Trading is a chain of business process of buying, taking delivery of goods bought, making proper arrangements for their storage and issuing them on sale, etc. The function of audit, in this background, is to ensure that there is no leakage of goods or cash; also that the goods that are purchased have been received and are of the type dealt in by the firm, the prices are normal and the goods have been
duly accounted for. It is, therefore, the duty of the auditors to see that the trading establishment, the accounts of which he is called upon to audit, has devised a system of internal control as a safeguard against the losses that may arise out of the foregoings. This he performs by reviewing the system. The principal features of such a system are briefly outlined below.
Buying : Buying should be a function independent of receiving, storage and despatching. There should exist a proper a procedure for buying, as regards who shall authorise a purchase, on what basis purchases are to be made, from whom to buy and in what quantity, etc.
The goods, if possible, should be purchased by a separate Purchase Department. The department should be constantly receiving information as regards prices prevailing in different supply centres and have knowledge as regards the allowance, if any, that should be made, the price of every commodity prevailing in one centre as compared to that in another on consideration of freight, quality and other
allied factors. The buying department should maintain an up-to-date list of suppliers and manufacturers of various commodities, dealt in by the concern with a note on their usual terms of trade and past performance. In respect of commodities or brands which are not so well known in the market, it is desirable that the view of the Sales Department should be obtained before an order is placed for purchase of such commodities or brands. It would also be prudent to avoid bulk purchase of such commodities/brands until consumer acceptance is evident. For purchasing such commodities, there should be a system of inviting quotations from a number of suppliers or manufacturers. When the purchase department decides to place an order for the purchase of commodities or goods, a purchase order, preferably standardised, should be prepared in quadruplicate; it should specify the name of the supplier, the goods ordered with specifications as to quantity, quality, source, etc. the date of supply and the price agreed to. It should also specify the other terms about delivery, freight,
insurance, etc. One copy of the Purchase Order should be forwarded to the Accounts Department and another to the Receiving Department. If the order has been placed on the basis of a sample, the sample should also be forwarded to the Receiving Department. The purchase order forms should be prenumbered and the internal reference number should be given to identify the purchase indent sent by the Stock Department. Any purchase which is initiated on indent of any section other than the Stock section, should be authorised by the concerned departmental head and manager.
Receipt of goods : The responsibility for the receipt of all incoming goods should be centralised in a separate department. The responsibilities of the Receiving Department should be the following :
- Verifying all receipts as to the quality and quantity by comparison with the copy of the purchase order issued by the Purchase Department and the forwarding challan of the supplier. The goods should be checked for damage, leakage, etc.
- Entering the goods immediately on receipt in the Goods Inward or Goods Received Book.
- Drawing up in quadruplicate a Goods Received Note for each consignment.
- Transmitting the material in the Stock Department along with a copy of the G.R. Note as aforementioned and obtaining a receipt for the goods for constituting the record of the department.
Before accepting the goods, the Stock Department sends a note to the Inspection Department for checking the quality and specification. Only on getting a clearance from this department, the goods are accepted. A copy of the Inspection Note is usually attached to the Goods Received Note. The original copy of G.R. Note should be retained in the Receiving Department as a permanent record of receipt, preferably bound up in the numerical sequence of receipts. One copy of the note should be handed over to the supplier for being enclosed with the invoice he would be sending for the supply made. The second copy should be forwarded to the Stock Department along with the goods and the third copy to the Purchase Section to enable it to follow up any non-supply or short supply made by the supplier. It would be a good internal check if the Accounts Section, before passing any invoice for supplies made, compares the suppliers copy of the note as enclosed with the invoice with that in the Stock Department because it is from that copy that entries in the stock records have been made.
Storage :
- No sooner the quantity of any article in the godown reaches the ordering level specified on the Bin Stock Card then the stock-keeper should prepare an indent, stating the particulars of goods to be purchased, the quantity required, the date and quantity of goods which was last ordered, the name of the party from whom the goods were obtained and other particulars considered relevant. The indent should be forwarded to the Purchase Department.
- The goods should be stored in a manner to ensure that :
- they are easily accessible and at no time are obscured from view;
- they do not suffer any deterioration during storage;
- they occupy the minimum amount of space;
- necessary segregation has been made in the matter of storage of fast moving and relatively slow moving items and easier accessibility has been arranged for the former type.
Also, it should be ensured that the goods are adequately insured against fire, theft, etc. and that
conditions of the insurance policy are complied with.
Issues :
- All deliveries from the sales-godown under all circumstances, should be made on delivery notes signed and authorised by the Sales Department. Where credit is to be allowed to the customer, the Sales Department should obtain the prior approval of the Accounts Departments.
- The requisition slip should be prepared in quadruplicate. The original copy should be retained by the Sales Department as a permanent record of the sale made. Two copies should be forwarded to the Stock Department. This department in turn should retain one copy in its record as evidence of goods having been issued, after it has been acknowledged by the Despatch Department and surrender the other to the Despatch Section along with the goods. The fourth copy should go to the Accounts Department. It will the basis on which the Accounts Department shall prepare the bill for the customer on receiving a copy of the despatch note from the Despatch Department.
- The Stock Department, on releasing the goods, should make an entry on the Bin/Stock Card.
- The goods on release from the sale godown should be sent to the Despatch Department, alongwith both the copies of the requisition slip; one should be obtained back duly signed in acknowledgement of the fact that the goods have been received for despatch. It should be placed on the file in the Stock Department.
- After the goods have been despatched, the Despatch Department should prepare a despatch note in quadruplicate. One copy of the note should be forwarded to the Accounts Department and another to the Sales Department for reporting to it that the goods sold have been despatched; from the third an entry would be made in the Goods Outward Book; and the fourth is to accompany the goods.
- The requisition slip forms should be pre-numbered and the control over them should be kept by the Sales Department. All forms that are spoiled should be kept in the file. (Students may note that the person who has got finished stock in his custody is described as the stockkeeper and the department dealing with the goods as the stock department. Likewise, the person who has in his custody the stores of raw materials, manufacturing stores, etc. is described as the storekeeper and the department is referred to as the stores department.)
