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Accounting Control in Inventory Management

Accounting is not simply a matter of recording transaction; it is essentially an economic management activity. Every management activity is closely associated with a keyword: "control". Therefore, accounting is control. On one hand, for accounting figures to be accurate, transparent, and reflective of the true financial situation of a business, relevant information related to economic transactions must be collected and recorded through a systematic documentation process (either on paper or electronically through computer software) that follows a coherent logic.


What is a system if not a series of well-organized control measures? On the other hand, for this control system to exist and effectively mitigate the risks of errors, fraud, and asset misappropriation, financial accounting serves as the linchpin by collecting fragmented information generated at each control stage, interpreting it, and presenting it in a meaningful consolidated form.

Thus, the aggregation of accounting control measures to form a complete and efficient accounting information system is particularly crucial in economic management. In this series of articles, as a professional consultant in business management in general and accounting practices in particular, RSM Vietnam offers insights into the control systems related to procurement, processing, and inventory transportation. These systems vary in complexity, ranging from document-based purchasing systems to barcode tracking systems, cross-docking systems, pick-to-light solutions, and more.

This blog outlines the fundamental purchasing process centered around the approval of purchase orders, starting as follows: The warehouse department initiates a purchase requisition when the inventory levels are low. This requisition allows the purchasing department to create a purchase order with multiple copies. One copy of the purchase order is sent back to the warehouse, where it is cross-checked with the purchase requisition to ensure that the requested quantity is adequately ordered. Another copy is sent to the supplier, while a third copy is forwarded to the accounts payable department for future reconciliation with the supplier's invoice. The fourth copy is directed to the receiving department, where it is used to reconcile with the actual received quantity, while the fifth copy is retained by the purchasing department.

Control Measures for the Procurement Process:

- Warehouse: Implement pre-numbered purchase requisition forms. In the absence of a standard inventory management system, only warehouse staff should be aware of impending low inventory levels. They must notify the purchasing department to place purchase orders for replenishment. To ensure standardized purchase requests, use pre-numbered requisition forms. Limit access to these forms to a select few warehouse personnel to prevent multiple requests for the same inventory item.

- Purchasing: Prepare pre-numbered purchase orders. Fundamental control over inventory in a basic inventory management system lies in the purchasing function by regulating the flow of goods into the warehouse. This control step may be exempt for certain low-value accessories. Since purchase orders are the primary control for inventory procurement, the issuance of false purchase orders can be mitigated by using pre-numbered purchase order forms stored securely in a locked cabinet.

- Verification of Purchase Orders against Purchase Requisitions: Once the warehouse personnel receive a copy of the purchase order, they must cross-check it with the original purchase requisition to ensure that the correct type of goods has been ordered. Any inaccuracies on the purchase order should be immediately reported to the purchasing department.

- Rejection of Unordered Deliveries: To reinforce the use of purchase orders for all inventory procurement transactions, receiving personnel should be instructed to reject all deliveries that do not correspond to a specific purchase order. This ensures that goods are only accepted when associated with a valid purchase order.

- Matching Delivery Receipts with Purchase Orders: Upon receiving an order, warehouse staff should input the received goods information into a receiving report. This report is then forwarded to the accounts payable department for future reconciliation with supplier invoices and purchase orders. The receiving report should also be sent to the purchasing department for analysis. This step ensures that the delivered goods match the information on both the purchase order and the delivery receipt.

- Cancellation of Duplicate Purchase Orders: Upon receiving the receiving report from the receiving personnel, the purchasing staff cross-references the data to identify purchase orders that have not been received and those with excess inventory. Orders with surplus quantities can be canceled to prevent unnecessary delays in subsequent shipments.

- Three-Way Matching for Invoice Approval: Upon receipt of the receiving report, the accounts payable personnel reconcile it with the supplier's invoice and the purchase order. This verification ensures that the quantity on the supplier's invoice matches the quantity received and that the prices align with the purchase order. The payment department proceeds to make payments to the supplier based on the results of this reconciliation process. This three-way matching approach minimizes the risk of discrepancies and inaccuracies in the payment process.


Additional Control Measures for the Procurement Process.

- Separation of Purchasing and Receiving Functions: Individuals authorized to issue purchase orders should be strictly prohibited from handling the receiving tasks. This segregation prevents any potential manipulation of the original purchase order and the misappropriation of inventory. This control measure is often considered a fundamental control to maintain transparency and integrity in the procurement process.

- Approval of Purchase Orders by Supervisory Personnel: If purchasing personnel lack experience, all purchase orders should be approved by a supervisory authority before issuance to identify and rectify potential errors. This control is particularly valuable in high-pressure business situations, such as fulfilling large orders, where mistakes could have significant consequences.

- Notification to Suppliers that Oral Orders are not accepted: Suppliers delivering based on oral approvals can undermine the effectiveness of formal purchase orders. To prevent this, periodic reminders should be sent to suppliers indicating that deliveries without formal purchase orders will be rejected at the receiving dock. This measure helps maintain the integrity of the formal purchase order process.

- Notification to Suppliers of Authorized Approvers for Purchase Orders: In cases where there is a significant risk of purchase order forgery, it is essential to inform suppliers about the authorized personnel responsible for approving purchase orders. This involves providing the names of individuals with approval authority and updating this list whenever changes occur. While this control may not be frequently employed, especially in organizations with large purchasing departments or frequent changes in approval personnel, it serves as a precaution against potential risks associated with purchase order manipulation. The level of risk in forging purchase orders is typically low under normal circumstances.

These controls are specific to traditional control systems that heavily rely on paper documentation and may have limited or minimal application of information technology and automation in management.

In subsequent articles, we will share more sophisticated controls related to accounting control systems for inventory that leverage technology and automation to a greater extent. Our goal is to convey specialized knowledge and modern solutions in economic and accounting management. RSM Vietnam is committed to providing the best services in accounting and economic information control systems, aiming to consult and optimize the entire process for our clients.


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DECREE NO. 64/2024/ND-CP ON EXTENDING THE DEADLINE FOR PAYING TAXES AND LAND RENT IN 2024 Issued by: Gorverment Issued date: 17 June 2024 Effective date: 17 June 2024 Expiration date: 31 December 2024



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