 in this presentation we will take a look at the segregation or separation first a word from our sponsor yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways like our trust me i'm an accountant product line yeah it's paramount that you let people know that you're an accountant apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions if you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com of duties with regards to the purchasing process recalling that the separation or segregation of duties is one of the major primary internal controls when we think about internal controls we want to think separation segregation of duties that means that we're going to be taking this process in key components of the process we will be separating duties and in so doing we'll provide some types of checks and balances to safeguard against problems within the process also recall that when we think about the internal controls and the separation or segregation of duties we're thinking about the company's information in terms of the processing of the company data through the purchasing process the internal controls then being set up by the company these would be things that would be set up by the company in order to safeguard items within the company we as the auditor of course then being concerned with the internal controls mainly as they would relate to the ability to make the financial statements more properly stated due to those internal controls so internal controls related to the purchasing process the purchasing function is segregated from the requisitioning and receiving function purchasing function is segregated or separated from the requisitioning and receiving functions if one individual is responsible for the requisition so we're going to request some item within the organization and they're in charge of the purchasing so they're going to actually go through the purchasing process with the vendor and in charge of receiving meaning we can imagine them in the warehouse now receiving the inventory it's quite possible in that case we're almost begging for it to happen that fictitious purchase can be made in other words especially as the company gets larger we're more concerned with this because we have types of individuals that are not possibly as closely knit and therefore we need more internal controls in order to put safeguards in this type of process in that kind of situation you can imagine a person if we put the person in the place and they're just seeing they could just see that oh well it's quite possible for this person then to have a requisition request something go through the purchasing process and then receive the goods all in the same by the same individual for that individual to then have a fictitious purchase that they can make and possibly resulting in a theft so they could possibly basically approve something that's actually for them maybe that is going through the purchasing process of the company of goods and possibly payment for the unauthorized purchase so we need the separation there that should seem somewhat clear invoice processing function is segregated from the accounts payable so the invoice processing this is the invoice that's coming from the vendor to us is segregated from the accounts payable recording the actual activity in the accounts payable so we are imagining usually when we're getting that invoice that happens after we sent the purchase order we typically receive the inventory we're imagining us receiving the inventory with possibly the invoice or billing with the invoice that has been received so if one individual is responsible for invoicing process and accounts payable function purchase transactions can be processed at the wrong price so it's possible for us then because instead of having that separation of duties to have the wrong price or terms or a cash disbursement can be processed for goods not received it would be possible to have a fictitious basically receipt then when no goods were actually received and still being able to record it in the accounts payable as if it was received possibly resulting in overpayment of goods or theft of cash and so again you can imagine types of situations here where if somebody was in charge of those two functions they could set up a process work with vendors that were fictitious or something like that and be able to basically commit some type of fraud and whenever we think about these internal controls you might be saying well that wouldn't happen i know all these people i trust all these people and whatnot but just remember as the company gets larger we want to remove the ability for fraud to be happening and we have to imagine then the fraud being taking place put in the internal controls in that system so it's often easiest for us to think about what's the type of thing that could result in fraud within the situation let's set up a system where that will be less likely we don't even want to have the the temptation of fraud being there if we could put in a simple safeguard or separation of duty in some key places in order to do that it may also reduce error as well given the fact that sometimes that results in a double checking as well disbursement function is segregated from the accounts payable function so the disbursement of the actual cash now being segregated from the accounts payable recording of that accounts payable the reduction of what is owed to the vendor in the books if one individual is responsible for the disbursement function and has access to the accounts payable records unauthorized checks supported by fictitious documents can be issued so we can imagine this happening again fraud you can imagine what would be the fraud scenario if someone had the ability to do both these things basically the disbursement of the cash as well as recording the decrease in accounts repayable you could see that we could imagine situations where cash could be sent out that was not correct unauthorized transactions can also be recorded possibly resulting in theft of the entity's cash and then we have the accounts payable function is segregated from the general ledger function so when we're thinking about the accounts payable segregated from the general ledger if one individual is responsible for the accounts payable records and the general ledger that individual can cancel any falsification that could that would normally be detected by reconciling the subsidiary records with the general ledger control account in other words we're typically thinking of someone being involved or handling the accounts payable the accounts payable subsidiary ledger typically broken out by vendor and we need to agree that we're going to agree that with the general ledger the account on on the general ledger controlling account they should agree if we separate those two out then we'll be able to reconcile those two and if we have two people involved we'll be able to have kind of a better check between those two reconciling whereas of course if we only have one person involved in both of those two two items then they can basically account for the the reconciling they can perform a falsification within the reconciliation and mask that what would be caught within that checking process therefore here's going to be a chart of our information we got the purchase process functions and then we've got the different areas purchasing receiving accounts payable cash here and the it so the preparation and approval of the purchase order that's going to be in purchasing then we have the receipt counting and inspection of purchase items so the receipt and counting that's going to be in receiving so we're considering the warehouse now that's separate from the purchasing the preparation and approval of the order we want to keep that separate from the receiving you'll recall the actual handling of the goods that we're imagining have been received in the warehouse then we have receipt of vendor invoices matching with the supporting document so that's going to be in the accounts payable so receiving is separate from the entering of the data the accounts payable then then we have the checking of the account disbursements so that's going to be in the accounts payable then we have the updating of accounts payable records again handled by accounts payable notice accounts payable can be a very key function depending on the size of an organization larger the organization is accounts payable can be a very specialized field involved in many folks within it it also might have an it an it component internal um it department component creation of vendor checks so that typically is going to be done through the it department through the creation of the checks signing and mailing of the checks should be done separately so notice the person creating the check is going to be separate from the person that is going to be of course signing the check now also note that in smaller companies we may not have all these separation of duties to be in place but of course the signing of the check even if we're sole proprietor or and we have other people that are basically helping us to you know purchase what we need working with us then a bookkeeper things like that we would need then to uh probably separate out the signing of the check that's one internal control we probably don't we don't want to just give the stamp or some kind of automated process possibly to somebody else there even if we trust the bookkeeper fairly well we probably want to have at least the signing or approval process of the actual payment so note again if smaller companies may have lesser and what they will have lesser internal controls will not be able to do the primary type of activities for a good control system because the primary activities include separation or segregation of duties they won't have the personnel however they do want to have some of the key components for that separation the cat the signing of the checks by the owner possibly and possibly doing the bank reconciliation process are some items that you may consider for small smaller companies creation of voucher register it and then we have the reconciliation of voucher registered to the general ledger so you'll notice that the it is basically does that because the system is going to help us to basically create a voucher register and then the reconciliation of voucher registered to the general ledger we have here in the accounts payable tying those two things out