-
and outbound transportation/traffic, and disposal.” (p. 4).
Based on Johnson, et al (2011), purchasing refers to the implementation of
just-in-time (JIT) tools and techniques to ensure that the supply process help to keep
inventories at a minimum level, and to keep the distances and delays between process
steps as short as possible.
Messier (2003) described purchasing is as follows, “A purchase transaction
usually begins with a purchase requisition being generated by a department or
support function. The purchasing department prepares a purchase order for the
purchase of goods or services from a vendor: When the goods are received or
the services have been rendered, the entity records a liability to the vendor. Finally
the entity pays the vendor.” (p. 425).
Referred to Messier (2003), the principal business objective of purchasing
process are acquiring goods and services at the lowest cost consistent with quality
and service requirements and effectively using cash to pay for those goods and services.
Table 2.1 lists the functions that are normally part of the purchasing process.
17
Requisitioning Initiation and approval of requests for goods and services by authorized individuals consistent with management criteria.
Purchasing Approval of purchase orders and proper execution as to price, quantity, quality, and vendor.
Receiving Receipt of properly authorized goods or services. Invoice processing Processing of vendor invoices for goods and services received;
also processing of adjustments for allowances, discounts, and returns.
Disbursements Processing of payment to vendors. Accounts payable Recording all vendor invoices, cash disbursements, and
adjustments in individual vendor accounts.
General ledger Proper accumulation, classification, and summarization of purchases, cash disbursements, and payables in the general ledger.
Source: Messier (2003) page 431: Auditing and Assurance Services: A Systematic Approach (3rd Ed)
Table 2.1
Functions of the Purchasing Process
Boynton and Johnson (2006) described the functions of purchasing is
as follows, “The processing of purchase transactions involves the following purchasing
functions:
• Initiating purchases. The request by an entity for a transaction with
another entity including:
� Placing vendors on an authorized vendor list
� Requisitioning goods and services
� Preparing purchase orders
• Receipt of goods and services. The physical receipt or shipment of a
product or service, including:
� Receiving the goods
� Storing goods received for inventory
� Returning goods to vendor
• Recording liabilities including preparing the payment voucher.” (p. 701).
18
Based on Agus and Ida (2008), there are six steps in the purchasing
cycle which are:
1. Planning
2. Administration
3. Supplier’s production
4. Delivery
5. Receiving and storing
6. Delivery to the production department
II.2.1. Documents in Purchasing
Referred to Stuart (2012), there are seven documents used in expenditure
process especially in inventory purchasing which are:
1. Purchase Requisition
Purchase Requisition is a document that prepared by a department
to request goods or services. It consist the type of goods, quality and
quantity of goods or services needed. This document is sent to
Purchasing Department to be process and after that, Purchasing
Department is going to do purchasing transaction for the goods or
services listed in Purchase Requisition.
2. Purchase Order
Purchase orders are prepared by Purchasing Department to initiate
purchase based on Purchase Requisition and then sent to chosen supplier.
Purchase Order reflects the description of goods to be purchased,
quantity of goods, and price of goods. Purchasing Department creates
five copies of Purchase Orders which are to be sent to supplier, as an
archive of Purchasing Department, to be sent to department that request
goods, Receiving Department, and Accounting department.
19
3. Receiving Document
Receiving document is made by receiving function to record the quantity
and quality of goods received from supplier and to make sure that
the goods received matches the Purchase Order.
4. Supplier Invoice
Supplier invoice is a document prepared by supplier that shows description
of goods sent to buyer (company), quantity of goods, and the total price of
goods that company owes to supplier. This document also shows the
due date of payment for goods ordered.
5. Voucher
Voucher is a document that prepared by Accounting Department consists
of liabilities from purchase transaction. This document used to
control payment for those liabilities.
6. Purchase Journal
Purchase journal is a document that contains list of purchase transactions
for time period.
7. Accounts Payable Subsidiary Ledger
This document consist list of account payable balance owed to
each supplier. For each supplier, an account payable subsidiary ledger is
created.
20
II.3. Internal Control over Purchasing Activities
Robertson and Louwers (2002) described that in performing
purchasing activities, proper control activities involves different people and different
departments in segregation of duties. Combinations of two or more responsibilities
in each activity may open the door for errors and frauds. The control system should
provide for detail control checking activities such as:
• Authorization of purchase requisition and orders.
• Adequate physical security on inventory warehouse.
• Accountant should record transactions with complete supporting
documentation.
• Invoices should be matched with purchase order.
II.3.1. Consideration of Internal Control Components
Control Environment
Boynton and Johnson (2006) described, “Management’s commitment
to competence should be reflected in the hiring assignment, and training of personnel
involved in processing purchase and cash disbursement transactions,
maintaining custody of purchased assets, and reporting on expenditure cycle activities.”
(p. 696).
According to Messier (2003) explanation, control procedures are implemented
within an organizational structure. Therefore, the entity’s organizational structure
for purchasing may affect the assessment of control risk. Authority and responsibility
for purchasing are usually granted through procedures that limit the amount of
purchases that can be made by various levels of authority within the entity.
21
Risk Assessment
Based on Messier (2003), it is necessary to understand how management
weighs the risks that are relevant to the purchasing process, estimates their significance,
assess the likelihood of their occurrence, and decides what actions should be taken to
address those risks.
Boynton and Johnson (2006) wrote, “Management risk assessments related
to expenditure cycle activities include consideration of such matters as:
• The risk of purchasing kickbacks.
• The risk of employee fraud through fraudulent purchases or cash
disbursements.
• The entity’s ability to meet cash flow requirements for purchase
transactions.
• Loss contingencies associated with purchase commitments.
• The continued availability of important suppliers and the stability
of important suppliers.” (p. 696-697).
Control Activities
Referred to Boynton and Johnson (2006), different individual or department
should be assigned to perform the major functions of purchasing. It provides
classical segregation of duties by segregating authorization of transactions, custody
of assets, and recording transactions. With this structure, the work of one employee
or department can provide an independent check on the accuracy of the work of
another.
22
Information and Communication Systems
Messier (2003) explained that it is necessary to obtain the information such
as how purchase and cash disbursement transactions are initiated and the accounting
records, supporting documents, and accounts that are involved in processing purchases
and cash disbursements transactions.
Monitoring
Boynton and Johnson (2006) stated that, “Several types of ongoing and
periodic monitoring activities may provide management with information concerning
the effectiveness of other internal control components in reducing the risk of
misstatements.” (p. 697).
According to Messier (2003) explanation, it is important to understand
the entity’s monitoring processes over purchasing process. It is also involves
understanding how supervisory personnel within the process review the personnel
who perform the controls and evaluating the performance of the entity’s system.
23
CHAPTER III
DATA PROCESSING METHOD
AND COMPANY’S EXISTING CONDITION
III.1. Data Collecting and Processing
To gather the information about the existing condition of the company,
the researcher directly came to the field to get primary data. Primary data is a new data
that were collect specifically for research purpose. In conducting this research all data
was collected and processed through observation, questionnaire, interview, and
documentation.
Observation
Observation is the process of gathering data by seeing, smelling, hearing,
tasting, and feeling to assess certain activities. Through observation, researcher
obtained information such as process of purchasing, application of certain procedure,
and the company’s working environment.
On behalf of this research, PT XYZ was observed on December 18th, 2013.
From observation process, the researcher understands that the security system in the
company is handled by security officers who secure the company’s gate. Security
officer will ask every guests of the company about their importance visiting the
company and who is he/she is going to meet. There is no access card in the company
which means that every employee can access any area in the company.
24
Questionnaire
An internal control questionnaire asks a series of questions about controls in
each audit area as a means of identifying internal control deficiencies. Internal control
questionnaire works as an indicator of how well internal control exists in a
certain procedure. The internal control questionnaire is given to the employees based
on the department they work for.
25
INTERNAL CONTROL QUESTIONNAIRE
No. Question Yes No Purchasing Department 1. Is the Purchasing Department independent from: a. Accounting Department? v b. Receiving Department? v c. Shipping Department? v
2. Does Production Department always prepare Purchase Requisition? v 3. Does company uses pre-numbered: a. Purchase Requisition? v b. Purchase Order? v c. Receiving Report? v
4. Are competitive bids (price quotation) received and reviewed?
v 5. Are all purchases made only on the bids of approved purchase
requisitions? v
6. Are purchase prices approved by a responsible purchasing officer? v 7. Does the Purchase Order contain approval from purchasing
manager? v
8. Does Purchasing Department send Purchase Order copy to: a. Production Department? v
b. Warehouse? v
c. Accounting Department? v Warehouse 1. Are quantity and quality of goods received determined at the time of
receipt by receiving personnel? v
- Is it done independent from Purchasing Department? v
2. Is material received compared with:
a. Purchase Order?
v
b. Packing slip? v
3. Does Warehouse prepare Receiving Report?
v 4. Is Receiving Report signed by warehouse manager?
v
5. Does Purchasing Department send Receiving Report copy to:
a. Production Department?
v
b. Warehouse?
v
c. Accounting Department?
v
Table 3.1
Internal Control Questionnaire for Purchasing and Warehouse Department
26
Interview
In this procedure, researcher asked for written and oral information from
the purchasing staff of PT XYZ. The researcher obtained the information about the
purchasing procedures in PT XYZ, the understanding of the staff about purchasing
procedures, and the detail for each procedure in the purchasing activity.
On behalf of this research, PT XYZ’s purchasing staff was interviewed on
December 16th and 18th, 2013. From interview process, the researcher understands
several points:
• Before prepare Purchase Requisition, production staff will verbally ask
warehouse staff about the availability of metal sheet. There is
no material request form in this process.
• Production staff manually inputs the types and quantity of metal sheet in
the Purchase Requisition form.
• The Purchase Requisition does not contain approval from production
supervisor.
• The Purchase Requisition does not contain note from warehouse about
material unavailability.
• The Purchase Requisition does not contain delivery date.
• The Purchase Requisition signed by production staff who prepared the
document, checked by purchasing staff, and approved by General
Manager.
• Purchasing staff does not send price quotation request to supplier. She
will call the suppliers asking him/her about the availability and the price
of metal sheet that they offer. However, purchasing staff will only ask
the chosen supplier to send written Quotation to the company.
27
• The approved Purchase Order is not sent to Warehouse, Production, and
Accounting Department.
• The process of receiving, document and physical checking, and custody
of inventory are done by the same person.
• Warehouse staff does not prepare Receiving Report, and does not have
any document related with metal sheet received because the packing slip
are sent to Production Department and purchasing staff.
• The Purchase Requisition, Quotations, Purchase Order, and Packing Slip
are filed in Purchasing Department.
• Purchasing Department checks the documents related with purchasing
transactions which are invoice, Packing Slip, Purchase Order, and
Purchase Requisition.
• In Purchasing Department, there is only one person in the department.
Purchasing staff handles every purchasing transaction in the company.
She is also the one who responsible to maintain relationship with
suppliers, including follow-up the delivery of purchases.
• All purchases of metal sheet are done in credit.
• The Purchase Request and Purchase Order are not pre-numbered. The
company used reference number.
Documentation
Documentation is the process of tracking down evidences either internal
or external evidences of transactions or activities being researched. The necessary
internal documents include company’s profile data, Standard Operational Procedures
of Purchasing, Purchase Requisition and Purchase Order. Sample from external
document need to be collected is Quotation from supplier. Researcher state evidences
(documents) being researched and the function of the documents either their format,
28
content, function that made them, function that authorized them, where they
are distributed, and the use of the evidences (documents).
III.2. Company’s Existing Condition
III.2.1. Company’s Background
PT XYZ is a manufacturing company that located in Cikarang, Bekasi,
West Java, Indonesia. PT XYZ grows as a metal stamping part manufacturer and
dies maker. They value their customers for long-term business relationships by
fulfilling the customers’ expectations and requirements with respect to high quality,
on – time delivery, reliability, cost efficient, and good service.
III.2.1.1. Vision and Mission
In order to reach the successes in their business area, PT XYZ’s vision and
mission are as follows:
Vision
Producing reliable metal stamping parts products and tooling components with
a solution that is able to meet and exceed the level of customer requirements with good
corporate performance and continuously improve the technology and quality of product
to reach customer satisfaction.
Mission
• Being a professional company with a technology base that is able to create highly
competitive products as a contribution to the development and advancement of
Indonesia’s industry.
• Developing a competency-based entrepreneurial business development and lead
to the achievement of sustainable benefits for the progress of all shareholders and
employees.
29
III.2.1.2. Organizational Structure
The organizational structure of PT XYZ is as follow:
30
HR
& G
A
Ma
teri
al
&
Pro
d.
Su
pp
ort
Qu
ali
ty
As
su
ran
ce
Da
ily
QC
Ma
inte
na
nc
e
Bu
ild
ing
&
Uti
lity
Fin
an
ce
Pro
du
cti
on
Op
era
tor
Wo
rks
ho
p
PP
IC
Wa
reh
ou
se
/
De
liv
ery
Wa
reh
ou
se
Op
era
tio
na
l/
Pa
ck
ing
Op
era
tio
na
l
Da
nd
ori
Su
pp
ort
Ma
rke
tin
gP
rod
uc
tio
n
En
gin
ee
rin
g
Pu
rch
as
ing
&
Ve
nd
or
Ma
na
ge
me
nt
Dir
ec
tor
Ge
ne
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Ma
na
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r
Pro
du
cti
on
Fig
ure
3.1
The
Org
aniz
atio
nal S
truc
ture
of P
T X
YZ
31
III.2.1.3. Job Description
The detail of job description for several levels in PT XYZ is mentioned below:
1. Director
a. Setting all objectives, policies, and activities of company in general.
b. Leading, controlling, and monitoring the whole industry production and
non-production activities.
c. As a decision maker and strategy planner for the industry going concern.
d. Checking and investigating industry’s financial statements.
e. Giving positive advices to subordinates.
2. General Manager
a. Assisting director’s work directly through being as an intermediary
between director and other manager and staffs.
b. Ensuring the entire director’s plans is well implemented in the fieldwork.
c. Maintaining conducive situation of assets and staffs.
3. Marketing Supervisor
a. Determining policies for marketing activities.
b. Promoting the products in concern to increase sales.
c. Creating monthly and annually marketing report.
d. Coordinating with other supervisors to provide supports needed.
4. Production Engineering Supervisor
a. Managing problem about repair dies.
b. Supervising the work of his subordinates.
32
c. Supporting the production activities.
5. Purchasing and Vendor Management Staff
a. Processing purchasing transaction by ordering the goods needed by the
company.
b. Cooperating with Production Planning and Inventory Control in
scheduling purchases to supplier.
6. Production Planning and Inventory Control (PPIC) Supervisor
a. Planning the production activity.
b. Managing and controlling the company’s inventory.
c. Supervising the work of his subordinates.
7. Production Supervisor
a. Determining policies for production activities.
b. Controlling the progress of production activities.
c. Supervising the work of his subordinates.
d. Giving advices and instruction to his subordinates.
e. Creating monthly and annually production report.
8. Quality Assurance Supervisor
a. Ensuring the quality of finished goods.
b. Monitoring and controlling the process of quality check.
c. Supervising the work of his subordinates.
d. Creating monthly and annually quality check report.
33
9. Maintenance Supervisor
a. Managing the maintenance of building and utility.
b. Supervising the process of maintenance.
c. Supervising the work of his subordinates.
10. Finance Supervisor
a. Managing company’s financial position in order to finance company’s
operation.
b. Preparing financial statements in accordance with system and procedure
of company.
c. Supervising activities regarding cash receipts and cash payments.
d. Supervising activities regarding recording of transactions.
11. Human Resources and General Affair Supervisor
a. Determining principal policies for employees to follow.
b. Coordinating the implementation of employment functions.
c. Supervising the ethical conduct and discipline of employees in the
company.
d. Selecting and hiring new employees.
III.2.2. Company’s Purchasing Activity
The detail of system procedure of purchases metal sheet is drawn on the
flowchart system below:
34
Figure 3.2
The Flowchart of Internal Control System on the Existing Procedures of
Purchasing in PT XYZ
35
Figure 3.3
The Flowchart of Internal Control System on the Existing Procedures of
Purchasing in PT XYZ (Continuation)
36
The PT XYZ’s procedures of raw material purchasing process are:
1. After verbally asking the warehouse staff about the availability of metal sheet,
production staff can initiate purchase request by filling the Purchase Requisition
form. Production staff will write the date when Purchase Requisition is
prepared, the type and quantity of materials needed, and sign the documents
without the date of when the materials is needed. The Purchase Requisition is
then sent directly to Purchasing Department without any approval or
authorization from production supervisor and any notes or written information
from Warehouse about the availability of the metal sheet requested.
2. After Purchasing Department receives Purchase Requisition from
Production Department, purchasing staff then will call the suppliers asking
him/her about the availability and the price of metal sheet that they offer.
However, purchasing staff will only ask the chosen supplier to send written
Quotation to the company. Purchasing staff will prepare Purchase Order (PO)
according to the chosen supplier’s Quotation. The Purchase Requisition,
Quotation, and Purchase Order are then sent to General Manager
for authorization.
3. General Manager will check the Purchase Order and Purchase
Requisition whether it is according to company’s need. If the Purchase Order
is properly made according to Purchase Requisition, General Manager
will sign the Purchase Order and Purchase Requisition and send them to
Purchasing Department for further process. If the Purchase Order is improperly
made, General Manager will send the documents to Purchasing Department to
be re-processed.
37
4. The signed Purchase Order will be sent to supplier by fax. The copy
of Purchase Requisition will be sent to Production Department as a means
that the request has been ordered. The original Purchase Requisition will
be saved in the Purchasing Department along with Purchase Order as a
temporary file.
5. When the metal sheet purchased arrived, warehouse staff will check the
Packing Slip (PS) and physically check the quantity of metal sheet.
If the quantity of metal sheet does not match with the Packing
Slip, the materials and Packing Slips will be returned to supplier. If the
quantity of metal sheet is match with the Packing Slip, warehouse staff will sign
the Packing Slip and the materials will be stored in Warehouse. The original
copy of Packing Slip is for the supplier as the proof of delivery. The first copy
is for Purchasing Department. The second copy is for Production Department.
Warehouse staff will update the metal sheet stock card.
6. When Production Department receives the Packing Slip, the Packing Slip
will be filed along with the Purchase Requisition in the permanent file, as
a means that the requested materials have been successfully purchased
and available in the Warehouse.
7. When the supplier sent the invoice to Finance (Accounting)
Department, accounting staff will send the invoice to Purchasing
Department. Purchasing staff will check and reconcile the invoice with
Purchase Requisition, Quotation, Purchase Order, and Packing Slip.
Purchasing staff will verbally inform whether the invoice is matched with
the supporting documents or not and send the invoice back to Finance
38
(Accounting) Department along with Purchase Requisition, Quotation, Purchase
Order, and Packing Slip.
8. Accounting staff will check the invoice with Purchase Requisition, Quotation,
Purchase Order, and Packing Slip. If the invoice does not match with the
supporting documents, accounting staff will send the invoice back to
the supplier for correction. If the invoice is matched with the supporting
documents, accounting staff will record the purchasing transaction and post it to
general ledger and account payable sub-ledgers. The Purchase Requisition,
Quotation, Purchase Order, and Packing Slip will be attached to the invoice and
then saved in the temporary file.
39
CHAPTER IV
EVALUATION OF INTERNAL CONTROL OVER
PURCHASING PROCEDURES
IV.1. Finding
Based on gathering and evaluating the data about internal control system on
the procedures of purchasing activities of metal sheet, there are several areas
of weaknesses that can be found as follows:
1. Purchase Requisition document is not authorized by production supervisor
and checked by Warehouse.
After verbally asking the warehouse staff about the availability of metal sheet,
production staff can initiate purchase request by filling the Purchase Requisition form.
The Purchase Requisition is then sent directly to Purchasing Department without any
approval or authorization from production supervisor and any notes or written
information from Warehouse about the availability of the metal sheet requested.
The company should start the purchasing activity from the request of materials for
production which is made by production staff. The material request should be checked
and approved by the person that has proper authorization in the Production Department
which is production supervisor. The request is sent to Warehouse to get the materials
needed. When the stock is not available, Warehouse Department should remark “no
stock” on the document of material request, and then forward the request to Purchasing
Department. The function of material request is then becoming Purchase Requisition
form.
40
The condition exists because the company wants to simplify the
preparation process of Purchase Requisition. Through a simple and easy procedure,
production staff can immediately request the materials needed to be
purchased. The company thinks that General Manager is the one who should
authorize the Purchase Requisition. The company perceives that verbal statement
of material unavailability is enough to initiate purchases.
This condition can bring some potential problems because the
Purchasing Department cannot check the Purchase Requisition whether it
has been made according to production’s needs. In addition, Purchase Requisition
does not approved by production supervisor to ensure that it has been made according
to the need of production. Since there is no control and supervision from production
supervisor, the Purchase Requisition is potential to be made more than one.
Purchasing Department may perceive that the second Purchase Requisition
is an addition for previous request and then issue another Purchase Order. Moreover,
there is no proof that production staff has requested the materials to Warehouse
and the material is out of stock since there is no written documentation.
It is potential for the company to over purchase the metal sheet. For example, the
materials needed for production is 500 strips of metal sheet. Production staff does
not ask Warehouse about the availability of metal sheet. Production staff will request
500 strips of metal sheet to be purchased when actually there are still 200
strips of metal sheet available in the Warehouse. Purchasing Department cannot
check whether production staff has already asked the Warehouse. It means that
the company will have 700 strips of metal sheet when production only needs
500 strips. The other 200 strips of metal sheet are purchased not in
accordance with company’s need. Assuming that this condition exists and happens
over again, the cost of raw materials that paid by the company will be high.
41
Besides, the materials in Warehouse are potential to have a slow movement or even to
become dead stock.
For this kind of internal control weakness, the appropriate solution is that
production staff should prepare Material Request/Purchase Requisition. The Material
Request/Purchase Requisition should be checked and approved by production
supervisor. The approved Material Request/Purchase Requisition should be sent to
Warehouse to get the materials needed. If the materials requested are available in the
Warehouse, the Material Request/Purchase Requisition is signed and noted
by warehouse staff about the type and quantity of metal sheet given to
Production Department. The function of Material Request/Purchase Requisition is
then becoming Material Request. The original Material Request should be sent to
Finance (Accounting) Department. Production Department should have the copy of
Material Request as a file. Warehouse should also have the copy of Material Request to
be the basis in updating stock card. However, if the materials requested are out of
stock, the form should be marked and signed by warehouse staff and
then sent to Purchasing Department for further process. The function of Material
Request/Purchase Requisition is then becoming Purchase Requisition.
2. Purchase Requisition does not state the delivery date.
When Production Department needs metal sheet for production
activities, production staff will prepare Purchase Requisition by directly
fill the Purchase Requisition Form. Production staff will write the date when
Purchase Requisition is prepared, the type and quantity of materials needed, and
sign the documents without the date of when the materials is needed. The Purchase
Requisition is then sent to Purchasing Department to be processed.
42
Purchase Requisition consists of types of materials, the quantity and quality
of materials, and when the material is going to be used. That information should be
clearly stated in the Purchase Requisition, because it is the basis for Purchase Order
preparation.
This condition happens because when production staff gives
the Purchase Requisition to Purchasing Department, production staff will verbally
inform purchasing staff about when the material is going to be used. Besides, the
company believes that Purchasing Department will directly process the Purchase
Requisition so it is not necessary to put the delivery date on Purchase Requisition.
The company feels that verbal information is enough to ensure that Production
Department will receive the material in the proper time.
By not stating the delivery date on the Purchase Requisition,
Purchasing Department does not have written information of when the materials are
needed. Since the company has tight purchasing activities, there are lots of Purchase
Requisitions to be processed. Purchasing staff may forget the verbal information of
when the materials are needed. If the Purchase Order issuance is late, it is not the
responsibility of Purchasing Department because there is no written information from
Production Department of when the material is going to be used. If this problem
happens, it means that Production Department will not receive the metal sheet needed in
the proper time.
In order to overcome this problem, the researcher suggests production staff should
write the delivery date required in the Purchase Requisition. The company should
revise the Purchase Requisition form by adding space or column for the date of when
the materials are needed.
43
3. The written Quotation is only requested to one selected supplier.
After Purchasing Department receives Purchase Requisition from
Production Department, purchasing staff then will call the suppliers asking him/her
about the availability and the price of metal sheet that they offer. However,
purchasing staff will only ask the chosen supplier to send written Quotation to the
company.
Based on the company’s written Standard Operational Procedure of Purchasing,
purchasing staff must ask for written Quotation to at least three suppliers in order
to look for which supplier that provides the best qualification of price, quality,
and availability. The written Quotations received must be reviewed and compared
in order to ensure that the purchasing transaction will be done with the supplier
that fulfills the company’s qualification of price, quality, and availability to deliver
the material in time.
Based on the company’s experience in purchasing activities, the
company believes that the chosen supplier is the best supplier that fulfills
company’s qualification. The company believes that verbal information by phone
is enough to compare the suppliers so it is not necessary to ask other suppliers
to send Quotation.
By not requesting written Quotations from at least three suppliers, purchasing
staff is not following the company’s Standard Operational Procedures of Purchasing.
Without Quotation from suppliers, it will potentially cause the company not
fully ensure that the price information from suppliers is correct. Besides, it is hard to
ensure that the company has purchase the materials with the best price. This condition
does not provide tool to control the work of purchasing staff in preparing
Purchase Order.
44
The researcher recommends purchasing staff should ask at least three suppliers to
send written Quotation. Purchasing staff should also prepare a report about comparison
among the price quotations. When purchasing staff sends the Purchase Order to
General Manager for authorization, she should attach the Purchase Order along
with Purchase Requisition, price comparison report, and Quotations from suppliers.
General Manager should monitor and control the process of selecting supplier
by reviewing the price comparison report. If it is necessary, General Manager can also
check the Quotations from supplier.
4. Purchase Requisition and Purchase Order are both signed/authorized by
General Manager.
Production staff directly sends the Purchase Requisition to Purchasing Department
without any approval or authorization from production supervisor. When purchasing
staff sends the Purchase Order for authorization, the Purchase Order is attached
with Purchase Requisition and Quotation from supplier. General Manager will sign the
Purchase Order and Purchase Requisition at the same time as his approval.
The function of authorization in Purchase Requisition is to control that
the Purchase Requisition has been properly made according to company’s need.
Purchase Requisition is the basis in preparing Purchase Order. It should be checked
and approved by responsible production officer before it given to other departments.
This condition happens because the company does not clearly understand
the proper procedure in purchasing. Through a simple and quick procedure,
production staff can immediately request the material needed to be purchased
without another process of authorization in Production Department. The company
feels that General Manager can authorize the Purchase Requisition because he is the
one who authorize the purchasing transaction.
45
This condition does not provide tool of control on the process of purchasing. The
preparation process of Purchase Requisition is not being controlled. The gap between
production and General Manager is long enough for General Manager to know the need
of production activity in detail. The one that fully understand the real condition in
production activity is production supervisor. If the Purchase Requisition is also signed
by General Manager, it means that General Manager is responsible for the material
request that he does not clearly understand. Moreover, if there is a problem related to
the Purchase Requisition, General Manager is responsible for that since production staff
can avoid it. It is potential for the company to purchase materials not in accordance
with production’s needs because General Manager does not fully understand the needs
of production.
The proper solution to overcome this kind of weakness in internal control is
production staff should ask approval or authorization from production supervisor in
Purchase Requisition before it is sent for further process.
5. Purchase Order is not sent to Warehouse and Production Department.
The approved Purchase Order is not sent to Warehouse and Production
Department. After getting approval from General Manager, purchasing staff will fax
the Purchase Order to the supplier. The Purchase Order document is then filed in
Purchasing Department as temporary file.
The usage of Purchase Order for Production Department is to inform that
the requested material has been ordered. For Warehouse, Purchase Order is used
to prepare space when material arrives and used to check the material received.
This condition happens because after the Purchase Order is sent to the supplier,
purchasing staff will verbally inform Warehouse about the quantity of materials and the
delivery date. The company believes that verbal information is enough to ensure that
Warehouse will prepare enough space and receive the materials according to what the
46
company purchases. Moreover, the company feels that Warehouse just needs to receive
the material from supplier without compare it with Purchase Order.
This condition can bring some potential problems. Since it is communicated
verbally, so if there is miscommunication between purchasing staff and warehouse staff,
the space prepared by warehouse staff may not be enough or even ready for the
materials received as no written information that clearly states about the quantity of
materials and when it will be arrive. Besides, in receiving the materials, warehouse
staff may not know whether the materials arrived are according to what the company
purchases. Therefore, if there is a problem, either Warehouse or Purchasing
Department cannot be blamed to take responsibility because there is no audit trail to
trace the cause of the problem.
In order to remove this kind of problem, the researcher recommends purchasing
staff should make four copies of Purchase Order. The original Purchase Order will be
faxed to supplier and sent to Finance (Accounting) Department. The first copy will be
sent to Production Department to inform that the material requested has been ordered.
The second copy will be sent to Warehouse to be compared with Packing Slip in the
document inspection of material received from supplier. The third copy will be saved
in Purchasing Department as temporary file.
6. Finance (Accounting) Department receives the Purchase Requisition,
Quotation, Purchase Order, and Packing Slip only after the invoice is
received.
When the supplier sent the invoice to Finance (Accounting)
Department, accounting staff will forward the invoice to Purchasing Department.
Purchasing staff will check and reconcile the invoice with Purchase Requisition,
Quotation, Purchase Order, and Packing Slip. Purchasing staff will verbally inform
whether the invoice is matched with the supporting documents or not and send
47
the invoice back to Finance (Accounting) Department along with Purchase Requisition,
Quotation, Purchase Order, and Packing Slip. Accounting staff will check the invoice
with Purchase Requisition, Quotation, Purchase Order, and Packing Slip. If the invoice
does not match with the supporting documents, accounting staff will send the
invoice back to the supplier for correction. If the invoice is matched with the
supporting documents, accounting staff will record the purchasing transaction and post
it to general ledger and account payable sub-ledgers.
The function of Accounting Department is to do preventive control on purchasing.
Therefore, Accounting Department should receive Purchase Requisition, Quotations,
and Purchase Order directly after they are prepared. Packing Slip should be sent to
Accounting Department directly from Warehouse after it received the materials from
supplier.
This condition happens because the company perceives that it is not necessary to
send the Purchase Requisition, Quotation, Purchase Order, and Packing Slip right away
to Finance (Accounting) Department. This is because in the end of the process all
documents will be sent to Finance (Accounting) Department. The company does not
clearly understand that Accounting Department has controlling function to prevent
misstatements or irregularities.
This condition does not provide preventive control. By not having the Purchase
Requisition, Quotation, Purchase Order, and Packing Slip right after those documents
are prepared, Accounting Department may not check those documents. Moreover,
those documents are the basis for recording purchasing transaction. There is a time lag
between the occurrence of purchasing activities and receiving invoice. This may create
cut-off problem. Accounting staff may not record the purchasing transaction because
she will receive invoice, Packing Slip, Purchase Order, Quotations, and Purchase
Requisition after Purchasing Department send them to her. Packing Slip is the
48
documentation of right and obligation transfer between the company and supplier.
Moreover, assigning lots of job duties to purchasing staff to prepare Purchase Order and
check the invoice with supporting documents without enough supervision can
broadens the possibility of human error in performing the job. It will also affect the
Purchase Order preparation, which is the main responsibility of Purchasing Department.
If the Purchase Order preparation is not properly done, it can lead to the failure
in achieving the objective of purchasing.
The company should have proper job description. In assigning the job, the
company should concern about the capability of the employees and their work load.
Therefore, Finance (Accounting) Department should not forward the invoice to
Purchasing Department. Warehouse should forward the Material Request/Purchase
Requisition to Finance (Accounting) Department right after it received and checked.
Purchasing Department should send the original copy of Quotation, price comparison
report, and Purchase Order to Finance (Accounting) Department right after they are
prepared. Warehouse staff should copy the Packing Slip and send one of the copies of
it to Finance (Accounting) Department right after he received the materials from
supplier.
7. Purchase Requisition and Purchase Order are not pre-numbered.
The documents involved in the purchasing of metal sheet which are purchase
requisition and purchase order are not pre-numbered.
Pre-numbered documents is necessary to control the used of forms in the
transaction, to ensure that all transaction are recorded, to prevent loss of documents, and
to facilitate the search of documents if needed at any time.
The company thinks that it is not necessary to use pre-numbered forms because
since the beginning of the company, pre-numbered forms are never been used.
49
The company argues that the staffs can connect one form to another form through their
reference number.
This condition does not provide tool to control the numbers of forms used by each
department in purchase transactions. The transaction might not been recorded or the
documents are lost during the process and there is no staff knows about it, especially
sometimes from one material request purchasing staff may prepare more than one
Purchase Order. It means that the company does not purchase the material according to
its need.
It is better for the company to create pre-numbered in each document including
purchase requisition, purchase order, and receiving report in order to facilitate
management and staffs in tracing and controlling the usage of forms/documents in the
purchasing activities of metal sheet.
IV.2. System Redesign
In order to improve PT XYZ’s internal control on purchasing procedures
weaknesses along with supporting its strength, the appropriate redesign of the system is
as follow:
50
Figure 4.1
The Flowchart of Internal Control System on the Redesigned Procedures of
Purchasing in PT XYZ
51
Figure 4.2
The Flowchart of Internal Control System on the Redesigned Procedures of
Purchasing in PT XYZ (Continuation)
52
The description of figure 4.1 and figure 4.2 is narrated below:
1. When Production Department needs materials for production activity,
production staff will prepare three copies of Material Request/Purchase
Requisition by filling the Material Request/Purchase Requisition form.
Production staff will write the date when Purchase Requisition is prepared,
the date of when the materials are needed, and the type and quantity of
materials. Production staff will sign the Material Request/Purchase Requisition
and then send it to production supervisor.
2. Production supervisor will checks the Material Request/Purchase Requisition.
If the Material Request/Purchase Requisition is not in accordance with
production’s need, he will send the Material Request/Purchase Requisition
to production staff for correction. If the Material Request/Purchase Requisition
has been properly made according to production’s needs, he will
sign the Material Request/Purchase Requisition. The approved Material
Request/Purchase Requisition is then sent to Warehouse to get the
materials needed.
3. Warehouse staff will physically check the stock of materials requested
in the Material Request/Purchase Requisition. If the materials requested
are available in the Warehouse, the Material Request/Purchase Requisition
is then signed and noted by warehouse staff about the type and quantity of metal
sheet given to Production Department. The function of Material
Request/Purchase Requisition is then becoming Material Request. The original
Material Request is then sent to Finance (Accounting) Department. The copy
of Material Request is for Production Department and saved in Warehouse
as permanent file. Warehouse staff will update the stock card of material out.
However, if the materials requested are out of stock, the form will be
53
marked and signed by warehouse staff and then sent to Purchasing Department
for further process. The function of Material Request/Purchase Requisition
is then becoming Purchase Requisition. The original Purchase Requisition is
then sent to Finance (Accounting) Department. The copy of Purchase
Requisition is for Production Department.
4. Production staff will saved the Material Request in the permanent file as
the materials requested is given by Warehouse. Meanwhile, accounting staff
will update the inventory record based on the Material Request given to her.
5. When purchasing staff receives Purchase Requisition, she will contact at
least three suppliers asking them to send written Quotation. After receiving
Quotations from suppliers, purchasing staff will prepare price comparison
report. And then she will prepare Purchase Order based on the price of
chosen supplier. The Purchase Order is then sent to General Manager
along with price comparison report, Quotations, and Purchase Requisition.
6. General Manager will check the Purchase Order and review the
price comparison report. If it is necessary, General Manager will check the
Quotations from supplier. If the Purchase Order is not properly prepared,
General Manager will send the Purchase Order, price comparison
report, Quotations, and Purchase Requisition to purchasing staff for correction.
If the Purchase Order has been properly prepared, he will sign the Purchase
Order and then sent the documents to purchasing staff for further process.
7. Purchasing staff will fax the approved Purchase Order to supplier and then
copy the Purchase Order into four copies. She will also copy the
price comparison report, and Quotations. The original copy of Purchase Order,
price comparison report, and Quotations are then sent to Finance (Accounting)
Department. The copy of them is then filed in Purchasing Department.
54
The other copies of Purchase Order are sent to Production Department and
Warehouse.
8. When the materials arrived, warehouse staff will physically check the
materials and compare it with the Packing Slip and Purchase Order. If the
materials received are not matched the Packing Slip and Purchase Order,
the materials and Packing Slip will be return to supplier. If the materials
received are matched with the Packing Slip and Purchase Order, warehouse
staff will sign the Packing Slip and then gave it to the supplier’s courier.
After that, warehouse staff will copy the Packing Slip into four copies
and distribute them to Finance (Accounting) Department, Purchasing
Department, and Production Department. Warehouse staff will then saved the
Packing Slip and Purchase Order as permanent file.
9. When purchasing staff received the Packing Slip, she will mark the
Purchase Order record and then filed the Packing Slip along with the
Purchase Order, price comparison report, Quotations, and Purchase Requisition
in the permanent file.
10. When production staff received the Packing Slip, he will then save it in
the permanent file along with the Purchase Requisition and Purchase Order.
11. When accounting staff received the invoice from supplier, she will check
the invoice with the Packing Slip and Purchase Order. If the invoice does
not match with the Packing Slip and Purchase Order, she will return the
invoice to supplier for correction. If the invoice is matched with the Packing
Slip and Purchase Order, she will then record the transaction in
purchase journals and post it to general ledger and accounts payable sub-ledger.
The invoice, Packing Slip, Purchase Order, price comparison report, Quotations,
and Purchase Requisition are then saved in the temporary file.
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CHAPTER V
CONCLUSION AND RECOMMENDATION
V.1. Conclusion
PT XYZ has good procedures of purchasing activities that supported with
clear organizational structure and written Standard Operational Procedures. In the
implementation of internal control, the researcher found several weak points exist that
should be improved. Those weak points are:
1. Purchase Requisition document is not authorized by production supervisor
and checked by Warehouse. Purchasing Department cannot check whether the
Purchase Requisition has been made according to production’s needs
because there is no control from production supervisor and there is no
proof about materials unavailability. The company perceives that verbal
information about materials unavailability told by warehouse staff is enough to
initiate purchase.
2. Purchase Requisition does not state the delivery date. Purchasing staff may
forget the verbal information of when the materials are needed and it is potential
for the materials to be received not in the proper time. The company feels that
verbal information told by production staff of when the materials are needed is
enough to ensure that Production Department will receive the material in the
proper time.
3. The written Quotation is only requested to one selected supplier. There is no
written comparison of price to ensure that the company purchases materials with
the best price. The company believes that the chosen supplier is the best
56
supplier that provide cheaper price so it is not necessary to ask for written
Quotation from other suppliers.
4. Purchase Requisition and Purchase Order are both signed by General Manager.
It is potential for the company to purchase materials not in accordance with
production’s needs because General Manager does not understand the needs of
production in detail. This condition happens because the company does not
clearly understand the proper procedure in purchasing.
5. Purchase Order is not sent to Warehouse and Production Department. The space
prepared by warehouse staff may not be enough for the materials received, and
in receiving the materials, warehouse staff may not know whether the materials
arrived are according to what the company purchases. The company believes
that verbal information told by purchasing staff is enough for Warehouse to be
prepared when receiving the materials.
6. Finance (Accounting) Department receives the Purchase Requisition, Quotation,
Purchase Order, and Packing Slip only after the invoice is received. This may
create cut-off problem. Accounting staff may not record the purchasing
transaction because she will receive invoice, Packing Slip, Purchase Order,
Quotations, and Purchase Requisition after Purchasing Department send them
to her. The company does not clearly understand that Accounting Department
has controlling function to prevent misstatements or irregularities.
7. Purchase Requisition and Purchase Order are not pre-numbered.
The transaction might not been recorded or the documents are lost during the
process. The company argues that the staffs can connect one form to another
form through their reference number.
57
V.2. Recommendation
In regard to enhance a positive development in internal control system on
purchasing procedures implemented by PT XYZ, the researcher has a notion that the
company should:
1. Prepare Material Request/Purchase Requisition that authorized by production
supervisor and checked by Warehouse.
2. Revise the Purchase Requisition form by adding column for the date of when the
materials are needed.
3. Ask at least three suppliers to send written Quotation and prepare a report about
comparison among the price quotations.
4. Prepare four copies of Purchase Order and distribute them to Finance
(Accounting) Department, Production Department, and Warehouse.
5. Send the Material Request/Purchase Requisition, Quotation, price comparison
report, Purchase Order, and Packing Slip right away to Finance (Accounting)
Department after the documents are prepared.
6. Create pre-numbered in each document including Purchase Requisition and
Purchase Order.
58
BIBLIOGRAPHY
Arens, A.A., Elder R.J., & Beasley, M.S. (2012). Auditing and Assurance Services:
An Integrated Approach (14th Ed). Upper Saddle River, New Jersey: Pearson Prentice Hall.
Boynton, William C., Johnson, Raymond N. (2006). Modern Auditing (8th Ed).
New York: Wiley and Sons. Gelinas, U., Sutton, S.G., Hunton, J.E. (2004). Accounting Information System.
New York: Thomson South-Western. Johnson, P.F., Leenders, M.R., & Flynn, A.E. (2011). Purchasing and Supply
Management (14th Ed). New York: McGraw-Hill. Leenders, M.R., Fearon, H.E., Flynn, A.E., & Johnson P.F. (2002). Purchasing and
Supply Management (12th Ed). New York: McGraw-Hill. Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R., Thibodeau, J.C. (2013).
Auditing & Assurance Services (5th Ed). New York: McGraw-Hill. Messier, William F. (2003). Auditing and Assurance Services: A Systematic Approach
(3rd Ed). New York: McGraw-Hill. Robertson, J. C., & Louwers, T. J. (2002). Auditing and Assurance Services (10th Ed).
Toronto: McGraw-Hill. Stuart, I.C. (2012). Auditing and Assurance Services: An Applied Approach. New York,
America: McGraw-Hill. Supriyanto, Agus & Masrurachah, Ida (2008). Purchasing Guide: Konsep dan Aplikasi
Manajemen Purchasing. Jakarta: Elex Media Komputindo. Warren, C.S., Reeve, J.M., Fess, P.E. (2005). Accounting (21th Ed). New York:
Thomson South-Western.
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APPENDICES
60
Flowchart Symbols
= Start/Stop = Manual Operation = Computer Process = Decision Making = Document = Manual Files = Data Storage = Manual Input = Terminator = Reference
61
= Annotation = Goods
= Logic Flow = Telecommunication Link = Temporary File = Permanent File
62
PT XYZ’s Purchase Requisition Form
63
Quotation from PT XYZ’s Supplier
64
PT XYZ’s Purchase Order
65
Figure 3.2
The Flowchart of Internal Control System on the Existing Procedures of
Purchasing in PT XYZ
66
Figure 3.3
The Flowchart of Internal Control System on the Existing Procedures of
Purchasing in PT XYZ (Continuation)
67
PT. XYZ
COMPANY’S CONFIRMATION LETTER
Here with, I am : Name : Ary Anggraeni
Function : Purchasing
Address : Cikarang, Bekasi
confirms that: Name : Amalia Wahyu Savitri
Student ID : 008201000109
Faculty/Major : Business / Accounting
University : President University
has done her research in our company in order to write the skripsi, title : EVALUATION OF INTERNAL CONTROL OVER PURCHASING PROCEDURES
IN PT. XYZ since December 16th, 2013 until January 24th, 2014, and has discussed with us the
content of her skripsi, including the findings and recommendations.
Jakarta, January 24th, 2014
PT XYZ
(Ary Anggraeni) Purchasing