Accounting Information Systems: The Processes and Controls, 2nd Edition

RISKS AND CONTROLS IN CONVERSION PROCESSES (STUDY OBJECTIVE 4)

Because conversion processes involve the physical movement of inventory throughout the operating facility and may be spread among multiple locations, departments, and employees, it is important that sufficient internal controls be included in the related business processes. In terms of the five internal control activities introduced in Chapter 3, the following are some procedures to be considered for implementation in conversion processes.

AUTHORIZATION OF TRANSACTIONS

Designated employees in the company should be given responsibility for purchasing raw materials, including specifying the quality of the items needed, selecting of vendor, and determining the appropriate quantities to order.

The following activities in the conversion process require express authorization:

• Initiation of production orders
• Issuance of materials into the production process
• Transfer of finished goods to the warehouse or shipping areas

These responsibilities require continuous monitoring of the production activities, and should therefore be conducted by an experienced member of management.

SEGREGATION OF DUTIES

Custody of inventories and the accounting for inventories and cost of sales need to be separate in order for internal control objectives to be met. Adequate segregation of duties reduces the risk of errors or fraud by requiring separate processing by different employees at the various stages of the conversion process. This feature ...