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Purchasing Policies

Updated: Sep 30, 2021

Internal controls in the form of procurement or purchasing policies help organisations prevent mistakes and fraud. Clear and consistent purchasing policies also make decision making easy, alleviating confusion and stress for staff members.

It is easy to neglect the purchasing area but when neglected this almost certainly influences your organisation’s performance negatively. If you do not plan your purchasing well you will often spend more money than necessary or buy goods of a lower quality than required. You can also end up selecting suppliers with poor customer service that can not only lead to frustration for your staff but also to a lowering of your own service levels.

Good financial management is based on four pillars:

– Budgeting,

– Internal Controls,

– Accounting and

– Reporting.

Internal controls are designed to ensure that:

  1. Assets are safeguarded

  2. Fraud and errors are detected and prevented

  3. Financial information is accurate and reliable

  4. Compliance with relevant laws and restrictions is adhered to

  5. There is accountability – employees are protected from themselves and each other

  6. Sound management practices are followed.

Your organisation’s purchasing policy is an important part of the organisation’s internal controls. Your purchasing policy should cover the following:

  1. Who has the authority to purchase items for the organisation? What items can that person purchase? Are there any spending limitations?

  2. What are the organisation’s requirements for adequate supplier competition and what criteria will be used to select possible vendors?

  3. What is the organisation’s position on the acceptance of gifts?

  4. What is the organisation’s position on conflict of interest and personal loans from suppliers?

  5. Which types of contracts can the organisation enter into with successful bidders or vendors?

  6. What kinds of information does the organisation consider confidential?

  7. What is the procedure for dealing with legal questions?

When drawing up a purchasing policy it is important to have different processes for the different types of purchasing that takes place. It is imperative to match the process to the type of purchase to eliminate unnecessary paperwork and time. The different features of purchases that organisations have to consider and address in a purchasing policy are:

  1. Is it a once-off or repeat type of purchase?

  2. Is it a high value, medium value or low value purchase?

  3. Has the purchase been budgeted for or not?

  4. Are you paying by cash or on credit?

  5. Are you purchasing a fixed asset or a consumable?

  6. Is it a routine purchase or an emergency purchase?

In the low-value process the person obtaining a quote and issuing the purchase order can be the same person. It is still preferable to have a different person doing at least the accounting entry. With the high-value purchase numerous people are involved in the decision making process together and separately. The segregation of duties is critical to effective internal control. It reduces the risk of errors or inappropriate actions.

One person should not :

-Initiate a transaction and

-Approve a transaction and

-Record a transaction and

-Handle assets and

-Review reports.

In general, the approval function, the accounting function, and the asset custody function should be assigned to different employees. When these functions cannot be separated, a detailed supervisory review of related activities is required as a compensating control activity.

Specific examples of segregation of duties as it pertains to purchasing:

-The person who requests the purchase of goods or services should not be the person who approves the purchase.

-The person who approves the purchase of goods or services should not be the person who is responsible for the accounting entry.

-The person who receives the goods/services should not be responsible for the accounting entry.

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