ANALYSIS OF INTERNAL CONTROL ON PURCHASING ACTIVITY …
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ANALYSIS OF INTERNAL CONTROL ON
PURCHASING ACTIVITY AT PT.XYZ
SKRIPSI
By
REGINA JAYA
008201000063
Presented to
The Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Economics, Major in Accounting
PRESIDENT UNIVERSITY
CikarangBaru – Bekasi
Indonesia
2014
i
ANALYSIS OF INTERNAL CONTROL ON
PURCHASING ACTIVITY AT PT.XYZ
SKRIPSI
By
REGINA JAYA
008201000063
Presented to
The Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Economics, Major in Accounting
PRESIDENT UNIVERSITY
CikarangBaru – Bekasi
Indonesia
2014
ii
PANEL OF EXAMINERS APPROVAL SHEET
Herewith, the Panel of Examiners declares that the skripsi entitled “ANALYSIS
OF INTERNAL CONTROL ON PURCHASING ACTIVITY AT PT.XYZ”
submitted by Regina Jaya, Accounting Study Program, Faculty of Business, has
been assessed and proved to pass the Oral Examination on Friday, March 14th
,
2014.
Chairman, Panel of Examiner,
Dr. Sumarno Zain, SE, Ak., MBA
Examiner 1,
Misbahul Munir, MBA, Ak., CPMA
Examiner 2,
Dr. Fachruzzaman, SE, MDM, Ak., CA
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RECOMMENDATION LETTER OF SKRIPSI
ADVISOR
The skripsi prepared and submitted by
Name : Regina Jaya
Student ID : 008201000063
Faculty : Business
Study Program : Accounting
Skripsi Title : ANALYSIS OF INTERNAL CONTROL ON
PURCHASING ACTIVITY AT PT.XYZ
has been reviewed and found to have satisfied the necessities for Oral Defense as
partial fulfillment of the requirements for Bachelor Degree in Economics – Major
in Accounting.
Cikarang, Indonesia, March 3rd
2014
Acknowledge Skripsi Advisor,
Dr. SumarnoZain, SE, Ak, MBA Misbahul Munir, MBA, Ak.,CPMA
Head, Accounting Study Program Advisor
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DECLARATION OF ORIGINALITY
I hereby declare that the skripsi entitled “ANALYSIS OF INTERNAL
CONTROL ON PURCHASING ACTIVITY AT PT XYZ” is originally
written by myself based on my own research and has never been used for any
other purpose before. I, therefore, request for Oral Defense of the skripsi.
Cikarang, Indonesia, March 10th
2014
Researcher,
Regina Jaya
008201000063
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ANALYSIS OF INTERNAL CONTROL ON
PURCHASING ACTIVITY AT PT XYZ
ABSTRACT
The company should be aware of the importances of internal control in
their activities to reduce the possibility of missappropriation, fraud, or human
error. The objectives of this research is to evaluate the internal control on
purchasing activity at PT XYZ. How the implementation, identify the weaknesses,
and give recommendation to overvome those weaknesses.
The scope of this research is focused on the control activities. The research
method used is qualitative method using case study approach. The researcher does
literature review and gathers actual primary data from the object research. During
the research, researcher gets primary data through interview, documentation, and
observation.
During the research process, researcher found several weaknesses of
internal control. First, the there is no written standard operating procedure (SOP),
so the employee does not have any formal and compulsory instruction in doing
their activities. Second, there is no receiving department, so there is no other
department that able to cross check the purchasing activity that do by purchasing
department. Third, Purchase Requisition does not show the date when spare part
needed, so the purchasing department only purchases the first Purchase
Requistion that came to them without knowing specific Purchase Requisition that
might need to be prioritizes after severals Purchase Requisition. Fourth, copy of
Purchase Order is not sent to the warehouse, so the warehouse migh confuse
whether their request has been received or not and decide to send a new request
that is meant for one request that lead the purchasing department to purchase
incorrectly.
For the better improvement in the company’s internal control system, there
are several recommendations from the researcher. The company should make a
written standard operating procedure for all activities, create a receiving
department, create Purchase Requisition form with date columns or state the date
when the spare part needed, send the copy of purchase order to the warehouse.
Key words: Internal control, control activities, purchasing activity
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ACKNOWLEDGEMENT
“Believe in yourself! Have faith in your abilities! Without a humble but
reasonable confidence in your own powers you cannot be successful or happy.”
“Don’t run away from your problem. Stand still and face them! Always
remember, God never leave us.”
Thanks and gratitude to God Almighty for hope, love, strength, and for
everything that he has given to me. Without Him, I would not be able to finish this
skripsi and not be able to graduation with my friends.
I also realize that without the support and assistance from the people around
me, I may not be able to finish this skripsi. Therefore I would like to give special
thanks for what they have given to me.
1. To my parents, my father Putra Jaya and my mother Fransiska Gozali as
my inspiration on motivation to make me always try my best. Thank you
so much for the support, patience, believe, and love.
2. To my wonderful brothers, Kevin Pratama Jaya and Nico Permana Jaya.
Thank you for always being my little brothers who always stand up for
me.
3. To Mr. Misbahul Munir, MBA, Ak, CPMA as my advisor. Thank you for
the guidance, criticism, and patience that you had given to me that make
me able to learn a lot more than just write my skripsi.
4. To Mr. Sumarno Zain, SE, AK., MBA., as the head of accounting study
program. Thank you for taking care of all accounting students in President
University and your help in organizing the accounting study program.
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5. To all the lecturers in President University. Thank you for your time to
teach and share your knowledge during our study.
6. To PT XYZ for giving me permission to do observation for my research.
7. To my roommate Lusy, Catherine, and Caroline. Thanks for moment that
we share together and thanks for advices that make me a better person.
8. To my dormitory gang at President Dormitory. Anthony, Hendy, Kris,
Michael, Rio, and Tobias. Thanks for every stupid moment that make my
campus life become colourful. Thanks for accepting me for the way I am
since the first time we met until now.
9. To Felani Angela Hermatang. Thanks for always being beside me in happy
or sad moment. Thanks for always see the kindness in me.
10. To my accounting gang at President University. Tia, Philip, Daniel, Irvin ,
James. Thank you for super time that we spend together start from our
study in President University until our internship. Thanks for always
support me in making my skripsi.
11. To my kost-mate, Carla and Cilla. Thanks for our time when we cheer up
each other in up and down situation while making our skripsi. Thanks for
that short yet beautiful moment.
12. To all accounting students batch 2010. Thank you for the friendship and I
am glad to know and be friend to all of you
13. To all people whom I cannot mention one by one. Thank you for your
support, help and advice.
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Table of Contents
TITLE ....................................................................................................................... i
PANEL OF EXAMINERS APPROVAL SHEET .................................................. ii
SKRIPSI ADVISOR RECOMMENDATION LETTER ....................................... iii
DECLARATION OF ORIGINALITY .................................................................. iv
ABSTRACT ............................................................................................................. v
ACKNOWDLEGMENT ........................................................................................ vi
LIST OF FIGURES ................................................................................................. x
CHAPTER 1 : INTRODUCTION...........................................................................1
I.1 Research Background ................................................................. 1
I.2 Problem Identification and Satetement ....................................... 2
I.3 Research Objectives .................................................................... 2
I.4 Research Scope and Limitation .................................................. 3
I.5 Research Benefits ....................................................................... 3
I.6 Research Method........................................................................4
CHAPTER II: LITERATURE REVIEW.................................................................6
II.1 Internal Control ......................................................................... 6
II.1.1 Definitions of Internal Control ................................... 6
II.1.2 Internal Control Objectives ........................................ 7
II.1.3 Components of Internal Control ................................. 9
II.1.4 Limitations of Internal Control ................................. 19
II.1.5 Roles and Responsibilities ........................................ 22
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II.2 Purchasing Procedure .............................................................. 25
II.2.1 Definitions of Purchasing ......................................... 25
II.2.2 Functions in Purchasing ........................................... 26
II.2.3 Documents in Purchasing ......................................... 27
II.2.4 Purchasing Procedure ............................................... 29
II.3 Internal Control Over Purchasing Activity.............................. 31
CHAPTER III: METHOD OF DATA PROCESSING AND COMPANY’S
EXISTING CONDITION......................................................................................37
III.1 Data Collecting and Processing ............................................. 37
III.2 Company’s Background ......................................................... 39
III.2.1 Background ............................................................. 39
III.2.2 Organization Structure ............................................ 41
III.2.3 Job Description........................................................ 42
III.3 Company’s Purchasing Process ............................................. 48
CHAPTER IV: ANALYSIS AND EVALUATION.............................................54
IV.1 Best Practices Done by The Company................................... 54
IV.2 Findings ................................................................................. 55
CHAPTER V: CONCLUSION AND RECOMMENDATION.............................60
V.1 Conclusion ............................................................................... 60
V.2 Recommendation ..................................................................... 63
BIBLIOGRAPHY .................................................................................................. 65
APPENDICIES......................................................................................................66
COMPANY’S CONFIRMATION LETTER.........................................................70
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List of Figures
Figure 3.1 Organization Structure of PT XYZ- Head Office ................................ 41
Figure 3.2 Organization Structure of PT XYZ- Manufacture...............................42
Figure 3.3 Flow Chart of Purchasing Process.......................................................49
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Chapter I
Introduction
I.1. Research Background
In this day, the business world has developed. This is also increases the
competition among companies. Thus, the company should be able to develop their
business so that they can survive in this business world. The more a company
develops, the more complex the activities. This increase the difficulty for the
company’s leader to control their business activities. Therefore, companies need
internal control system that can help them to control their activities. Internal
control system is a system and procedure designed by the management to provide
reasonable assurance regarding effectiveness and efficiency of operations,
reliability of financial reporting, compliance with applicable laws and regulations,
and safeguarding assets.
One of the most important activities of the company, one of them is
purchase activity. The purpose of this activity is to provide the needs of the
company to run its business. There are few things to be considered in purchasing
activities, such as whether the materials purchased are materials needed by the
company, whether the materials are purchased with the best price, and whether the
materials received are what the company’s order. Therefore, a company needs an
internal control to ensure that its activities had been carried out properly and in
accordance with procedures.
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PT. XYZ is one of palm oil companies in Riau that produces CPO. This
company is in the change phase, from conventional into modern, so that many
activities within the company still needs a lot of improvement. Moreover, this
company has already existed for more than 10 years and it seems that there is no
development in its business. Everything is almost the same as when it was started
PT XYZ has purchased spareparts for its production machines. Based on
explanation above, the researcher decided to conduct a research with title
“ANALYSIS OF INTERNAL CONTROL ON PURCHASING ACTIVITY
AT PT.XYZ”
I.2. Problem Identification and Statement
To clarify the understanding of the discussion from the research
conducted, researcher identified problems are as follows:
a. Whether the spare parts purchased are what the company needs?
b. Whether the spare parts have been purchased with the best price?
c. Whether the spare parts that have been received have been checked
properly?
d. Whether the documents used in purchasing activity has been used
properly?
e. Whether all departments related to purchasing activity have functioned
properly?
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I.3. Research Objectives
The purpose of this research is to see the problems, the causes, and the
effects on the company activity, and then makes recommendations or suggestions
to help the company overcome the problems based on knowledge from the
literature review. Some objectives that must be achieved in this research are:
a. To evaluate and understand the internal control on purchasing activity
b. To identifty the weaknesses in the internal control on purchasing activity
c. To formulate recommendation needed to overcome those weaknesses and
to improve the internal control on purchasing activity
1.4 . Research Scope and Limitation
The researcher limits the scope of the discussion on internal control of
purchasing spare parts. The discussion about internal control is limited on one of
COSO’s components of internal control which is control activity. The categories
of control activity discussed in this research are transaction authorization,
segregation of duties, documentation, and access control.
The researcher is not allowed to take any quantitative data related to
financial aspects and accounting report as well as some important informations
claimed as confidential.
1.5. Research Benefits
1.5.1. Research Benefits for Company
This research can give some give feedback to the company
about the weaknesses and problems in their purchasing process and
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finally some recommendations to improve their purchasing
process.
1.5.2. Research Benefits for Author
This research gives a real experience of implementation of
the theories that have learned during class sessions. The research
will increase author’s knowledge about the implementation of
internal control in purchasing process in the real life.
1.5.3. Research Benefits for Readers
This research hopefully is able to expand the reader’s
knowledge about the implementation of internal control on
purchasing. This research may also help another researcher as
reference for their researches.
1.6. Research Method
This is qualitative research with case study approach. Researcher did
literature review and field research. In literature review, researcher got reference
or relevant theories from text books, internet, journal, and other scientific sources
in order to get criteria in assessing the existing conditions of the company. In the
field research, researcher came to the company to get the primary data.
In doing field research, the researcher using types of audit evidence
methods which are:
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Interview
Consist of seeking information from knowledgeable persong, both
financial and nonfinancial, throughout the company or outside the
company.
Observation
Consists of looking at a process or procedure being performed by the
company. The activity may be the routine process to see that the employee
are performing their assigned duties in accordance with company policies
and procedure.
Documentation
Consists of looking the evidence such document being used by the
company in their activity to get better understanding with the company
activity. Rechecking of transfers of information involves seeing if
information is recorded consistently in the accounting records
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Chapter II
Literature Review
II.1. Internal Control
II.1.1. Definitions of Internal Control
COSO framework quoted by Boynton, William C., and Johnson (2006)
stated that, “Internal control is a process, effected by an entity’s board of
directors, management, and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following categories :
Reliability of financial reporting
Compliance with applicable laws and regulations
Effectiveness and efficiency of operations”. (p.391)
Moeller (2009) stated that, “Internal control are process, implemented by
management, that are designed to provide reasonable assurance; compliance with
policies and procedures plans, laws, rules and regulations; safeguarding of assets;
operational efficiency; achievement of an established mission, objectives and
goals for enterprise operations; and integrity and ethical values.” (p.24).
Meanwhile, Reeve, Warren, and Duchac (2007) write, “ Internal control
are policies and procedures that protect assets from missuse, ensure that business
information is accurate, and ensure that laws and regulations are being followed.”
(p.231).
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Based on the definitions above, internal control is a plan, process,
procedure, and policies designed by the management to give a reasonable
assurance towards achievement of the efficiency and effectiveness of operations,
reliability of financial reporting, safeguarding the assets, conformity to the laws,
policies and other regulations.
II.1.2. Internal Control Objectives
An internal control system consists of the entire system and procedure that
established by a company to provide reasonable assurance of the achievement of
the company’s objectives. Refers to Hall (2011) there are four objectives of
internal control:
To safeguard assests of the firm
Internal control designed by the management is used to prevent fraud and
miss-use of company’s assets because assets are important resources of
company to do their operation
Reliability of financial reporting
Financial report is prepared by management for internal and external
users, which makes the informations in the financial report must be
reliable to reflect the actual condition of the company. Good internal
control will produce good and sufficient transaction’s evidence that
affected the information contained in financial report.
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Efficiency and effectiveness of operations
Internal control in a company avoids unnecessary activity being performed
and encourages efficient use of resources to optimize company’s goals.
Compliance with laws and regulations
Internal control encourages all people work in a company to comply with
applicable laws and also rules and regulations established by the company.
Moreover, the main objectives of an internal control system are also
summarised from the Auditing Practices Board (APB) and the COSO guidelines
are as follows:
To ensure that business operation has been carried out orderly and
efficiently as a result from the fully implemented system designed by
management. Controls help the business processes and transactions to run
without interference or with less risk which will adds value and creates
shareholder value.
To safeguard the company’s assets. Assets include tangibles and
intangibles, and controls are necessary to ensure they are optimally utilized
and protected from miss-use, fraud, misappropriation or theft.
To prevent and detect fraud. Controls are necessary to show up any
operational or financial dicrepancy that might be the result of theft or
fraud. This might include unbalanced sheet financing or the use of
unauthorized accounting policies, inventory controls, use of company
property.
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To ensure the completeness and accuracy of accounting records. Ensuring
that all accounting transactions are fully and accurately recorded, that
assets and liabilities are correctly identified and valued, and that all costs
and revenues can be fully accounted for.
To ensure the timely preparation of financial information which applies to
statutory reporting (of year end accounts, for example) and also
management accounts, if appropriate, for the facilitation of effective
management decision-making.
II.1.3. Components of Internal Control
Based on COSO’s Internal Control- Integrated Framework, there are five
components of internal control which are control environment, risk assessment,
control activity, information and communication, and monitoring.
Control Environment
Elder, Beasley, and Arens (2012) explained that, ”To understand and
assess the control environment, auditors should consider the most important
control subcomponents.
a. Integrity and Ethical Values
Integrity and ethical values are the product of the entity’s ethical
and behavioral standards, as well as how they are communicated
and reinforced in practice. They include management’s actions to
remove or reduce incentives and temptations that might prompt
personnel to engage in dishonest, illegal, or unethical acts. They
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also include the communication of entity values and behavioral
standards to personnel through policy statements, codes of conduct,
and by example.
b. Commitment to Competence
Competence is the knowledge and skills necessary to accomplish
tasks that define an individual’s job. Commitment to competence
includes management’s consideration of the competence levels for
specific jobs and how those levels translate into requisite skilss and
konwledge
c. Board of Director or Audit Committe Participation
The board of directors is essential for effective corporate
governance because it has ultimate responsibility to make sure
management implements proper internal control and financial
reporting processes. An effective board of directors is independent
of management, and its members stay involved in and scrutinize
management’s activities. Although the board delegates
responsibililty for internal control to management, it must regularly
assess the controls. In addition, an active and objective board can
often reduce the likelihood that management overrides existing
controls.
d. Management’s Philosophy and Operating Style
Managements, through its activities, provides clear signals to
employees about the importance of internal control. For example,
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does management take significant risks, or is it risk averse? Are
sales and earning targets unrealistics, and are employees
encouraged to take aggressive actions to meet those targets? Can
management be described as “fat and bureaucratic”, “lean and
mean”, dominated by one or few individuals, or is it “just right”?
Understanding these and similar aspects of management’s
philosophy and operating style, the auditor sense of management’s
attitude about internal control.
e. Organization Structure
The entity’s organizational structure defines the existing lines of
responsibility and authority. By understanding the client’s
organizational structure, the auditor can learn the management and
functional elements of the business and perceive how controls are
implemented.
f. Human Resource Policies and Practices
The most important aspect of internal control is personnel. If
employees are competent and trustworhty, other controls can be
absent, and reliable financial statements will still results.
Incompetent or dishonest people can reduce the system to a
shambles-even if there are numerous controls in place. Honest,
efficient people are able to perform at a high level even when there
are few other controls to support them. However, even competent
and trustworthy people can have shortcomings. For example, they
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can become bored or dissatisfied, personal problems cand disrupt
their performance, or their goals may change.” (p.295-296).
From explanation above, we can see that control environment sets the tone
for the organization and influence the control awareness from its management and
employees. Control environment is the foundation for all other components of
internal control as well as providing discipline and structure.
Risk Assessment
Elder, Beasley, and Arens (2012) stated that, “ Risk assessment for
financial reporting is management’s identification and analysis of risks that might
happen when the preparation of financial statements in conformity of appropriate
accounting standards.” (p.297).
Based on Hall (2011), “Risks can arise from changed circumstances:
a. Changes in the operating environment that needed new or change
competitive pressures of the organization.
b. New worker who have a different understanding of internal control
c. New person who handle information systems that might affect
transaction processing.
d. The implementation of something new like technology into the
production process or information system that has impacts for
transaction processing.
e. The introduction of new product or activities that the organization has
little experience
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f. Organizational restructuring resulting in the reduction or reallocation
of worker that have impact in operations and transaction.
g. Entering into foreign markets that may impact operations, such as risks
associated with foreign currency transactions.
h. Adoption of a new accounting principle that impacts the preparation of
financial statements.” (p.133).
From description above, we can see that every organization faces variety
type of risks both externally and internally in preparing their financial report. That
is why the management has to identify or assess the risk that might disrupt their
process in making financial report in accordance with the accounting standard.
Control Activity
Refer to Hall (2011), control activity is grouped into two categories:
computer controls and physical controls. Computer controls are controls concern
in IT environment and IT audit. As for physical controls, these controls concern
toward human activities in the accounting procesws. Physical controls fall into six
categories, they are transaction authorization, segregation of duties, supervision,
accounting records, access control, and independent verification.
a. Transaction authorization
Every transaction must be authorized before getting processed. The
purpose of this control is to ensure that every transaction are valid and
in accordance with procedure applied in the organization. So there are
no transaction that not known by authorized person. There are two
types of authorization which are general authorization and specific
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authorization. General authorization is an authorization for daily basis
transactions such as purchase inventory when the amount of inventory
already in predetermined reorder points. Meanwhile, specific
authorization is an authorization for non-routine transaction or special
case transaction. For example, a manufacturing company sell one of
their production machine.
b. Segregation of duties
The purpose of this control is to reduce the ability of the employee to
has excessive authority in transaction of certain assets. There are three
guidelines for segregation of duties to prevent fraud and error in an
organization:
Segregation of duties between authorizing a transaction and
processing that transaction
Separation between the one who has custody of assets with the
one who reponsilbe in recording those assets
Separation responsibility of accounting records, between the
one who record journals, subsidiary ledgers, and general
ledger.
c. Supervision
To have a good internal control, all assets and documents must be
protected, so they can not be stolen, damaged, changed, or lost. For a
small company who does not have enough employees to make
segregation of duties in order to maintain its assets and documents,
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supervision is important to control the activities of employees toward
those assets or documents. Moreover, supervision also can be done by
security tools to safeguard the assets and documents and electronic
tools in recording the transactions.
d. Accounting records
This control is to ensure that all documents related with economic
transactions are complete and all notes about the information of those
transactions are made in detail. The purpose of this control is to make
the informations related with the transaction are trustworthy in order
to ensure that transaction able to be recorded properly. This control
also provides audit trail that help auditor to trace all transactions
process from beginning until the financial statement.
e. Access control
The objective of access control is to safeguard the assets by restricting
access to them which is only authorized personnel that able to access
the company’s assets. The access toward assets can be direct and
indirect. Direct access can be controlled by physical security tools,
such as locks and fences. As for indirect access is about having access
or authority toward documents that control the use of assets. This
indirect access can be controlled by segregate the duties between
employees so there is no employee has excessive access toward a
certain assets.
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f. Independent verification
Independent verification is an independent check toward accounting
transactions to identify any errors that might happened. This control
should be made periodicaaly by independent personnel such as
internal auditor. This control can be done by reconciling documents of
transaction with control accounts or by comparing the amount of
inventory with its record.
Elder, Beasley, and Arens (2012) defined control activities of internal
control as follows, “ Control activities are the policies and procedures, in addition
to those include in the other four components, that help ensure that necesary
actions are taken to addres risks in the achievement of the entity’s objectives.”
(p.298).
Control activities generally fall into five types, as follows:
1. Adequate separation of duties
a. The person who performs to custody company’s assets must
be different with the person who performs accounting
function.
b. The person who authorized the transactions must be
different with the person who custody the related assets.
c. The person who has operational responsibility must be
different with the person who has record-keeping
responsibility.
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d. The person who has IT duties must be different with the
user departments.
2. Proper authorization of transactions and activities
a. General authorization.
b. Specific authorization.
3. Adequate documents and records
a. The documents must be pre-numbered.
b. The documents and records must be prepared at the time of
transaction is happened.
c. The documents and records must be designed for multiple
uses.
d. The construction of documents and records must be
designed to encourage correct preparation.
4. Physical control over assets and records
a. Physical control over assets and records is important to
safeguarding company’s assets and records.
5. Independent checks on performance
a. Internal control tends to change overtime. Unless there is a
mechanism for frequent review of company, it is necessary
to conduct independent verifications.
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Information and communication
Messier (2008) explained that, “An information system consists of
infrastructure (physical and hardware components), software, people, procedures
(manual and automated) and data.” (p.227).
The information system in the company help management in making a
financial report that consist of infrastructure, software, people, procedure, and
data. The infrastructure such as computer, printer, copy machine, and other tools
needed for the operation. Software components are computer’s program such as
excel, word, powerpoint, etc and accounting system used by the company that
helps management in making a financial report.
People are the employees that have ability, skill and konwledge to running
the software and make a financial report. Procedure is steps that has to be done
when making a financial report. Data is an input or information to make an output
or financial report
Messier (2008) also explained that, “Communication involves providing
an understanding of individual roles and responsibilities pertaining to internal
control over financial reporting.” (p.228)
This is about how the management communicate with the employess and
make sure the employees understand their activities that related with financial
reporting system and understand their activities relate to work of others both
inside and outside the organization. Communication can be made through policy
manuals, accounting and financial reporting manuals, a chart of accounts,
memoranda, or can be made electronically, orally, and through management’s
actions.
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Monitoring
Messier (2008) writes, “ Monitoring can be done through ongoing
activities or separate evaluations. Ongoing monitoring procedures are built into
the normal, recurring activities of the entity and include regular management and
supervisory activities. For example, production managers at the corporate or
divisional levels of an entity can monitor operations at lower levels by reviewing
activity reports and questioning reported activity that differs significantly from
their knowledge of operations. In many entities, the information system produces
much of the information used in monitoring. If management assumes that data
used for monitoring are accurate, errors may exist in the information, potentially
leading management to incorrect conclusions.” (p.229).
Meanwhile, Bodnar and Hopwood (2010) write, “ Monitoring is
accomplished through ongoing activities, separate evaluations, or some
combination of the two. Ongoing activities would include management
supervisory activities and other actions that personnel might take to ensure an
ongoing effective internal contro process.” (p.148).
From the definition above, monitoring is an ongoing activities in
evaluating internal control toward normal operation activities, includes regular
management, supervisory, and other personnel activities in performing their jobs.
II.1.4. Limitations of Internal Control
Boynton, William C., and Johnson (2006) stated that, ”No matter how well
designed, implemented and conducted, an internal control can provide only
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reasonable assurance to management and the board of directors regartding
achievement of an entity’s control objectives. The achievement is affected by
limitations inherent in all systems of internal control. there are severals limitations
in internal control, as follows:
Mistakes in judgment
Occasionally, management and other personnel may exercise poor
judgment in making business decisions or in performing routine
duties because of inadequate information, time constraints, or other
procedure.
Breakdowns
Breakdowns in established control may occur when personnel
misunderstand instructions or make errors owing to carelesness,
distractions, or fatigue. Temporary or permanent changes in
personnel or in systems or procedures may also contribute to
breakdowns.
Collusion
Individuals acting together, such as an employee who performs an
important control acting with another employee, customer, or
supplier, may be able to perpetrate and conceal fraud so as to
prevent its detection by internal control. For example, collusion
among three employees from personnel, manufacturing, and
payroll departments to initiate payments to fictitious employees, or
21
kick-back schemes between an employee in the purchasing
department and a supplier or between an employee in the sales
department and a customer.
Management override
Management can overrule prescribed policies or procedures for
illegitimate purposes such as personal gain or enhanced
presentation of an entity’s financial condition or compliance status.
For example:
inflating reported earnings to increase a bonus payout or the
market value of the entity’s stock, or to
hide violations of debt covenant agreements or
noncompliance with laws and regulations.
Override practices include making deliberate misrepresentations to
auditors and others such as by issuing false documents to support
the recording of fictitious sales transactions.
Cost versus benefits
The cost of an entity’s internal control should not exceed the
benefits that are expected to ensue. Because precise measurement
of both costs and benefits usually is not possible, management
must make both quantitative and qualitative estimates and
judgments in evaluating the cost-benefit relationship. For example,
an entity could eliminate losses from bad checks by accepting only
certified or cashier’s checks from customers. However, because of
22
the possible adverse effects of such a policy on sales, most
companies believe that requiring identificsation from the check
writer offers reasonable assurance against this type of loss.”
(p.393).
From explanations above we can see that there are several limitations in
internal control. First is human weaknesses. From those weaknesses, some
decisions made maybe less satisfactory or maybe need to be change. Second, a
well-designed system of internal control also able to break down caused by
personnel who misunderstand the instructions, commit errors due to carelessness,
distractions, being asked to focus on too many tasks, or changes in personnel or
system. Third, limitation might come from some people who working together for
their benefits to create flaws in the internal control, so they able to do fraud
without get detected by system.
Fourth, management also able to do things that are not in accordance with
the applicable rule and regulations for their benefits or to increase the look of
company’s performance. The last, sometimes the limitation come from the
company itself. The company does not want to have costs that exceeds the
benefits they receive. Therefore, management must do calculations to see how
much benefit they get with the cost that might incurred.
II.1.5. Roles and Responsibilities
The COSO report that quoted by Boynton, William C., and Johnson
(2006) concludes that, “In an organization has some responsibility, and is actually
23
a part of, the organization’s internal control. Several responsible parties and their
roles are as follows:
Management
It is management responsibility to establish effective internal
control. In particular, senior management should set the “tone at
the top” for control consciousness throughout the organization and
see that all the components of internal control are in place. Senior
management in charge of organization units. Should be
accountable for the resource in their units. The CEO and CFO of
publics companies must also make an assessment of the adequacy
of internal controls over financial reporting
Board of director and audit committee
Board members, as part of their general governance and oversight
responsibilities, should determine that management meets its
responsibilities for establishing and maintaining internal control.
The audit committee (or in its absence, the board itself) has an
important oversight role in the financial reporting process.
Internal Auditors
Internal auditors should periodically examine and evaluate the
adequacy of an entity’s internal control and make
recommendations for improvements. They are part of the
monitoring component of internal control, and active monitoring
by internal auditors may improve the overall control environment.
24
Other entity personnel
The roles and responsibilities of all other personnel who provide
information to, or use information provided by, systems that
include internal control should understand that they have a
responsibility to communicate any problems with noncompliance
with control or illegal acts of which they become aware to a higher
level in the organization
Independent auditors
When performing risk assessment procedures, an independent
auditor may discover deficiencies in internal control that he or she
communicates to management and the audit committee, together
with recommendations for improvements. This applies primarily to
financial reporting controls, and to a lesser extent to compliance
and operations controls.
Other external parties
Legislators and regulators set minimum statutory and regulatory
requirements for establishing internal control by certain entities.”
(p.394).
Form explanation above, we can see that everyone both internally and
externally related with the organization have their own roles and responsibilities
on organizations’s internal control. From internal there are management, board of
directors and audit committee, internal auditors, and other entity personnel.
Management reponsible to set the internal control, board of directors and audit
25
committee have role and responsible to monitor the management’s responsibilities
in setting internal control, internal auditor responsible to evaluate the internal
control’s adequacy and make recommendations, other entity personnel
responsible to communicate to higher level if there is any problem in the internal
control.
From external, there are independent auditor and other external parties.
Independent auditor has role and reponsibility to make recommendation for any
deficiencies in internal control while performing risk assessment procedure, and
other external parties have role and responsibilities to make as rule and regulation
for organization in establish internal control.
II.2. Purchasing Procedure
II.2.1. Definitions of Purchasing
Bodnar and Hopwood (2010) also stated that, “ Procurement is the
business process of a selecting source, ordering, and acquiring goods or services.
The goods or services might be obatined internally if the goods are produced by
another entity in the company. Purchasing is a synonym for procurement.”
(p.308).
Hall (2011) stated that, “ Purchasing is responsible for ordering inventory
from vendors when inventory levels fall to theri reorder point.” (p.19).
From definitions above, it can be concluded that purchasing is a process of
buying goods from vendors when the stock is running out whether to be used in
the business’s operations or sell to another party.
26
II.2.2. Functions in Purchasing
According to Mulyadi (2008), there four functions related in purchasing
system which are warehouse function, purchasing function, receiving function,
and accounting function.
Warehouse function
In purchasing accounting systems, warehouse function is responsible for
the purchase request in accordance with the position of existing inventory in the
warehouse and to store goods that have been received by the receiving function.
For items directly used (no inventory held in the warehouse), purchase requests
submitted by the users.
Purchasing function
Purchasing function is responsible for obtaining information on the price
of goods, define the selected suppliers in the procurement of goods, and issue a
purchase order to the selected supplier.
Receiving funtion
In purchasing accounting systems, this function is responsible for
conducting the examination of the type, quality and quality of goods received
from the supplier in order to determine whether or not the item being received by
the company. This function is also responsible for receiving goods from the buyer
derived from sales return transactions.
27
Accounting function
Accounting functions that related to the purchase activity is a recording
debt and recording inventory. In purchase accounting systems, function of
recording debt is to record purchasing transactions into registers as proof of cash
out and to organize source documents (proof of cash out) as notes to subsidiary
ledger. In purchase accounting systems, function of recording inventory is to
record the cost of inventory purchased into inventory card.
II.2.3. Documents in Purchasing
According to Mulyadi (2008) there are six documents used in purchasing
system. They are purchase requisition, price quotation, purchase order, receiving
report, change order, and voucher.
Purchase requisition
This document is a form that made by the warehouse or user to request
purchasing department to purchase goods with the type, quantity, and quality as
mentioned in the purchase requisition form. The purchase requisition form is
usually made in two copy, one copy sent to the purchasing department, and one
the other copy as archive for the warehouse or user.
Price quotation
This document is used to request a price for the goods which the
procurement are not repeatedly, which involves the purchase of a large amount of
dollars.
28
Purchase order
This document is prepared by the purchasing department based on
purchase requisition received. This document used to order goods to selected
supplier. This document was created in five copies with the following objectives:
The first copy is sent to the selected supplier
The second copy is being kept by purchasing department as archive
The third copy is sent to the user who request the goods as
information that the purchase has been made
The fourth copy is sent to the receiving department as basis
comparison when the goods came.
The fifth is sent to the accounting department as the basis for
recording the liability
Receiving report
This document is created by a receiving department to indicate that the
goods received from the supplier has met the type, specification, quality and
quantity as specified in the purchase order.
Change of purchase order
Sometimes change in purchase order that has been sent is necessary. Such
changes in quantity, goods delivery schedules, specifications, replacement or
other matters concerned with changes in design or business. Usually the changes
are formally notified to the supplier using a change of purchase order form.
Change of purchase order form made in the same copy amount anddistributed to
the same parties who have a purchase order form.
29
Voucher
This document was created by accounting department as basic recording
for the purchase transaction. This document also serves as a cash disbursement
orders for the payment of debts to suppliers and also serves as a notified to
creditors regarding payment intent.
II.2.4. Purchasing Procedure
Messier (2003) stated that, “ A purchase transaction usually begins with a
purchase requisition being generated by a department or support function. The
purchasing department prepares a purchase order for the purchase of goods or
services from a vendor. When the goods are received or the service have been
rendered, entity records a liability to the vendor. Finally, the entity pays the
vendor.” (p.425).
According to Mulyadi (2008), there are five procedures that form
purchasing process. They are purchase request procedure, offering price and
supplier selection procedure, purchase order procedure, receiving goods
procedure, and liability recording procedure
Purchase request procedure
In this procedure the warehouse make a purchase requisition form and
send it to the purchasing department. The need for goods based on economic order
quantity calculation (EOQ) and re-order point. If the goods are not stored in
warehouse, for example goods that directly used, the user make a purchase
requisition form and directly send it to the purchasing department
30
Offering price and supplier selection procedure
Purchasing department select suppliers from supplier records and send the
price quotation and availability of the goods to the supplier to obtain information
on the prices of goods and other purchase terms. If already obtained the prices and
the availability of the goods, the purchasing department select the most
competitive supplier and make purchase orders form to be sent to that supplier,
accounting department, receiving department, warehouse ( inventory controller),
and purchasing department as archive. At the receiving department, quantity and
price of the goods column must be cleared to ensure the receiver who the check
goods received not knowing the price of goods to avoid the act of theft.
Purchase order procedure
In this procedure the purchasing department sent a purchase order to
selected supplier and the copies to accounting department, receiving department,
warehouse (inventory controller), and purchasing department as archive. At the
receiving department, quantity and price of the goods column must be cleared to
ensure that the receiver who the check goods received not knowing the price of
goods to avoid the act of theft.
Receiving goods procedure
In this procedure the receiving department check the type, quantity, and
quality of goods received, and then make a report to acknowledge the receipt of
goods from the supplier. This report is given to the purchasing department,
warehouse, and as archive at receiving department. Then send the goods received
to the warehouse and listed on the stock card.
31
Liability recording procedure
In this procedure the accounting department has two functions that is to
check the documents related to the purchase (purchase order, receiving report, and
invoice from supplier) and make a record of debt from that purchase. Then
summarize the purchase journal to the journal and then post it to the general
ledger. The second function as inventory control is to record the receipt into the
inventories card
II.3. Internal Control Over Purchasing Activity
According to Messier (2003), there are some internal control procedures in
purchasing activities, as follows:
To avoid purchase recorded goods that are not ordered or received.
Management should have a clear segregation of duties, purchase not
recorded without approved purchase order and receiving report, also check
if there is any cancellation of documents.
To avoid purchase made but not recorded
The staff should match the receiving report with vendor invoices and
entered in the purchase journal.
To avoid purchase transaction recorded in wrong period
The management should reconcile to daily account payable listing, all
receiving report should be given to account payable department every day,
recording the purchases as soon as possible after the goods received.
To avoid purchase goods not authorized
32
There must be an approved purchase requisition, approval and acquisition
consistent with the limit amount from supplier.
To avoid vendor invoice improperly priced or incorrectly calculated
Checking the accuracy of vendor invoice, purchase order agreed to
purchase order, receiving report, and invoice.
According to Mulyadi (2008), there are three main elements of internal
control on purchasing. Those three elements are organization, authorization
system and recording procedures, and healthy practices.
Organization
To have a good internal control on purchasing, there are two main points
in designing an organization. First, an organization must separate three main
functions which are accounting function, warehouse, and operational function.
Second, there is no activity done by only one personnel from beginning until the
end. There are four applications of these two maint points:
1. Purchasing funtion must be separated from receiving function
Purchasing function is a function that responsible in getting trusted
supplier for company. Receiving function is a function to do the
independent checking on goods receied from suppliers. The separation of
purchasing and receiving function will reduce the risks of receiving goods
that are not ordered by vompany, receiving goods which quantity, quality,
and specification are not in accordance with purchase order, and not
receiving goods at the time stated in purchase order.
33
2. Purchasing function must be separated from accounting function
Accounting function is responsible to record the accound payable and
inventory and the purchasing function is the operational function to
purchase material neede by the company. The purpose of separation of this
functions is to protect company’s assets and to ensure the reliability of
information in accounting data.
3. Receiving function must be separated from warehouse function
Receiving function is responsible to receive the goods from supplier.
Warehouse function is responsible in storing and managing goods that
already received by the receiving function. The purpose of separation of
this functions is to make the receiving and storing activities handled by
functions that skilled in their field, so it will increase the reliablity of
information in receiving goods and inventory record.
4. Transaction must be done by more than one personnel or more than one
function
It is necessary to have more than one personnel or more than one function
in a transaction so there is an internal checking wihtin each function.
Authorization system and recording procedures
In a company, every transaction should have proper authorization and
accounting records. To authorize a transaction, the authorized person must write
his signature on the main and supporting documents of transaction. To provide
accounting records, all transaction have to be recorded in accounting record based
34
on procedure that applied in the company. Thus, company’s assets will be secured
and guaranteed and the accounting data will be accuracy and reliable.
a. Purchase Requisition has to be authorized by warehouse function
The purpose is to ensure that the purchase requisition issued for requested
goods are the goods needed by the company.
b. Purchase Order has to be authorized by purchasing function or higher
management
Purchase order is an initial procurement transactions. With this purchase
order company initiated the procurement process that will resulted in the
receipt of goods purchased and result on the emergence of the company's
obligations to outsiders. Therefore, authorization by purchasing function or
higher management to reduce the possibility to receive of goods and
liabilities that are not required by the company.
c. Receiving Report has to be authorized by receiving function
Receiving function give the authorization signature on the receiving report
as proof of receiving goods from suppliers. The document sent by the
receiving function to the accounting function as a proof that the
examination has been done, thus the goods received from the supplier in
accordance with the purchase order that issued by the purchasing function.
d. Cash disbursement voucher has to be authorized by accounting function or
higher management.
35
In a purchase transaction, the accounting function accepts a variety of
documents from the following sources:
A copy of the purchase order from the purchasing function is a proof
that the company has been ordered goods by the number, type,
specification, quantity and quality of goods, and the delivery time as
stated in the document.
Copy of receiving report from receiving function is that the goods
have been ordered have been received and in accordance with the
goods ordered in the purchase order
Invoice from a supplier which is proof that company’s obligations has
occurred as a result from ordering goods and receiving goods
Documents above is used by accounting function accounting as basis for
recording accounts payable and addition of inventory. Also all accounting
transaction in purchasing must be recorded by authorized person. Thus, the
responsibility for changing accounting records can be attributed to a particular
employee, so there is no changes the accounting records that are not accounted
for.
Healthy practices
There are several healthy practices in purchasing, as follows:
1. Using prenumbered forms, especially in purchase requisition, purchase
order, and receiving report, so the use of the documents can be acounted to
managers who have the authority to use that forms.
36
2. Suppliers selected bases on the analysis of prices from various supplier,
not only because the company has special relation with the supplier but
because the price offered with the same quality is more competitive than
other supplier.
3. Receiving function will receive and inspect the good after get the copy of
purchase order from purchasing function.
4. Receiving function compares the goods received with purchase order copy
from purchasing function. To ensure that the company receive goods that
already ordered.
5. Accounting function verifies the information such as price and purchasing
terms, and calculate the invoice before preparing cash disbursement
voucher.
6. Periodically reconciles accounts payable ledger with its control account
from general ledger.
7. All invoices are paid within stipulated time to get cash discount.
8. Cash disbursement voucher and its supporting documents are stamped
“Paid” by cash disbursement function after the check has been sent to
supplier. To avoid the use of supporting document more than one as basis
for cash disbursement voucher.
37
CHAPTER III
METHOD OF DATA PROCESSING
AND COMPANY’S EXISTING CONDITION
III.1 Data Collecting and Processing
In this research, researcher gets primary data directly from the company’s
sources. Writer did some audit procedure for collecting and processing primary
data as follows : inquiries of the clients, observation, and documentation. The
colection was done in December 2013.
1. Interview.
In this procedure, writer asked for the information that was obatined
through oral interviews and discussions with the management of the company.
Inquiries process will allows the interviewees to answer from their point of
view rather than focusing on a structural question with limited answer. The
interviewees can also express their thought or answer freely.
In this research, writer interviews the interviewees directly one by one.
Before question and answer section, writer already prepared the question first.
During the interview, writer ask additional questions out of questions list,
depend’s on interviewees’s response to the question.
Writer interviewed all parties that related directly or indirectly to the
purchasing process. They are head of purchasing department, purchasing staff,
38
and human resource department. Interviewees gave information about company
profile, job description, and standard operation of purchasing process.
2. Observation
Researcher did observation to gather the data by seeing, hearing, and
feeling to assess certain activities in the company. Writer is doing observation
by attending the place observed and observing the management’s daily
activities, especially activities in purchasing. Observation is done starting on
December 23, 2013 until January 10, 2013 and take place at the company’s
office at Jl. Prof M. Yamin SH, No. 42 A Pekanbaru, Riau. By doing this
observation, wrtiter knows working environment, actual activities and
processes, and real condition in the company related with purchasing
activities. Writer can also identify the strength and weaknesses occured during
the observation.
3. Documentation
Documentation is the process of tracking down evidences either internal or
external evidences of transactions or activities being researched. The
researcher tracked down several purchasing documents, such as request note,
purchase requisition, purchase order, sending and receiving form. In thic case,
the researcher tried to obtain the understanding of those document in PT.
XYZ, the person who create and authorize, and the detail that stated in the
documents.
39
The result of data collection process is as follow:
III.2 Company’s Background
III.2.1. Background
PT. XYZ is a private company established on May 1st, 1993 at Pekanbaru,
Riau, Indonesia with notary Tajib Raharjo, SH, No. C2- 1300 HT. 01. 01- TH.
1993. There are several changes on management of the company, the last changes
happened at July 9th
, 2012. Regarding the changes and replacement of Directors
and Commisioners.
This company involves in two activities which are plantation and
manufacturre that producing CPO (Crude Palm Oil). The plantation and
manufacture located in Petapahan Jaya Village, Riau Province and the headquarter
office located in Jl. Prof.M.Yamin No.42 A, Pekanbaru, Riau.
PT. XYZ has motto 3P :
1. Performance : The achievement
What had been done
2. Potential : Plan and opportunities
What should been done
3. Passion : Desire
Sense of belonging
Vision :
“The Best Palm Oil Company in Indonesia”
40
Mision :
1. Managing the palm oil business in a professional manner to produce the
product with quality that based on market desired
2. Implement the palm oil cultivation with environmentally friendly
technology and society empowerment.
3. Creating a mutually beneficial partnership that synergy with justice and
the absence of oppression
4. Having a professional, disciplined, reliable, faithful and religious human
resource.
5. Become a producer of palm oil that competitive, profitable and useful for
the nation and the State.
III.2.2. Organization Structure
The researcher gets to know the information about company’s
structure organization and job description by interviewing the management of
the company. The organization structure for head office can be seen on figure
3.1 and the organization structure for manufacture can be seen on figure 3.2
41
Figure 3.1 Organization Structure of PT. XYZ - Head Office
Director
Finance Manager
Accounting
Chasier
Operational Manager Sales
Production Manager
Purchasing Manager Purchasing Staff
Human Resource
42
Figure 3.2 Organization Structure of PT. XYZ - Manufacture
III.2.3. Job Description
Below is the job descriptions for each department in the head office:
a. Director
Job description :
Determine the company’s goals
Establish policies in achieving company’s goal
Production Manager
Traksi
Workshop
Transportation
Administrative Office
Warehouse
Cashier
Administration Operator
Laboratory
43
Lead, coordinate, and supervise all company’s operations
Responsibility for the work implementation and achievement of
company’s goal.
Hire proficient managers
Oversee the operational report, operasional report, and financial
report
b. Finance Manager
Job description :
Manage and control every financial activities in the company
Supervise activities regarding cash receipts and cash payments
Head of cashier and accounting department
Managing budgets
c. Accounting
Job description :
Making financial report in accordance with rule and regulation
Calculate tax, ensure the payment, make report, and other tax
requirments
Verify and check all documents that related in payment and receipt
activities
d. Cashier
Job description :
Arrange payments and receipts for both cash and credit
44
Responsibility for petty cash
Make cash and bank reconciliation
e. Operational Manager
Job description:
Monitoring operational jobs to ensure the activity in the company
works properly.
Communicating with other departments in making decision related
with operational activity.
Supervise the sales activity
f. Sales Staff
Job description:
Maintaining and deaveloping the realtionship with existing
customer
Find a link to a new customer
Maintain the good record of order from existing customer.
g. Puchasing Manager
Job description:
Negotiating and agreeing offer with the supplier.
Approve the purchase order.
Build a good relationship with the suppliers
Follow up every price update.
45
h. Purchasing Staff
Job description :
Find and choose the best products and suppliers in terms of price,
delivery schedules and quality
Make purchase order to the selected supplier
Coordinate the receiving activities of material purchased
Arrange the sending activities of material received to the
manufacture
Make a recapitulation of purchase order based section in plantation
i. Human Resource
Job description:
Organiza the recruitment, employment, and placement of new
employess
Coordinating the implementation employee benefits, such as obtain
of employement and social insurance
Supervising the ethical conduct of employees in the company
Maintain the attendance report of the employees
Moreover, below is job decriptions in the manufacture :
a. Production Manager
Job description:
Ensuring continuity in quality of product
Ensuring that production is cost effective
46
Ensure implementation of safety procedure
Monitoring product standard and implementing quality control
program
Ensure that planning of efficiency and performance are met even
exceed.
Manage the manufacturing operation consistent with the company
guidelines.
b. Traksi
Job description:
Maintain all machines and equipment in order to make them ready
to operate
Maintain and repair the manufacture infrastructure.
Plan the preparation of spare part for machines and equipments
Asking spare part needed to the warehouse
c. Workshop
Job description:
Set the mechanic in accordance with their skills.
Maintain and repair all manufacture equipment and machine.
Maintain the cleanliness and environmental security of workshop.
47
d. Transportation
Job description:
Set up and check the transportation in order to make them ready to
operate
Make daily report about tranportation problems.
Control the continuity of daily transportation.
e. Administration
Job description:
Responsibility of administrative matters related to manufacture.
Help and control the continuity of production activity.
Give regular report to the head office.
f. Warehouse
Job description:
As a place to store the spare part and other support equipment
needed by the manufacture
As a place to receive the spare part or other support equipment
from the purchase department
g. Operator
Job description:
Responsibility to do daily check to the production machine
Make daily job report.
Responsibility for the state of production machine
48
h. Laboratory
Job description:
As control center towards the quality of CPO produced during and
after the production process.
III.3. Company’s Purchasing Process
The discussion is about the purchasing process of spare parts in the
manufacture that applied by PT XYZ . Purchasing by credit is an activity that
is routinely performed by this company. This company does not have written
standard operation procedure (SOP) so the researcher gets to know the
procedure by interviewing purchasing staff of PT XYZ.
The detail of purchasing process can be seen on the flow chart
below:
50
A. Documents Used in Purchasing Process :
1. Demand and Taking Out Stock Form (NPPB/ Nota Permintaan dan
Pengeluaran Barang)
Traksi staff who require spare parts send this form to the
warehouse. This form consists of name of product, the requested amount
and received amount, section who will use the spare part, and the date and
form’s number which is wrote manually.
2. Purchase Requisition
This form is create by traksi to the purchasing department. This
form identify the items information being ordered such as the name/type,
the quality, the quantity, the use, the last stock amount in the warehouse,
and form number that written manually.
3. Quotation
The purchasing department who receives the purchase requisition
from the warehouse will ask quotations from three suppliers. The
information requested from the suppliers are informations contained in the
purchase requisition form. The information given by supplier usually by
phone, email, or fax.
4. Purchase Order
After receiving back the quotations from supplier, the Purchasing
manager will select one supplier and agree with the information given.
After that the purchasing department issuing the purchase order to that
51
supplier. Purchase order contains information about the name of the
supplier, name of goods (brand, type, quality), the amount, price, purchase
requisition number, taxes incurred (PPN, PPH), date, and purchase order
number which is written manually.
5. Sending and Receiving Report (SPPB/ Surat Pengantar dan
Permintaan Barang)
After receive spare part ordered from the supplier, purchasing staff
check and compare the spare part received with the purchase order. If
already accordance with the purchase order, then purchasing staff arrange
the delivery by driver to the warehouse. The delivery must be
accompanied by sending and receiving form that created by purchasing
department. The informations contained in the form are the name or type
of spare part, the quantity, purchase request number, purchase order
number, date, and form number which is written manually.
B. Purchasing Process
1. The request came from the traksi staff. Traksi staff has job to routinely
check the spare part used in the machine and make a request when the
spare part needed, and also responsible for the use of spare part. Head
of traksi using demand and taking out stock form for request and give
it to the warehouse. In order to be valid, this form has to be signed by
head of traksi, administrative office, and production manager. This
form is made in three copies
52
a) 1st copy to the accounting
b) 2nd copy to the warehouse
c) 3rd copy as file for traksi staff
2. After receive the demand and taking out stock form (NPPB), the
warehouse staff will check the availability of the spare part. If the
spare part is available then it will go directly to the traksi staff who
requires it, if there is no stock or the amount of stock is low, then the
warehouse staff makes a purchase requisition (PR). After that the
purchase requisition send to the purchasing department. In order to be
valid, purchase requisition form should be signed by the head of the
warehouse, administrative office, and production manager. Purchase
requisition form is made in two copies
a) 1st copy to the purchasing department
b) 2nd copy as file for warehouse
3. After receive the purchase requisition, the purchasing staff will ask
quotation from three suppliers. After receive the three quotations, the
head of purchasing department decide which supplier to be choose.
This activity done by phone, fax, or email.
4. After decide the supplier, then purchasing staff create a purchase order
and send it to that supplier. Purchase order is valid after signed by the
purchasing manager and approved by finance or director. Purchase
Order (PO) is made in 4 copies
53
a) 1st copy to supplier
b) 2nd copy kept by purchasing department
c) 3rd and 4th copy to accounting department
5. Spare parts ordered by the purchasing department directly sent by the
supplier to the purchasing department. The purchasing staff will
compare the spare parts received with the purchase order. If the spare
parts received are not accordance with purchase order, then purchasing
staff will decline the spare part and ask for change. If the spare part
received already accordance with purchase order, then purchasing staff
will arrange the delivery to the warehouse in Petapahan by a driver.
6. In the delivey, purchasing staff will send spare part along with sending
and receiving report (SPPB). The sending and receiving report is made
in 4 copies. The purchasing staff keep 1 copy and send 3 copies of this
report to the warehouse in order to get signed by warehouse staff,
administrative staff and production manager. After the delivery is
completed and the report properly signed, the driver brings back the
report which is only in two copies.
a) 1st and 2nd copy to purchasing department
b) 3rd copy to warehouse
c) 4th copy to accounting department
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CHAPTER IV
ANALYSIS AND EVALUATION
This chapter consists of all discussions about the assessment or evaluation
results relating to the evaluation of internal control on purchasing activity. After
processing data through type of evidence : interview, observation, and
documentation; the researcher will discuss the best practices and the weaknesses
of internal control along with the recommendations.
IV.1 Best Practices Done by The Company
a) Proper authorization in purchasing activity
The company has a proper authorization in doing a transaction.
Start from making material request, purchase requisition, purchase order,
and sending and receiving report. For example, in preparing purchase
requisition, the request made by traksi, aprroved by warehouse, reviewed
by administration, and authorized by production manager.
The company makes an authorization as an important part of the
transaction, if there is no authorized signature so that transaction is not
valid and cannot be processed. It is a good internal control for the
company which is can minimize the possibility for the employess to do
fraud or error by request or order spare part that do not needed by the
company.
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a) The company ask and receive return Quotations from three suppliers
Before making purchase order, the purchasing department asks
quotations from three suppliers. After the suppliers give the quotations, the
purchasing department compare the three quotations in terms of price,
quality, and availability. After decide the best supplier, then the
purchasing staff create the Purchase Order to the decided supplier.
b) The company always purchase spare part needed.
Purchase requisition should be approved by warehouse in order to
be processed. Warehouse has function as place to store the material or
product needed for the production activities. This way make the company
purchase spare part needed by the company because the spare neede
already been checked first in the warehouse whether it available or not.
IV.2 Findings
a) There is no written standard operating procedure (SOP)
The company does not have a written standard operating procedure
related to the purchasing activities. The activities are done based on oral
instructions given by higher level management.
The company should have a written standard operating procedure
for purchasing activities. The standard operating procedure has function to
give instructions to the employee how to do their activity and maintain the
consistency of that activity in order to reduce the possibility of fraud and
human error.
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The company does not have standard operating procedure because
they does not know how to make a written standard operating procedure
and does not aware of functions of written standard operating procedure.
As long as the employee understand their job, its unecessary for them to
take an effort to make a written standard operating procedure.
The effect from this condition is it is hard for the company to
maintain its employee’s activity because there is no formal and
compulsory instructions to the employee how to do their job.
The company should train or increase the employee knowledge in
order to be able to make a written standard operating procedure and
increase the employee awareness about the needs of written standard
operating procedure. Then the company should make a written standard
operating procedure as formal and compulsory instruction for their
employees to do their activities. It is also easier for the company to
maintain the consistency of that activity and reduce the possibility of
human error or fraud.
b) There is no receiving department
The company does not have receiving department, so the one who
takes role as receiving department is purchasing department. Here,
purchasing department has function to do purchasing activity and also do
the receiving activity.
The company should separate the receiving activity from
purchasing department by create a receiving department in the head office.
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The purpose of this separation is to avoid the purchasing department to do
fraud or human error by purchase spare part that does not needed by the
company.
This condition happen because the company does not aware the
function of receiving department. They think in the end the spare part will
be sent to the warehouse and warehouse staff will check the spare part. So
there is no need to create a new department that will create a new cost.
The effect from this condition is there is a chance for the
purchasing department to do fraud or error and there is no other
department that able to checked out that activity.
The company should create a receiving department which is create
a separation from purchasing department in order to make sure that the
purchasing department do not do fraud or human error by purchase spare
part that does not needed by the company..
c) Purchase requisition does not shows the date when spare part needed
Purchase requisition sent by the warehouse does not show the date
when the spare part needed.
The purchase requisition form should shows the date when the
spare parts are needed. The date shown has function to remind or inform
the purchasing department for specific request that needs to be purchased
in the mean time. So the purchasing department able to prioritize a
specific purhase requisition in the mean time.
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This condition appear because the company does not aware the
importance of the date when spare parts are needed in purchase
requisition. The company think that the purchasing department process
the purchase requisition as soon as they receive the purchase requisition.
The effect from this condition is the purchasing department does
not know when the spare parts request are needed and does not able to
fulfill the request when the spare part needed in the mean time.
The company should state date when the sp\are parts are needed in
purchase requisition form, so the purchasing department able to make a
purchase based on the date of needs.
d) Copy of purchase order is not sent to Warehouse
The purchasing department does not send the copy of purchase
order to the warehouse as advance notification that the spare part request
has been received and processed.
The purchasing department should sent the copy of purchase
order to the warehouse as advance notification that their request has been
received and processed to avoid the warehouse send more than one
purchase requisition.
This condition happen because the company does not think it is
necessary for purchasing department to send a copy of purchase order to
the warehouse because in the end the spare part received will be sent to the
warehouse.
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The effect from this condition is the warehouse might be confused
whether their request has been received by purchasing department or not.
In the end the warehouse might send a new purchase requisition to the
purchasing department. This is resulted the purchasing department might
received more than one purchase requisition that is meant for one purchase
requistion and make purchasing department do purchasing activity
incorrectly by purchase spare part that does not neede by the company.
The purchasing should send a copy of purchase order to the
warehouse as advance notification that their request has been received and
processed in order to avoid warehouse send a new purchase requisition
that make purchasing department order spare part needed incorrectly.
CHAPTER V
CONCLUSION AND RECOMMENDATION
V.1 Conclusion In this sub-chapter, the researcher make a conclusion about the
evaluation result on the internal control of purchasing activity at PT XYZ. The
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evaluation is done through the types of evidence which are interview, observation,
and documentation. The researcher found both positive and negative findings, as
follows:
1. According to the evaluation on purchasing of the company, the researcher
found four positive findings, such as:
a. The company has a proper authorization
The company has proper authorization in doing a transaction.
Without proper authorization a transaction is not valid and cannot
be processed. This is a good internal control for the company to
minimize the possibility for the employee to do fraud or human
error by request or order spare part that does not needed by the
company.
b. The company ask and receive return Quotations from three
suppliers
Before make a purchase order, the company ask and receive
quotations from three suppliers. Then company will choose the
best supplier in terms of price, qualtiy, and availability. This way
make the company able to purchase spare part economically.
c. The company always purchase spare part needed.
The company always purchase the spare part needed because the
the purchase requisition get approved by warehouse.
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2. According to the evaluation on purchasing activity of the company, the
researcher found four negative findings, as follows:
a. There is no written standard operating procedure (SOP)
There is no written standard operating procedure in the company.
The activity run in the company based on oral instructions given by
higher level management. The company does not have written
standard operating procedure because they do not know how to
make it and does not aware of its function. This condition make
company hard to maintain the consistency of its employees’s
activity.
b. There is no receiving department.
The company does not have receiving department. The one who
takes role as receiving department is purchasing department. This
condition happen because the spare part received will be sent to the
warehouse and checking process can be done there, so there is no
need to create a new department that will create a new cost. The
effect from this condition is give chances to the purchasing
department to do fraud or human error by purchase spare part that
does not needed by the company because there is no other party
that able to check out the purchasing activity.
c. Purchase requisition does not shows the date when spare part
needed.
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The purchase requisition sent by warehouse does not show the date
when the spare parts are needed. This condition happen because
the company think that as soon as purchasing department receive
the purchase requisition, they will process the request. The effect
from this condition is the purchasing department might does not
know which request they should prioritize in the mean time,
resulted the purchasing department does not able to fulfill the
needs.
d. Copy of purchase order is not sent to warehouse
The company does not send the copy of purchase order to the
warehouse. This condition appear because the company think that
the warehouse does not need the copy of purchase order because as
soon as the spare parts received, they directly be sent to the
warehouse. The effect from this condition is warehouse might
confuse whether their request has been received and processed by
purchasing department or not and decide to sent a new purchase
requisition which make purchasing department receive more than
one purchase requisition that is meant for one request and purchase
incorrectly.
V.2 Recommendation
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Based on the conclusion above, the researcher made several
recommendations that could applied in the company to overcome the weaknesses
on the internal control as follow:
1. Make a written standard operating procedure
The company should train or increase the employee’s konwledge in
order to be able to make a written standard operating procedure. The
standard operating procedure has function as formal and compulsory
instruction for the employee how to do their activities. Moreover, with
written standard operating procedure, it is easier for the company to
maintain the consistency of its emlpoyee’s activity in order to reduce
the possibility of human error and fraud
2. Create receiving department
The company has to create a receiving department to create a
separation activity between purchasing activity and receiving activity.
The purpose of this separation, to avoid human error or fraud from
purchasing department by purchase unnecessary product for the
company because there is a different department that able to check the
purchasing activity.
3. State the date when the spare part needed in purchase requisition.
The company should state the date when the spare parts needed in the
purchase requistion form. The date shown in the purchase requistion
form is to remind or inform the purchasing department when the spare
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parts needed. So the purchasing department able to prioritize a specific
purchase requisition in the mean time in order to fulfill the needs.
4. Send a copy of purchase order to the warehouse
The company should send one copy of purchase order to the
warehouse as advance notification that their request has been received
and processed by purchasing department. So the warehouse does not
confuse and sent a new purchase requisition that resulted purchasing
department receive more than one purchase requisition that is meant
for one purchase requisition.
BIBLIOGRAPHY Arens, A.A., Elder R.J., & Beasley, M.S. (2012). Auditing and Assurance Services
An Integrated Approach. New Jersey, America : Prentice Hall.
Bodnar, G.H. & Hopwood, W.S. (2010). Accounting Information System 10th
Edition.New Jersey, America : Prentice Hall.
Boynton, William C., Johnson, Raymond N. (2006). Modern Auditing (8th
Ed)
New York.: Wiley and Sons.
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Hall, J. (2011). Accounting Information Syste 7th edition. United State : South-
Western Publishing Co.
Messier, W.F, Jr., Glover, S. M., & Prawitt, D.F. (2008). Auditing and Assurance
Services An Integrated Approach. New York, America: McGraw-
Hill/Irwin.
Moeller, Robert R. (2009). Brink’s Modern Internal Auditing: A Common Body of
Knowledge (7th
Ed). New Jersey: Wiley and Sons..
Mulyadi. (2008). Sistem Akuntansi. Jakarta: Salemba Empat.
Pahan, I. (2006). Panduan Lengkap Kelapa Sawit : Manajemen Agribisnis Dari
Hulu Hingga Hilir. Jakarta: Penebar Swadaya, Anggota IKAPI.
Reeve, J.M., Warren, C.S., & Duchac, J.E. (2007). Principles of Accounting (22nd
Ed) Nashville, Tennessee: Thomson Corporation South-Western
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Figure 3.2 Flowchart of Purchasing Process of PT. XYZ
Traksi Warehouse Purchasing Accounting
Start
Request spare part
Create SPPB
Check Spare parts
Create PR
Approved by head of warehouse
PR
Receive PR
Supplier Master
File
Create PO
Approved by finance
PO
Receive Spare parts
1
3
1
2
2
3
No
Yes
Compare with PO
Yes
Sending and receiving report
5
Receive sparepart
3
SPPB
Create Purchase journal
PO SPPB
Receive spare part
End
Sending and receiving report
3
Give to user
11
Sign Receiving and sending report
Sending Spare Parts
Decision
PR Signed receiving
and sending report
Request Quotations
Supplier 1 Supplier 2 Supplier 3
Quotation
Quotation
Quotation
Supplier 4
4
No Send back to supplier
5
6
6
6
7
7
3