RISKS AND CONTROLS IN THE PURCHASE RETURN PROCESSES (STUDY OBJECTIVE 3, continued)

AUTHORIZATION OF TRANSACTIONS

Whenever problems are noted with purchases, special authorization should be required to officially reject and return the items and initiate the preparation of a debit memo. All debit memos must be approved by a member of management or other designated individual within the company before the goods are physically returned to the vendor.

SEGREGATION OF DUTIES

The accounts payable employee who prepares the debit memos should not also be responsible for performing duties in the custody or authorization functions of the purchasing process. Accordingly, these individuals should not handle inventory or cash, or approve purchasing or purchase return transactions.

ADEQUATE RECORDS AND DOCUMENTS

The debit memo is the most significant document in the purchase return process. It is important that debit memos include thorough descriptions regarding the items being returned, including quantities and prices, as well as reference to the original purchase invoice. Debit memos should be issued in numerical sequence to enable the verification of complete accounting for purchase return transactions. When debit memos are issued on prenumbered forms, company personnel can account for the sequence and evaluate whether or not the entire sequence has been accounted for.

Debit memos should be filed along with supporting documentation such as the original purchase records. They should also be matched with the refund or credit documentation received from the vendor.

SECURITY OF ASSETS AND DOCUMENTS

Accounts payable records and data files should be restricted to those who are specifically authorized to approve or record the related purchase return. Custody of the returned goods should be controlled and limited to those in the shipping function or others specifically designated to handle the goods.

INDEPENDENT CHECKS AND RECONCILIATION

Companies should have in place specific internal control activities to achieve accountability for purchase returns. Especially important are controls that check for the possibility of unrecorded purchase returns. Physical inventory counts can help detect unrecorded returns. In addition, someone independent of the accounting function should review supporting documents to verify that debit memos represent actual returns.

COST–BENEFIT CONSIDERATIONS

Internal controls should always be a part of a company's accounting system. However, certain exposures may exist within a company that may warrant the need to implement more extensive internal control procedures. A company should evaluate whether the benefits achieved from its internal controls are worthwhile, given the related risks and costs of implementation. In addition to the risks noted under the cost–benefits discussion related to the purchasing process, a company might also consider the need for extensive internal controls related to the purchase return process when it processes a large volume of debit memos.

Exhibit 9-13 presents some common control procedures related to the purchase return process, along with the related risks that they address.

Exhibit 9-13 Purchase Return Controls and Risks