What are Purchase Order Controls?

Purchase Order Controls

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Purchase Order Controls

Purchase order controls are internal control processes designed to ensure that a company’s purchase orders are accurate, properly authorized, and properly recorded. They help a business maintain accuracy in their financial records, prevent fraud or errors, and ensure that purchasing procedures are followed. They are part of a company’s broader internal control and financial management system.

Here are some examples of purchase order controls:

  • Authorization: Purchase orders should be authorized by an appropriate individual, typically a manager or executive. This person should verify the accuracy of the information and ensure that the purchase is necessary and within budget.
  • Segregation of Duties: The person who authorizes the purchase order should not be the same person who requested the purchase, received the goods or services, or makes the payment. This reduces the risk of fraud or error.
  • Verification of Receipt: When goods or services are received, they should be checked against the purchase order to ensure that the correct items have been delivered, in the correct quantity, and at the agreed price.
  • Record Keeping: Purchase orders should be properly recorded in the company’s financial system, and copies should be kept for reference and audit purposes.
  • Supplier Vetting: Companies should have a process for vetting suppliers to ensure they are reliable and provide high-quality goods and services.
  • Budget Control: Purchase orders should be checked against budget allowances to prevent overspending.
  • Reconciliation: The accounts payable department should reconcile purchase orders with invoices and delivery notes to ensure accuracy in payments.

These controls are especially important in larger organizations where there may be multiple people involved in the purchasing process. They help to ensure that the company’s financial resources are used effectively and responsibly.

Example of Purchase Order Controls

Let’s consider a medium-sized tech company, TechFlow, as an example:

TechFlow needs to purchase 20 new laptops for its development team. Here’s how purchase order controls could be implemented in this scenario:

1. Authorization: The IT department manager submits a purchase requisition to the procurement department for approval. The procurement department reviews the request to ensure the laptops are necessary, within the budget, and from a reliable supplier.

2. Segregation of Duties: The person approving the purchase order in the procurement department is not the same person who requested it (the IT department manager). The segregation of duties helps reduce the risk of errors or fraud.

3. Verification of Receipt: When the laptops are received, someone from the IT department checks to make sure all 20 laptops have been delivered and that they match the specifications in the purchase order.

4. Record Keeping: The procurement department keeps a copy of the purchase order and matches it with the receipt when the laptops arrive. This record is stored and can be referenced in the future if necessary.

5. Supplier Vetting: Before making the order, the procurement department would have performed a vetting process to ensure the chosen supplier is reliable, offers high-quality products, and provides competitive pricing.

6. Budget Control: When the IT manager requested the laptops, the procurement department checked to ensure that this purchase aligns with the company’s budget and the department’s allowances.

7. Reconciliation: Once the supplier’s invoice is received, the accounts payable department reconciles the purchase order, delivery receipt, and invoice to ensure all details match before making the payment.

These controls will help TechFlow ensure that their purchasing process is well-managed, reduce risks, and maintain financial integrity.

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