Differences between a capital goods acquisition and a purchase of inventory

2. Inventory purchase process considerations

Each entity has its own inventory purchase workflow that incorporates business peculiarities and external environment factors. The diagram below illustrates major stages in purchasing inventory. A company may add or remove sub-processes and internal controls depending on its needs.

An inventory acquisition would include the following sub-processes:

Illustration 1: Inventory acquisition process

Inventory Acquisition Process

In order to improve the quality of reporting, a company may design and implement internal controls for each stage.

The ordering sub-process typically includes the following internal controls:

  • Purchase orders are reconciled to original requisitions;
  • Vendor invoice is matched to the purchase order;
  • Spending limits are enforced and;
  • Approval procedures are defined in company policies.

For example, if a requisition amount is less than $1,000, it is routed to the purchasing department directly. If the requisition amount exceeds $1,000, the approval of the department manager will be required. Significant purchases may also require authorization of a vice president and a chief financial officer.

The invoicing process may include the following internal controls:

  • Vendor invoices are reviewed for mathematical accuracy (for instance, verifying that the number of units multiplied by the price minus discounts equal the total amount of the invoice);
  • An automated or manual thee-way match may be performed, when a vendor invoice is traced to the purchasing order and original requisitions (or receiving reports).

The payment process may be enhanced with such internal controls:

  • Verification that payments are made for approved vendor invoices only;
  • Original vendor invoices are matched to payment vouchers to prevent duplicate payments;
  • Total checks issued are reconciled to accounts payable and cash registers/ledgers;
  • Access to check signing machines and checks are restricted.

At the end of the year, it is reasonable to perform the following procedures:

  • Review purchases that have not been fulfilled (e.g., review of open purchase orders);
  • Perform cut off tests and review vendor invoices to be recorded in the proper period;
  • Conduct reconciliations between vendors’ statements and accounts payable balances.
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