Evaluation of Internal Control Over Purchasing Procedures

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



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


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

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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.

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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

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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

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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

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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.

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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.

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• 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.

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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.

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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

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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).

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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

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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.

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• 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.

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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: ………………................

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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.

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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).

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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.

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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

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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.


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.


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.


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


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


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


51

Figure 4.2

The Flowchart of Internal Control System on the Redesigned Procedures of


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.

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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



66

Figure 3.3



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