"Purchases Risk and Controls"
City of ______________ Summary and Evaluation of Key Controls Accounts Payable Disbursements Cycle The following summarizes the key controls that typically would be relevant to a local government client. Determine if we have addressed these controls in the activity-level controls matrix attached. 1. Persons processing accounts payable are separate from those ordering or receiving goods or services. 2. There is an appropriate system for review and approval of vendors. 3. Invoices are properly approved for payment. 4. The accounts payable GL account and list of accounts payable are reconciled regularly. 5. In some governments (espcially larger organizations), there is a formal purchase-order process in place. 6. There is a process to review, record, and approve retainages and encumbrances at year end. If there are controls listed above that are not in place, evaluate if there are compensating controls that achieve the same control objective and list here: Summary 1 The following is a list of common controls surrounding the AP disbursement process. This list can be used for reference when populating the controls matrix. Also refer to list of AP Disbursement key controls in previous tab. (Note that all of not all of these controls are considered necessary or relevant to every government) Source: PPC GRX-9a-6: Control Activities Form for Expenditures of Goods and Services and Accounts Payable (PPC risk based audits 2006 edition) 1. Segregation of duties and reviews—control activities tested through inquiry and observation a. Purchasing is separated from requisitioning, shipping, and receiving functions. b. Requisitioning, purchasing, and receiving functions are segregated from invoice processing, accounts payable, cash receipts and disbursements, and general ledger functions. c. Invoice processing and accounts payable are segregated from the general ledger function. d. Individuals independent of purchasing and receiving functions follow up on unmatched open purchase orders, receiving reports, and invoices. e. There is a periodic review of purchase prices by someone outside the purchasing department. f. Vendor statements are periodically reviewed by the appropriate level of management or other responsible person for overdue items. g. There are defined cutoff procedures that are continually monitored by the appropriate level of management or another appropriate person. h. Employees with purchasing and accounts payable responsibilities are required to take vacations and other employees are required to perform those functions when an employee is absent. i. A current purchasing manual defines restrictions on purchases of goods or services from governing body members, employees, or other suppliers that would create a conflict of interest. j. Purchases are reviewed for compliance with requirements of laws and regulations, the governing body and of funding sources, if applicable (for example, competitive bidding requirements). k. The government has procedures for coding expenditures in compliance with funding and organization accounting requirements. l. Management periodically compares actual expenses to budgeted expenses and investigates unanticipated variances. m. Goods received are independently inspected for condition and independently counted, measured, or weighed. 2. Recording, reconciliations, and reviews—control activities tested through inquiry and document inspection a. Purchasing i. There is an approved vendors list. ii. Noninventory expenditures are supported by approved invoices, purchase orders, and other supporting documentation as appropriate. iii. The following documents (including unused forms) are prenumbered with the sequence controlled and accounted for: 1) Purchase orders. 2) Receiving reports. 3) Debit/credit memos. 4) Vouchers 5) Shipping orders for returned goods. iv. Purchase orders are reviewed to ensure the expenditure is within budget or other restrictions. v. Account distributions are recorded by the operating department and reviewed by the accounting department. vi. There is a proper cutoff of purchases at month-end. vii. Shipping orders for returned goods are matched with vendors’ credit memos. viii. The appropriate level of management or another appropriate person periodically compares actual expenditures to budgeted expenditures and follows up on significant variances. b. Accounts payable i. Monthly vendor statements are reconciled to the accounts payable trial balance. ii. The accounts payable trial balance is compared with individual open invoice totals. Complete Controls 2 iii. The accounts payable trial balance is reconciled to the general ledger control account. iv. The appropriate level of management or another appropriate person reviews reconciliations between the accounts payable trial balance and general ledger control accounts. v. Accruals are periodically reviewed for reasonableness by the appropriate level of management or another appropriate person. vi. Receiving reports are promptly provided to personnel in accounts payable processing and recordkeeping. vii. Purchase and receiving documents are controlled so that liabilities are recorded for goods or services received but not yet invoiced. c. Encumbrances i. Open purchase orders are reconciled to the outstanding encumbrance listing at year end. ii. The outstanding encumbrance listing is reconciled to the reserve for encumbrance general ledger account. iii. The appropriate level of management reviews reconciliations between the outstanding encumbrance listing and the general ledger control accounts. 3. Purchasing—control activities tested by review of supporting documentation for a sample of purchase transactions a. Purchases are supported by properly authorized and approved requisitions and purchase orders. b. Invoices are compared to purchase orders and receiving reports and reviewed for correctness of: i. Quantities received. ii. Brand name and product ordered. iii. Pricing. iv. Clerical accuracy. c. Any noninventory expenditures are supported by approved invoices and other supporting documentation, as appropriate. d. The mathematical accuracy of invoice is checked. e. Purchases are recorded properly as to account, amount, and period. Complete Controls 3 City of Brookfield Internal Controls Documentation Procurement Process Process Documentation Control Procedure (A) (B) (C) All City departments have the authority to The Finance Department monitors purchase goods and services subject to the compliance with City procurement policies guidelines set forth in the City's Procurement and procedures. The Accounting Manager Policy. Department heads have the has been delegated the authority to be the responsibility for procurement issues in their City's Purchasing Agent. individual departments. In general, purchase orders are required for Department heads or designated employees all purchases in excess of $1,000 or when a must approve all purchase requisitions. vendor requests one. Authorized personnel within each department prepare purchase order requisitions and submit them to the Accounting Department for processing. Purchases in excess of $10,000 require Prior to purchase a Procurement Request additional documentation and approvals form and Bid Summary sheet must be Initiation of transaction depending upon the dollar amount as set submitted to the Accounting Department forth in the City's Procurement Policy. for review and approval. $10,000 - $25,000: Competitive quotes are required. Department head and Purchasing The Accounting Manager/Purchasing Agent Agent approvals are required. reviews/approves the Procurement Request $25,000 - $50,000: Sealed bids or formal and bid documentation. Additional approvals, proposals are required. Additional approvals if required, are obtained and a copy of the include Finance Director and Mayor. approved Procurement Request is fowarded Over $50,000: Sealed bids or formal proposals to the requesting department. required. Additional approvals include Finance Committee and Common Council. With approval, purchase orders for unspent All carry-over purchase orders must be budgeted funds may be carried-over at the approved by the Director of Finance. end of a fiscal year (General Fund only). Requests to carry-over purchase orders must be approved by a department head. Each department is responsible for creating The Accounting Manager is responsible for their own purchase orders/requests using user access and security as it relates to the City's Procurement Processing software. the City's Financial Management System Individual users are limited to specific G/L which includes Procurement Processing accounts that they have access to. software. Users cannot issue purchase orders that The Accounting Manager must approve all exceed $25,000 or that exceed the budgeted purchase requests that exceed $25,000 and amount of the G/L account that is being provide override authority for G/L accounts encumbered. that are over budget. The Accounting Department is responsible for Purchase order forms are kept in a locked printing and mailing of purchase orders. storage room in the Accounting Department. Purchase orders are run by the Accounts Purchase order numbers are computer Payable Clerk on a daily basis or as needed generated and are reset at the beginning of depending upon the volume of requests in the each year by the Accounting Manager. system. b15aae78-ac99-4901-911d-6ccdaee312c9.xls - Procurement Matrix 4 Transaction Recording Process Documentation Control Procedure (A) (B) (C) There are four copies of each purchase order. The yellow receiving copy is returned to the White - Original vendor copy. Accounting Department when an order is Transaction Recording and Processing Blue - Accounting Department copy. complete. The purchase order is then closed Pink - Issuing Department's copy. out. Yellow - Receiving copy. Once printed, the Accounts Payable clerk An Open Purchase Order Report is run posts the purchase orders to the general periodically to review outstanding purchase ledger which creates the encumbrances orders and encumbrances. against the appropriate expense accounts. As invoices are processed against purchase orders encumbrances are reduced by the amount of the invoice being processed. At the end of each fiscal year all outstanding All "Non Carry-Over" purchase orders are encumbrances are cleared out of the general closed out in December of each year. ledger. Carry-over purchase orders are recorded as Carry-over purchase orders are flagged as a an expenditure in the current year with the part of the year-end close of the Financial offset being a credit to Prior Year Reserve For System. The appropriate journal entries are Encumbrances. As these funds are spent in created by the Financial System as a part of the subsequent year, the reserve is debited. the year-end process. The Accounting (Note: General Fund only) Manager reviews and posts these entries. Purchase orders can be modified or voided Only the Accounting Department can through the "Work With Open Purchase add/change/delete an updated/posted How the incorrect Orders" function of the procurement software. purchase order. The Accounting Manager processing of When these changes are updated/posted the must authorize any changes to existing transactions is resolved Financial System creates the appropriate purchase orders. encumbrance adjusting journal entries. Departments have access to encumbrance The Accounting Department periodically information through general ledger inquiry. In runs an open purchase order listing to review addition, departments can run an open all outstanding purchase orders. Process for reconciling purchase order report for their department. detail to the general An excel spreadsheet is created each year to The Accounting Manager updates this ledger track transactions by purchase order in the spreadsheet and reconciles the balance to Prior Year Reserve For Encumbrances G/L the general ledger. account (101-298-100). b15aae78-ac99-4901-911d-6ccdaee312c9.xls - Procurement Matrix 5