Question

Managing the risk of material misstatement in the purchasing process is critical. Identify two (2) different industries and analyze how these risks differ from one industry to the other. Also, identify internal controls that could help to keep these misstatements to a minimum

Answer 1

Answer: Before answering to the question , it would be very much essential to know that what is material misstatement in said purchasing process. From Accounting & Auditing purpose materiality refers both omission or misstatement of information in the financial statements. Some one may fail to give the details therein as omission, on the otherside there may be wrong information for the users. Its a critical process to manage the risk of material misstatement as there may be so many information with the  purchasing department, some of may be hidden, some may be not on record, even some on record but wrong. Accounting Standards defines such words as Material if "Reasonably be expected to influence the economic decisions of users made on the basis of the financial statements."

Purchase cost is the important part of all organisations as it affect our cost of sales & profitability in the last besides to decide the sale price.

An Example of two industries may be discussed herein. In an organisation dealing with manufacturing of Oil Processing company, the purchase department buy Crude Oil on different terms & from different places all over world. While the Car manufacturer purchase tyres & Steels to manufacture the Cars. In purchase of Crdue & Car Tyres & Steels, while deciding about the cost, the terms & conditions, continuous availability, transportation cost, payment terms plays an imprtant role. In both the cases ,the risk differ as Crude processing requires continuous supply & Car manufacturer has seperate divisions to carry on manufacturing activities for the various parts. Hence in both these company's the purchase department work in different ways. There may be material misstatements in financial statement of different types.

INTERNAL CONTROLS:

Various internal controls measures can be taken to control such events. We can summarise these things in broader way as under:

The management must meet All the Purchasing team members seperately to take their feedback. Priority deciding factors may be fixed.

Purchase Department process may be kept more transparent while deciding about individuals task.

Decentralisation of powers & responsibilities will be more better.

Whistleblower system if suitably launched, may stop such omission or misstatements.

Continuous review of these activities will minimise the risk of frauds.

Continuous audit & deviation if any found must be removed with immediate action.

Disciplinary proceedings against the responsible person with quick decisions will enhance the productivity & transparency.