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CHAPTER ONE

ABOUT THE REPORT


1.1About Internship
The part Internship indicates practical training in any area. Stated in other word internship
is practically training in any real field where theoretical knowledge is practically applied. In
academic teaching student become aware of common rules and principles that should be
followed in the typical situations due to various reasonable causes. The participants of
practical training become acquainted with practical rules that in follow in practical situation.
They also become aware of how practical practice deviate from theoretical principles. Thus
internship program expands the knowledge and it fulfills the theoretical knowledge of the
participants.
Therefore in single word it would be called that internship is a process by which the
acquired knowledge if the participant become expanded by application of academic
knowledge in practical field.

1.2 Origin of the Report


The report is originated from the curriculum requirement of BBA program of American
international university. The topic of my report is Accounts Payable Internal Control
System, Compliance and Recording Process of Incepta Pharmaceuticals Ltd.. The report
has been prepared under direct supervision of Kazi Tanvir Mahmud Ph.D Assistant
Professor, Department of Economics, Faculty of Arts & Social Sciences, AIUB and Md.
Touhidun Nabi khan Accounts Officer, Finance & Accounts, Incepta Pharmaceuticals Ltd.

1.3 Background of the study


Accounts payable are unpaid obligations for goods and services received in the ordinary
course of business. It is identified by the existence of vendors invoices for obligation. A
large number of transactions are affected by accounts payable.
So it is important to maintain this account in such a way that possible misstatements,
fraudulent activities or any other risks related to this account can be avoided. Incepta
Pharmaceuticals Ltd. is one of the large local organizations in our country. It has plenty of
vendors both local and foreign. Md. Touhidun Nabi khan, Accounts Officer, Finance &
Accounts Department of Incepta Pharmaceutical Limited asked me for designing the
existing methodology of recording process, compliance and internal control system of
accounts payable of Incepta Pharmaceuticals Ltd.

1.4 Benefits to the organization through this report


The Institution will get an overall picture on internal control and recovery process of this
report. It may take steps to overcome its shortages or weakness; at the same time it may
explore the opportunities it does have.

1.5 Scope of the Report


The scope of my study is only about accounts payable- its recording process, compliance
and internal control. The report describes about the existing procedure of recording process
of accounts payable of Incepta Pharmaceuticals, the rules and regulations followed by it and
the existing internal control system relating to this account. The report is prepared on the
basis of interviews with personnel of accounts and finance department of IPL. My scope of
work is limited to local transaction. For understanding the internal control system of
accounts payable there is lots of audit related work. But as an intern I am not allowed to do
that type of work.

1.6 Objective of the Report


The main objective of preparing this report is to fulfill the requirement of BBA program.
This contains three credit hours for internship and to apply the theoretical knowledge gained
from the coursework of the BBA program in a specific field. The other objectives are;

Broad Objective
The objective of this study is to determine the recording process, compliance and internal
control.

Specific Objectives
The specific objectives of the study are to

Know the ability of employees to perform promised service dependently and


accurately.

To get an introduction about the organizational structure & how co-ordination among
different set of activities is made.

To know about the procedures of acquisition and payment.

To be familiar with internal control system of accounts payable payment procedure.

To get an idea about the related compliance of accounts payable

To relate the theoretical leanings with the real life situation.


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1.7 Methodology of the Report


This report has been prepared on the basis of experience, which I was gathered during the
period of internship. For preparing this report, I have also got information from various
employees of IPL (Purchase Dept., Planning Dept., Accounts Dept., and Human Resources
Dept. etc), different books and website of the Incepta Pharmaceutical Limited.

1.8 Data processing and Analysis


Data collected from primary and secondary sources have been processed and analyzed
manually and qualitative approach has been used throughout the study.
Data has been
analyzed by using computer program with the help of Microsoft Word, and Microsoft Excel.

Primary sources

Practical deskwork

Face to face conversation with the officer

Direct observations

Face to face conversation with the client

Secondary sources

Annual report of IPL

Files & Folders

Various publications on IPL

Employee database prepared by HRD

Audit Report

Website

1.9 Limitation of the Report


Limitations may conflict the study, but among those some major limitations have been
mentioned below: -

The duration that is for internship is not enough to learn about a big organization like
Incepta Pharmaceuticals Limited.

For non-availability of secondary data and for time limitation it was not possible to
work on the basis of board data.

Due to restriction of time, I could not get detailed information about every
Departments of IPL.

Lack of confidential information about the organization makes many mistake and
targeted aim.

It was very different to collect the information from various personnel for the job
constrain.

Incepta policy was not disclosing some data and information for obvious reasons.
Lack of experiences has acted as constraints in the way of meticulous exploration on
the topic.

Internet speed is very slow (outside) for collecting necessary data in time.

CHAPTER TWO
AN OVERVIEW OF INCEPTA
PHARMACEUTICAL LIMITED
2.1 History of Incepta Pharmaceutical Limited (IPL)
Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh
established in the year 1999. The company has a very big manufacturing facility located at
Savar, 35 kilometer away from the center of the capital city Dhaka. The company produces
various types of dosage forms which include tablets, capsules, oral liquids, ampoules, dry
powder vials; powder for suspension, nasal sprays etc. Since its inception, Incepta has been
launching new and innovative products in order to fulfill unmet demand of the medical
community. The focus was to bring more new technologically advanced molecules to this
country.
The company specializes in value added high technology dosage form like sustained release
tablets, quick mouth dissolving tablets, barrier coated delayed release tablets etc. It has
established a modern research and development laboratory for the development of new
advanced dosage forms for various drugs and devices like poorly soluble drugs, dry powder
inhalers, coated pellets, modified release products, taste masked preparation etc.
Incepta quickly developed a very competent sales team, which promotes the specialties
throughout the country. The company virtually covers every single corner of the rural as
well as urban area of Bangladesh. It has its own large distribution network having 13 depots
all over the country. The company has a clear vision to become a leading research based
dosage form manufacturing company with global presence within a short period of time.
The Research and Development department for various dosage forms has been very well
developed. Incepta intends to bring newer products of advanced technology through
research hitherto unknown in this country. Such activities will not only benefit the company
but also the total pharmaceutical sector of the country. In the post 2005 era, the company
also intends to embark into the production of Active Pharmaceutical Ingredient (API). Plans
are underway to get into reverse engineering and analogue research in order to produce new
API.
The company is now expanding its activities beyond the geographical boundary of
Bangladesh. The products are of high standard and therefore these will be exported to both
developed and developing countries. The company is open to collaborate with interested
parties in various countries. The future is wide open and the opportunities

Incepta will continue to strive to provide high quality medicine at affordable prices to the
people here in Bangladesh and other parts of the globe.

Market Position of Incepta


Table 1:
Companies

Market Position Of the Companies

Square

(Total 100%)
19.48%

Incepta

8.24%

Beximco

7.72%

Acme Laboratories

4.81%

Opsonin Pharma Ltd

4.76%

Eskayef

4.59%

Reneta Pharma

4.54%

ACI

4.48%

Aristopharma

4.07%

Drug Int.

3.00%

Others

33.43%

Annual Report 2009

Incepta was ranked the 2th largest company of the country with the highest growth rate
among the top Ten.
Highlight of the fastest growing Pharmaceuticals sectors in Bangladesh.

Total Market Size in 2009: US $ 715 M

Second highest contributor to national ex-checker

Largest white-collar labor intensive employment sector

97% Local Manufacturing

About 39,000 retail drug license holders in Bangladesh.


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2.2 Vision and Mission


Vision
To become a research based global pharmaceutical company in addition to being a highly
efficient generic manufacturer. To discover and develop innovative, value-added products
those improves the quality of life of people around the world and significantly contribute
towards the growth of Bangladesh.

Mission
Provide people globally with high quality health care products at affordable prices in order
to improve access to medicine and to improve employees an enabling environment that
facilities realization of their full potential.

2.3 Ownership Pattern


Incepta Pharmaceuticals Limited is the sister concern of the renowned Impress Group and
the business is running as fully private limited company. Directors of Incepta
Pharmaceuticals Limited own the majority shares. Incepta is not DSE listed in capital
market yet, so it is controlled by the internal board of directors .So any kind of significant
decision taken by the management.

2.4 Scenario of Incepta


Exporting country
Afghanistan, Belize, Bhutan, Congo, Costa Rica, Cambodia, Dominican republic, EI
Salvatore, Ethiopia, Guyana, Georgia, honk Kong, Honduras, Kenya, Myanmar, Mongolia,
Mauritania, Srilanka, Somalia, Togo, Tajikistan, turkey, Ukraine, Vietnam.

2.5 Figures of Incepta


Incepta began its operation with a handful of highly skilled and dedicated professionals
guided by an able leadership. Proper strategic planning, technical excellence, swift and
timely decisions helped us achieve our objectives leading to much faster growth.

Table 2:
December 16, 1998, the construction of the factory began.
1998/99

December 1999, first batch of product was produced.


April 2000, Osartil the CVS product of Incepta came to the market.

2000

2001

By the end of 2000 Incepta become the number 31st company of the
country.
A total of 18 new generics with 37 presentations were launched this
year. 11 of these generics were first ever in Bangladesh.
By end of the year incepta was ranked the 12 th company of the
country.
A total of 32 new generics with 49 presentations were launched. 14 of
these generics were first ever in Bangladesh. New office for the sales
and distribution operation was also taking shape.

2002
By the end of the year Incepta was ranked the 10 th company of the
country.
2003

A total of 32 new generics with 48 presentations were launched. 18 of


these generics were first ever in Bangladesh.
By the end of the year Incepta was ranked the 8 th company of the
country.

2004

A total of 17 new generics with 32 presentations were launched. 6 of


these generics were first ever in Bangladesh.
The company was ranked the 5th largest company of the country with
the highest growth rate among the top five.

2005

We thrived under challenges and excelled in venturing into


unexplored grounds and continued to satisfy our customer. Incepta
started to provide life saving drugs to UNICEF from March, 2005.
A total of 27 new generics were launched.
12 of these generics were first even in Bangladesh. The company was
ranked the 3rd largest company of the country with the highest growth
rate among the top five.

2006

In a short time Incepta positioned itself at home as an innovative


research oriented and knowledge based Pharmaceutical company
specializing in analysis, design and development of new products.
With this harmony Incepta successfully started overseas marketing
from May 2006.
A total of 25 new generics with 82 presentations were launched. 9 of
these generics were first ever in Bangladesh.
Incepta introduced the era of biotech and lyophilized products in
Bangladesh and remained as one of the pioneer manufacturers in
Bangladesh.

2007

2008

2009

2010

A total of 32 new generic with 82 presentations were launched. 4 of


these generics were first ever in Bangladesh.
Insulin was manufactured and launched for first time in Bangladesh
by a national company.
Marketing, sales, distribution and administration departments shifted
to fully own new office premises.
Our core strength is our manufacturing plant which attained European
Certificate of GMP compliance on the January 11.2008. Incepta has
been able to bring, for the first time ever, such reorganization for a
Bangladesh Pharmaceuticals company. As a result of this certificate
Incepta will be able to start export of non-patent infringing products
to European union and many other regulated markets.
Incepta Pharmaceuticals Company really a big Company and day by
day it will be increase because most of the employees are so sensitive
their own work. Therefore, Incepta pharmacy is the only national
company in Bangladesh to have an EU-GMP certified plant for solid
dosage forms. It is a pre-requisite for export to European Union very
quickly has achieved their goal than others.
A total of 17 new generics with 32 presentations were launched. 6 of
these generics were first ever in Bangladesh.
The company was ranked the 2th largest company of the country with
the highest growth rate among the top five.

2.6 Company Profile


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Corporate Headquarters

40 Shahid Tajuddin Ahmed Sarani


Tejgaon I/A, Dhaka-1208. Bangladesh
Phone: +880-2-8837811-26
Fax: +880-2-8837952
E-mail: incepta@inceptapharma.com,
info@inceptapharma.com

40 Shahid Tajuddin Ahmed Sarani


Tejgaon I/A, Dhaka-1208. Bangladesh
Managing
Director
Operational
Phone: +880-2-8837811-26
Headquarters
Fax: +880-2-8837952
E-mail: incepta@inceptapharma.com,
info@inceptapharma.com
Director
Factory

Dewan Idris Road, Jirabo, Savar, Dhaka.


Bangladesh
General Manager
Phone: +880-2-7708502
Fax: +880-2-7708507
E mail: factory@inceptapharma.com
Deputy General Manager

Year of establishment
24/02/1999
Assistant General
Commercial Production
Manager April-1999
Status
Private Company Limited.
Senior
Manager Manufacturing Company.
Type of business
Pharmaceuticals
Number of employees

3500
Manager

Deputy Manager

Assistant Manager

Executive Officer

2.7 Structure of Incepta


Figure 1: Employment Structure of Incepta Senior Officer
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Officer

Assistant Officer

2.8.1 Major Departments


Head Office
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Administration
Human Resources
Finance & Accounts
Financial System
Management Information System
Planning & Commercial
Legal Affairs
Marketing Strategy
Sales Secretariat
Sales Service Research

Factory

Management Information System


Engineering
Production Planning
Production
Quality Assurance
R&D

2.8.2 Finance and Accounts Department


There are five wings under Finance and Accounts Department:
1. Treasury
2. Financial Accounting
3. Costing, Budgeting, Controlling & Industrial operation
4. Legal Affairs
5. Trusty

2.8.3 Five wings of Finance & Accounts Department


Figure 2: Five task of Finance & Accounts
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Financial
Accountin
g

Trusty

Treasury

Accounts &
Finance
Departmen
t
Legal
Affairs

Costing, Budgeting,
Controlling &
Industrial operation

Annual Report 2009

1. Core function of Treasury wings

Fund Management
Maintaining banking transaction, loan, and leases
Party payments & receipts
Employee payroll. etc.

2. Core function of Financial accounting wings

Day-to-day transactions recording


Monthly reports
Auditing
Preparing reports. etc.

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3. Core function of Costing, Budgeting, and Controlling and Industrial


operation wings

Budgeting
Costing
Cost control
Internal Reporting
Factory inspection. etc

4. Core function of Legal Affairs wings

Maintaining legal compliance


All legal events. etc.

5. Core function of Trusty wings

Handling tax related matters


Maintaining SEC rules
Employee payroll management. etc.

2.9 Factors of Quality Control


Since 1999, the Incepta name has been synonymous with the trust and reliability inherent in
the word Quality. Quality is ingrained in the work of our colleagues and all our Values. We
are dedicated to the delivery of quality healthcare throughout the nation. Our business
practices and processes are designed to achieve quality results that exceed the expectations
of patients, customers, colleagues, business partners and regulators. We have a relentless
passion for Quality in everything we do.

2.9.1 Teamwork
We know that to be a successful company we must work together, frequently transcending
organizational and geographical boundaries to meet the changing needs of our customers.

2.9.2 Performance
We strive for continuous improvement in our performance, measuring results carefully, and
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ensuring that respect for people are never compromised.

2.9.3 Community
We aim to become nations most admirable business enterprise through our honest and
intelligent approach to everything that we do. We strive to support the community where we
live and to also support our nation as far as possible at the time of its need. We truly believe
that we can only survive and grow if our nation remains healthy.

2.10 Distribution channel of incepta


Incepta has highly disciplined and organized Sales and related information available to the
customer. The company virtually covers every single corner of the rural as well as urban
area of Bangladesh. The company has very large and competent sales team, which promotes
the specialties throughout the country. Sales team operates its activity by dividing the whole
country into 8 regions. Incepta have 600 members strong sales team promotes the products
to the doctors. It has its own large distribution network having 13 depots all over the
country. They make the products available in every single drug store of the country. The
depots are located at Dhaka, Chittagong, Rajshahi, Bogra, Khulna, Sylhet, Barishal,
Comilla.

2.11 Corporate Social Responsibility


Incepta achieved its tremendous commercial success through its honesty and sincerity in
business polices. The company aims to become nations most admired company through
their honest and intelligent approach to everything they do. Company management strives to
support the community where they life and also to support this nation as far as possible in
times of need. Incepta believes it can survive commercially and grow if the nation remains
healthy. Incepta gives emphasis to its practice of corporate social responsibility and evidence
of this commitment is found in its dealing with clients, employees, governments and the
society at large.
Company CSR activity includes its finances because the company pays tax and VAT to the
government and also settles bank and suppliers liabilities in a timely fashion and disburses
benefits to employees on time. Incepta considers its employees to be valuable assets and
protects their rights and provides full range of staff facilities including life insurance and
disbursement of 5% of the company profit to them. Incepta maximizes safety in work place
for its employees and child labour is strictly prohibited.
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As it commitment to society the company donates medicine to the government Relief Fund
during natural disaster. Incepta also provides financial assistance for expensive treatment
including heart and cancer and disburses its corporate zakat for relief of distressed people
every year.
Incepta also products life saving import-substitute medicines at affordable price for the
people of Bangladesh as an expression of a true love and compassion for the people. All
these activities are evidence of socially responsible and carrying company.

CHAPTER THREE
PROJECT PART LITERATURE
REVIEW
3.1Concepts of Accounts Payable
Accounts payable are unpaid obligations for goods and services received in the ordinary
course of business. It is classified as a current liability account and as such normally has a
credit balance. It is classified as a Current Liability because the obligation is generally due
within 12 months from the initial transaction date.
This kind of liability usually arises from a purchase of merchandise, materials, or supplies.
The accounts normally do not include accrued salaries payable, accrued interest payable, or
rent payable. This list is kept in the ordinary course of the debtor's business. Aside from
materials and supplies from outside vendors, accounts payable might include such expenses
as taxes, insurance, rent (or mortgage) payments, utilities, and loan payments and interest.
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It is sometimes difficult to distinguish between accounts payable and accrued liabilities, but
it is useful to define a liability as account payable if the total amount of the obligation is
known and owed at the balance sheet date. Even as it is a debt owed by a business that arises
in the normal course of its dealings, that has not been replaced by a note from another
debtor, and that is not necessarily due or past due.
According to Britannica concise encyclopedia1, Accounts payable is any amount owed as
the result of a purchase of goods or services on a credit basis. Although a firm making a
purchase issues no written promise of payment, it enters the amount owed as a current
liability in its accounts. Companies often incur this type of short-term debt in order to
finance their inventories, especially in industries where inventory turnover is rapid.
Wikipedia2 describes accounts payable as one of a series of accounting transactions
covering payments to suppliers owed money for goods and services. The average household
performs this task by writing cheques each month to such suppliers as the electric company,
telephone company, cable television or satellite dish service, newspaper subscription, and
other such regular services.

3.2 Recording
Inventory Process of

Shipping Notice
Receive
Goods
Accounts
or
Payable
Services

Control
Accounts payable is a part of acquisition and payment cycle. The cycle begins with a request
for goods or services and ends with the payment to the vendor. Figure is a data flow diagram
Materials
of the acquisition
and payment cycle.
Requisition
Form

Receiving
Report

Figure 3: Data Flow Diagram of the Acquisition and Payment Cycle


Production
Departments

Purchase
Requisition
Acknowledgemeant

Purchas
e Goods
or
Services

Purchase
Order

Vendor

Notice of Receipt

1
2

http://britannica.com
http://en.wikipedia.org/wiki/Accountspayable

Maintai
n
Account
s
Payable

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Accounts
Payable Master
File

Payment

Cash Requirement
Forecast

Management
Purchase Analysis

Casher, Jonathan D.; How to find and Eliminate Erroneous Payments; APA's Employer Practices;
winter 2000.

3.3 Classes of Transactions and Business Functions for the


Acquisition and Payment Cycle
The cycle encompasses transactions related to credit purchase of goods and services, and to
pay for the item purchased. According to Arens & Loebbecke3 there are three classes of
transactions included in the cycle;
1. acquisition of goods and services
2. cash disbursements
3. purchase returns and allowances and purchase discounts
They have told that this cycle involves the decisions and processes necessary for obtaining
the goods and services for operating a business. They have drawn a table showing the
classes of transactions, accounts, business functions and related documents for the cycle.
The table is shown in table 1. According to them there are four business functions shown in
the third column of table 1. But Romney and Steinbart has divided those functions into
three categories;
3

Arens Alvin A and Loebbecke James K.;Auditing- An Integrated Approach ; Prentice Hall International;
Eighth Edition; 2000.

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1. Ordering goods, supplies and services


2. Receiving and storing goods, supplies and services
3. Paying for goods, supplies and services
He includes the liability recognition in the paying for goods supplies and services function.
As a whole we can say that acquisition and payment cycle includes four basic business
activities;
1.
2.
3.
4.

Ordering for goods and services


Receiving goods and services
Recognizing liability for receiving goods and services
Paying for goods, supplies and services

1. Ordering For Goods and Service


The cycle begins with need reorganization. Respective department identifies its need, arise
purchase requisition and then send it to purchase department. This department makes order
for goods and services.

Table 3: Classes of Transactions, Accounts, Business Functions, and


Related Documents and Records for the Acquisition and Payment Cycle
Classes of
Transaction
Acquisition

Accounts

Business
Function

Inventory
Services
Property, plant,
equipment
Prepaid expenses
Leasehold
improvements
Accounts payable
Manufacturing
expenses
Selling expenses

Processing
purchase order

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Documents and Reports


Purchase requisition
Purchase order

Administrative
expenses
Receiving goods
and services
Recognizing the
liability

Cash
Disbursement

Cash in bank (from cash


disbursements)

Accounts payable
Purchase discounts

Processing &
Recording cash
disbursement

Receiving report
Acquisitions journal
Summary acquisitions
report
Vendors invoice
Debit memo
Voucher
Accounts payable master
file
Accounts payable trial
balance
Vendors statement
Cash disbursements journal
Check

2. Receiving Goods and Services


After a certain period of time vendors send goods or services to the organization along with
invoice and packing slip. Normally the goods are received by factory and send them to ware
house. Before that an inspection cell inspects those goods.

3. Recognizing the Liability


If all the received goods are in accordance with purchase order, liability for receiving goods
is recognized. Some organizations recognize the liability at the time of reception. Whatever
the case may be it should be recognized with proper documentation.

4. Processing & Recording Cash Disbursement


After a certain period of time the liability should be paid up. It also requires proper
documentation and adequate references for disbursing cash.

3.4 Methods to Design Accounts Payable and Accounting


Procedures
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If an organization follows some method it could improve its accounts payable procedure.
According to Chris Anderson4 there are nine methods to design accounts payable and
accounting procedures

1. Eliminate Paper
The single biggest cost for any purchasing and payables department is paper, including:
purchase orders, purchase order follow-up, small-dollar purchases, delivery tracking &
receipts, and vendor payments. Utilizing paperless invoices, Web-based supplier selfservicing, centralized vendor files, automated workflows for electronic or imaged invoices
(see ERP below), and payment methods, such as business credit cards, Electronic Data
Interchange (EDI) and Electronic Funds Transfer (EFT), can reduce by paper handling costs
by as much as 90%.

2. Integrate ERP Systems


Enterprise Resource Planning (ERP) automates the purchasing and payables functions,
which allows a company to get more work done with fewer personnel. Also, electronic
invoice matching applications save time in retrieving paperwork. It is estimated that an ERP
system can annually save an organization $300 per million in sales.

3. Increase Payment Terms


Negotiate payment terms based on receipt of goods or the invoice. This can add one week or
more to your terms, which can be 25% of 30 day terms. Use EFT for just-in-time payments
to maximize your payables terms and minimizing the impact to your credit.

4. Take Payment Discounts


If you are getting 2%/10 net 30 terms, then consider taking it. This means you are offered a
2% discount if you pay within 10 days, instead of the normal 30 day terms. This translates

into an 18% return on your capital, and for many organizations this is a good return
on your investment.

5. Review Purchases
4

http://www.bizmanualz.com?src=ART81

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Purchasing is a continuous process that requires continuous review. Consider: transportation


charges, expedited fees, odd lot penalties, new pricing, new products, consolidating vendors,
new vendors or buying groups, payment terms, and more. Communicate with your suppliers
to improve the process. And review and monitor everything to account for changes in your
environment.

6. Communicate with Suppliers


Communicate with your suppliers to improve the process. Ask suppliers to submit their
invoices electronically. This will save you time, resources and losses due to waste.

7. Eliminate Disputes
Disputes with your suppliers are typically the result of a problem with your
purchasing/receiving process. When disputes occur, review your purchasing procedures to
ensure that they are producing the correct metrics and that you are not forced to pay for your
mistakes.

3.5 Definition of Internal Control


An internal control system is the process that an administrator uses to provide reasonable
assurance that the unit's goals and objectives will be achieved. It is the management of
business risks and is a dynamic process that changes as personnel and
Circumstances change. The system includes organizational design, written policies and
procedures, actual operating practices, physical barriers to protect assets and all personnel.
The system should be designed to discourage occurrences of errors or irregularities and to
identify, within a reasonable time frame, errors or irregularities that may occur. The internal
control system encompasses a variety of internal controls such as background checks of
prospective employees for sensitive positions to locking the door when the office is closed
for the evening.
According to Arens & Loebbecke a system of internal control consists of policies and
procedure designed to provide management with reasonable assurance that the company
achieves its objectives and goals. These policies and procedures are often called controls and
collectively they comprise the entitys internal control. Detailed definition of Internal
Control per ISA 65 is given below
The term Internal control system means all the policies and procedures (internal controls)
adopted by the management of an entity to assist in achieving managements objective of
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paragraph 6, international Standard on Auditing

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ensuring, as far as practicable, the orderly and efficient conduct of its business, including
adherence to management policies, the safeguarding of assets, the prevention and detection
of fraud and error, the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information. The internal control system extends beyond
those matters which relate directly to the functions of the accounting system and comprises
The control environment means the overall attitude, awareness and actions of directors and
management regarding the internal control system and its importance in the entity. Factors
reflected in the control environment include:

The function of the board of directors and its committees.


Managements philosophy and operating style.
The entitys organizational structure and methods of assigning authority and
responsibility.
Managements control system including the internal audit function, personnel
policies and procedures and segregation of duties.

3.6 Need of Internal Control


The internal control system provides for safeguarding of assets, proper recording of
transactions and the efficient and effective accomplishment of the units and university's
goals and objectives including compliance with federal, state, and university rules and
regulations.
International Standards on Auditing relating to Risk Assessments and Internal Control,
states (paragraph 2) about the importance of internal control that the auditor should obtain
an understanding of the accounting and internal control systems sufficient to plan the audit
and develop an effective audit approach. The auditor should use professional judgment to
assess audit risk and to design audit procedure to ensure it is reduced to an acceptably low
level.
There is no requirement that the auditor is to rely on any particular control. The requirement
is that if the auditor wishes to rely upon controls as part of his audit evidence he must:
Gain an understanding of those controls. Study the operation of that control and evaluate the
operation of those controls

3.7 Responsibility for Internal Controls


The administrator who is responsible for the accomplishment of goals and objectives is also
responsible for establishment, maintenance, and monitoring of the internal control system
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which helps ensure the accomplishment of those goals and objectives. He or she is
responsible for the sound financial condition of the unit, protection of the university's assets
including its human resources, and compliance with federal, state, and University rules,
regulations, and procedures. He or she must ensure that the funds entrusted to the unit are
used appropriately.
The administrator may delegate some of the related duties but cannot delegate
accountability.

3.8 The Importance of Good Internal Controls


Good internal controls are essential to assuring the accomplishment of goals and objectives.
They provide reliable financial reporting for management decisions. They ensure
compliance with applicable laws and regulations to avoid the risk of public scandals. Poor or
excessive internal controls reduce productivity, increase the complexity of processing
transactions, increase the time required to process transactions and add no value to the
activities.
Good internal controls help ensure efficient and effective operations that accomplish the
goals of the unit and still protect employees and assets.

3.9 Components of Internal Controls


Environment Control
The control environment includes administrator's attitudes that are then reflected in the
employees' attitudes. An administrator's attitudes should support ethical values and good
business practices. An administrator should promote compliance with university policies and
procedures through his or her actions as well as through unit policies and procedures. He or
she should ensure that employees also support ethical values and have the technical
competence for the position. Background checks should be performed prior to hiring for key
positions. Policies and procedures should be written, provided to all staff, and expectations
for compliance communicated to staff. There should be no tolerance for fraud or conflicts of
interests. Disciplinary action should be consistently applied to all employees. Administrators
must support compliance with university policies and procedures if they expect employees
to have that attitude.

Risk Assessment
Administrators should identify and analyze the relevant risks to the achievement of unit
goals and objectives. He or she should determine what can go wrong, what areas have the
most risk, what assets are at risk, and who is in a position of risk. Risks may include:

Public scandal
Revenues not received or if received, not recorded properly
24

Assets (financial, personnel, space, personal property) not used efficiently


Assets (financial, personnel, space, personal property) not used to accomplish unit
goals and objectives
Assets (financial, personnel, space, personal property) may be diverted to personal
use
Information used for decision making is not reliable, timely, or available
Methods to control risks should be identified and the associated costs analyzed and
compared to the risk. For some risks, there may not be reasonable controls or the cost
of controls may be prohibitive.
Uncontrolled risks may result in insufficient resources to achieve established goals
through loss, misuse or mismanagement of resources.

Control Activities
Control activities are those activities that provide a "reasonable" level of assurance that the
unit's goals and objectives will be accomplished. Absolute assurance is not possible due to
costs, collusion, human error, and management's ability to override controls. Control
activities include

Authorization to initiate or approve transactions should be limited to specific


personnel. Authorizations can be limited by type of transactions or amount of
transactions.
Separation of duties provides that one employee does not have the responsibility for
all phases of a transaction. Generally, an employee with physical access to an asset
should not also be responsible for accounting records relating to that asset.
Assets should be physically secured.
Access to assets should be limited.
Reconciliations of assets to accounting records should be prepared periodically and
reconciling items should be resolved timely.
Physical assets should be counted periodically and the results of the counts compared
to accounting records. Discrepancies should be reported to appropriate
administrators and investigated.
Transactions should be properly documented and the records retained in an organized
manner.

Information and Communication System


25

The purpose of the information and communication system is to help ensure that employees
are aware of the unit's goals and objectives, how they are to be accomplished, and who is
responsible for the specific tasks to accomplish them. The information and communication
system must also provide administrators with reports containing operational, financial, and
compliance information to monitor progress toward accomplishing established goals and
objectives and to allow administrators to make appropriate decisions. Information and
communication systems include:

The university's written policies and procedures


The unit's goals and objectives
The unit's documented policies and procedures
Organization charts
Position descriptions
Performance evaluations
Training programs

An essential part of the internal control system is an effective information and


communication system that ensures that employees know what they are supposed to
accomplish and how they are to do it.

Monitoring
Monitoring ensures that the internal control system is operating as expected. It should be
performed by supervisory personnel and focused on high-risk areas Monitoring activities
include:

Spot checks of transactions to ensure compliance with policies and procedure


Reviews of outstanding encumbrances
Understand
internal
control-payroll pay lists and employee
Reviews of high risk accounts
or records
including
acquisitions and cash
leave records
disbursements
Evaluations of trends
Review of supporting documentation

Assess planned
control
riskFigure 4: Methodology for Designing
Tests
of Controls
and Substantive
acquisitions and cash
Tests of Transactions for the Acquisition and Payment Cycle
disbursements

Evaluate costbenefit of testing


controls

Design tests of controls


and substantive tests of
transactions for 26
acquisitions and cash
disbursements to meet
transaction-related audit

Audit procedure
Sample size
Items to select
Timing

Internal control can be understood by studying the clients flowcharts, preparing internal
control questionnaires and performing walk through tests for acquisitions and cash
disbursements. There are some key internal controls for all business functions mentioned
earlier in this chapter. These key controls should be examined carefully. After identifying the
weaknesses and assessed control risk, auditor will decide whether substantive tests will be
reduced sufficiently

CHAPTER FOURE
ACCOUNTS PAYABLE
&
RECORDING PROCESS OF IPL
As discussed earlier, accounts payable is a part of acquisition and payment cycle. The
acquisition and payment cycle of Incepta Pharmaceuticals (IPL) begins with a request for
goods or services from various departments and ends with the payment to the vendor by
issuing checks. In some cases the procedure includes budgeting and prior approval of
superior before requesting to the authority.
For the convenience of discussion I have divided this chapter in to four parts. The first part
is about the accounts and classes of transactions in the acquisition and payment cycle of IPL.
The second part is about related document and records kept by IPL. Third part talks about
the procedure of acquisition and payment with related business functions. And in the last
part I have talked about their accounting software in which they maintain a separate module
for accounts payable.

4.1 Accounts and Classes of Transactions in the Acquisition and


Payment Cycle
27

The acquisition and payment cycle of IPL consists of the procedure regarding procurement
activities in order to continue the day to day business and production process. It helps them
to minimize their cost of acquisition as well as control the quality. The cycle includes three
classes of transactions;

Acquisition of goods6, property, plant & equipment7, and services8


Cash disbursement
Purchase return

These transactions generate different types of accounts. Those accounts are shown in figure
(below). If we note the figure carefully, we can see that each account is affected by accounts
payable. All these accounts are either debited or credited against accounts payable. For
example, acquisitions are debited against accounts payable and cash disbursement is
credited against it.

Figure 5: Accounts in the Acquisition and Payment Cycle of IPL

Material
Property, plant
and equipment
All type of
services

Accounts
Payable
Acquisition
of

Purchase
Account Payable document of IPL returns

Cash
disbursements

Manufacturing
expenses

Repair and
maintenance
Taxes
Supplies
Freight in
Utilities
Insurance

Purchase
Prepaid
Printing
discounts Module
expenses
4.2
Recording and Reporting
of Accounts Payable
Travel expense
System
Supplies
Delivery expense
Officers travel
Repairs
IPL
maintains
a
number
of
documents
and
reports
for
its
own
convenient.
Selling
Administrative
Legal fees It designed its
Advertising
documents
and reports in such
a way that they
can be used inAudit
multiple
expenses
Expenses
fees purposes. The
Promotional
documents
are generated from using
Expenses are mainly prepared in manual system. But the reports Taxes
accounting software. The name of the software is MAPICS which means Manufacturing
6

Here goods refers to inventoriable items like raw material and packing material.
Refers toSubsidiary
tangible fixed assets used by
BPL.
Control
Control
Subsidiary
8
Service refers to all type of short term and long term services like cleaning, plantation, nursery, gardening,
Ledger
Ledger
Ledger
Ledger
postal, software etc.
7

28

Accounting Production Information Control System. The documents and reports maintained
by IPL from acquisition to payment procedure are;

Documents
1.
2.
3.
4.
5.

Purchase requisition
Purchase order
Material receiving report (MRR) / Goods receiving report (GRR)
Invoice / Bill
Quality Assurance (QA) Report

Records and Reports under Accounting Software


6. Accounts payable payment voucher
7. Vendor ledger
8. Vendor account balance
9. Journal register
10. Cash requirement report
11. Tax report
12. VAT (Musok 11) report
13. Report on purchase
14. Report on payment

1. Purchase Requisition
Its a requisition generate by respective department. Data elements conveyed by a purchase
requisition of IPL include unique number of purchase requisition, CEP and purchase order
number with date name and description of material and service, unit number, required
quantity, unit price and quantity ordered. It also includes signature and approval of
authorized person, suppliers name; mode of payment, advance payment (if any), terms and
conditions, MRR number, invoice number etc.
If the requisition is for fixed asset then a CEP (Capital Expenditure Proposal) is raised by the
user department. In this case, proposed suppliers name, estimated budget, justification for
proposed expenditure and estimated life of proposed expenditure is also required. A sample
of CEP is given in the Annexure A (Figure 8)

2. Purchase Order
Its a document through which an order is made. The heading contains the purchase order
number, purchase requisition number and date. The body contains the description of
required item, quantity required and ordered, amount with unit price, suppliers name and
address, terms and condition of order, due date, other relevant dates etc. Besides, it also
29

describes the mode of purchase, advance payment (if any), purchase reference and other
relevant information. A sample of purchase order is added with Annexure A (Figure 9)

3. Material Receiving Report (MRR) / Goods Receiving Report


(GRR)
Its a report produced by the inspection department or receiving department. It is used to
reflect the receipt of goods on consignment or goods returned to supplier. The report
indicates item ordered, name of the material and supplier with the date of arrival of products,
its quantity, quality and description of the received item. It also includes MRR number, order
number, signature of the authorized person etc. The report is also used as inspection report.
Because it mentioned information regarding to

Quantity ordered before quality test


Quantity received after quality test
Quality
Whether as per specification or not
Country of origin
Deliver in time or not
Pricing
Legal requirements etc.

4. Accounts Payable Provision Voucher


Under this document provision i.e., entry is given against acquisition. Accounts payable is
credited here. From the figure given is Annexure A (Figure 10) we see that information
relating to voucher no, vendor no, invoice no, and MRR no is required with their date for
provision journal. Besides, information about due date for payment, item name, item
number, unit, party name and the number of the account under which the item belongs to is
also required.

5. Invoice / Bill
This document is generated by supplier/ service provider that mention the quantity and
amount, bill number with date etc. The bill is attached with MUSOK 11, delivery challan
etc.

6. Tax and VAT (Musok 11) Report


IPL prepares these reports for calculating the amount of Tax and VAT deducted at source of
suppliers. Tax and VAT amount is deducted from the total amount due. Deduction and
30

calculation is made according to section 51(A), 52 of ITO- 19849, rule 16 of ITR-198410, and
the VAT Act-1991 (Musok 11). The reports contain vendor number, vendor name, and
period, total amount due, tax amount, amount excluding tax amount, VAT amount and
amount excluding VAT. A sample of tax and VAT report is added with Annexure (Figure
11)

7. Accounts Payable Payment Voucher


Its the preliminary entry of a invoice in accounting software. The voucher contains the
information of the payment date, mode of payment, item or batch no, voucher no with date,
AP journal voucher number with date, amount, party name and other related information. A
sample of this voucher is given in the Appendix-A (Figure 12)

8. Vendor account balance


It is nothing but a report about the due amount payable to an individual vendor 9r a number
of vendors on a certain date. The report includes vendors name, code and the total due
amount.
From this register management of IPL will get all related information of accounts payable
transaction for a certain period of time. For example, if management wants to know about
the amount of purchase of an individual vendor for a certain period of time with related
deductions they can get it from journal register. Even the register also informs about whether
any payment has been made or not and the due amount of that period.

9. Cash requirement report


Its a managerial enquiry regarding vendors payable amount to forecast the current
liabilities. From this report management of Finance and Accounts Department can be
informed about the cash to be paid to individual vendor for a certain period of time.

10. Report on purchase


Its a statement that informs manager about the amount of purchase that has been acquired
from an individual vendor.

11. Report on payment


Its a statement of payment to vendor. Here vendors name, number, payment amount tax
deducted amount etc. has been mentioned.
9

Income Tax Ordinance 1984.


Income Tax Rules 1984.

10

31

4.3 Acquisition and Payment Cycle of IPL


This cycle defines the buying process from initial need recognition through to cash
disbursement. Here I am going to describe the whole procedure of acquisition and payment
procedure of IPL.
1. The procedure includes following business functions;
2. Processing purchase order
3. Receiving goods, material and services
Requisition of respective
department
4. Recognizing
the liability

With approval of the


departmental head

5. Processing
recording
Tenderand
/ Quotation
callcash disbursement

Issuing order

By Purchase Department
or by User Department

Receiving goods / Services by


factory/ Respective Department
By QAD, or by
receiving
department

Produce MRR / GRR

Receiving bills by purchase


department
Comply the bills with order,
MRR / GRR and approve
Sent bills to accounting
department

Payment procedure is
complied with sec
Figure
Acquisitions
51(A),652
of income tax
ordinance-1984 and rule
16 of income tax
Rule1984 and Musok 11
of VAT Act 1991

Accounts payable journal


voucher/ provision voucher

and Payment Procedure of IPL


Ready for payment

Accounts payable payment


voucher
32
Issuing check

Processing Purchase Order


The procedure begins with need recognition. The respective department identifies its need,
gets approval of the departmental head and with the approval an authorized person sends
purchase requisition to purchase department to initiate purchase. In case of property, plant
and equipment acquisition, before sending purchase requisition, a budget has to be prepared
33

by the user department. If the departmental head or higher authorities, whichever is required,
approve the proposed budget a purchase requisition is sent to purchase department. And in
case of raw or packing materials, the planning department determines the quantity and
timing of raw materials. This department informs the purchase department when to buy
materials.
When the purchase department got the requisition, it calls for quotation11 or tender12. After
receiving the quotation or tender, supplier has been selected. The supplier may be local or
international. If the terms and conditions are in favor of both IPL and the selected supplier,
an order for the purchase is than issued by the purchase department. In case of raw or
packing material, the purchase order is issued by the factory. A purchase register is
maintained by the purchase department in which they maintain all the required information
relating to a consignment.

Receiving Material, Goods and Services


Generally the goods and services are received by the user department who has issued the
purchase requisition or in some cases by the authorized department. Materials are received
by Quality Assurance Department (QAD) in the factory. After receiving materials, goods and
services an MRR is issued for material and other than material a GRR is issued by
receiving department to purchase department. In the mean time the invoice or bill is
received by the purchase department.
Before using the product by user department that is at the time of delivery, it has been
inspected by the inspection or QAD, by user department or by authorized department. QAD
examined the materials on a sample testing basis and provide a certificate. Normally,
1.
2.
3.

QAD inspects standardized items like raw material, packing material etc.
User department inspects non standardized items like services, stationeries etc.
Inspection department inspects machineries, plants etc.

Again at IPL there are some authorized departments for inspection. For example, computer
Packing
Accept
or IT related products are inspected
by IT department,
furniture are byPurchasing
HR department.
order
Slip

Vendor

Refuse the order Goods &


Reorder the item services
Received on condition

Figure 7: receiving function

Delivery by
User
department/
Factory

Packing
slip

by Purchase/
Planning Dept

Goods &
services

Count &
Inspect
MRR/ GRR
Vendor
goods by
respective
departments
11
Quotation is an indication of the price at which a seller might be willing to offer goods for sale.
12
Tender is a means of selecting supplier. The lowest bidder with required quality is selected.

34
MRR/GRR

Goods &
services

Warehouse/ Factory/
Ready for Use

Recognizing the Liability


The purchase department compares the invoice/bill and MRR/ GRR/ QC with the purchase
order. If every thing has been complied, the amount payable to supplier is approved by the
purchase department. There is a seal on the invoice named Approved By with the signature
of purchase manager. It means the purchase department is satisfied with the information
mentioned in the bill. A copy of all this documents is kept by purchase department and the
main copies along with copies not negotiable are sent to accounts and finance department.
The accounts and finance department is then ready for giving provision voucher. An
authorized person is liable for giving provision voucher. He examines the not negotiable
copy of bill/ invoice at the time of giving provision voucher. Generally the liability is
recognized when the vendor sends the invoice or bill. But in some cases it may be
recognized at the time of goods received. The source documents for recognizing the amount
of liability for acquisition are;

Report on purchase
Vendor account balance
Vendor ledger
Journal register
Tax report
VAT report
35

Processing and Recording Check/ Cash Disbursement


After a certain period of time when the date becomes matured for the liability the payment is
made by IPL. The matured date has been calculated in the aged payable report for each
vendor. The due amount for an individual vendor is identified from vendor business position
report. In this stage another report is prepared for forecasting cash requirement. An
individual person enters data in MAPICS for having this reports and forecasts. The same
person checks the arithmetical accuracy, casts, cross casts, deductions and payable amounts.
If the checking is matched with those reports checks are issued to pay vendor.
The mode of payment is usually pre numbered check. In most cases the payment is made by
payee only check. In some cases the payment may be made by cash or by bearer check or
paid in advance fully or partly. So we can say that IPL pays its supplier in three ways1. By payee only check
2. By cash or bearer check
3. Pay in advance ( partial/ full)
Issuing check is a sensitive issue. It is prepared by that person who will give the payment
voucher. And it is signed by senior management. The payment voucher is given by the same
person who has checked the reports and payable amounts. This voucher includes original
bills, MRR/ GRR, Vat (musok 11) and challan. It is recorded in the record book after the
sign has been made.
After all the procedure has been completed the check is given to vendor and the counter foil
of that check is preserved by IPL. If the payment amount is large part by part payment is
Vendor
made.
Purchase
Factory/ User
Department

Purchase order

department

MRR/GRR
Vendor
invoice
Approve
vendor
invoices by
purchase
department
Bill/ Invoice
Purchase Order
MRR/ GRR
VAT (MUSOK 11)

Figure 8: Pay for Goods Function


Accounts &
Finance
Department

Pay Vendor
(cash
36
disbursements

A/P Payment
Voucher

A/P Provision
Voucher
Checks

Accounts
Payable Module

A. File
Maintenance

B. Transaction
Processing

D. Inquiry

E. Year End

C. Reports
Maintain vendor
master

Journal Register
Reports on Purchase

List vendor master


Reports on Payment
List vendor code

Vendor Ledger
Both

Vendor Ledger
Maintain item code
Vendor Account
Balance
List item code
In MAPICS IPL maintains a separate accounts payable module for its own convenient.
Through this module related transactions
records
and reports mentioned earlier are kept.
Journal
Register
Only theMaintain
authorized personnel of IPL are allowed to use this module. The use of the module
implementation
data
is controlled
by user password.
Cash Requirement
Report
Following items are the part of AP module;
Payable
Figure 9: Accounts PayableAged
Module

4.4 Accounting Software

Tax Report
Vat Report
Vendor37
Business
Position
Create Web Page

John Wiley and Sons; Accounting Payable System, 2000 Edition

CHAPTER FIVE
ACCOUNTS PAYABLE INTERNAL
CONTROL SYSTEMS OF IPL
38

In the literature review section, methodology for designing tests of controls and substantive
tests of transactions has been described. In this section I am going to draw a picture of
internal control system of Incepta Pharmaceuticals Ltd. relating to accounts payable. But
before starting I want to confess that I have some inherent limitations. Internal control
system is very sensitive issue for any organization and I was only an intern at BPL for three
months. So it was not possible for me to do all the theoretical works. The picture that I have
drawn in the following sections is prepared on basis of interviews with Incepta personnel,
internal control questionnaires and my personal observations and assumptions.

5.1 Internal Control Committee


IPL has a specially assigned team to carry out internal financial audits of different segments
of the business. The team is known as FSD (Financial System Department). The team is
headed by a manager who reports to the CEO. After appropriate review of the report
necessary corrective actions are undertaken.
IPL claims that it employs a sound system of internal control including internal financial
control to ensure compliance of its activities with the desired objectives. It also says that the
FSD carries out internal audits of different segments of the business.

It reviews the system periodically


Inspects what is done in the factory
Inspect the inward and outward of materials and finished goods
Review the cash receiving and disbursement process
Monitor the activities to make sure that the standard and procedures set out for each
business function is being effectively complied with etc.

5.2 The Controlling System of Accounts Payable


A brief description of controlling system of accounts payable of IPL is given below. The
description is designed on basis of internal control questionnaires attached in the annexure
section.
39

Processing Purchase Order


In case of purchase unique-numbered purchase and field order forms are used and strictly
accounted for by number. Both purchase order and purchase requisition requires approval of
departmental head of user department or factory. Normally the need for such requirement is
reviewed by cross sectional departmental check. For example

Table 4:
Cross examined assets
Computer & Other IT related assets
Office Equipments or Furniture & fixture
Manufacturing Equipments
Raw and Packing materials

Department for cross examination


MIS Department
HR Department
BRD Department.
Planning Department

Accounting Inf. Annormation Systems; Pearson Education; Ninth Edition

So possibility of orders for unneeded goods or more goods than need has been checked by
this cross sectional verification.

Receiving Material, Goods and Services


When ordered products are received, they are inspected by user department. Before
inspection no products will be used. From the recording process we see that how each of the
items is examined, who are responsible for inspection and what is inspected there.
According to me the internal control system at this stage is satisfactory because the ordering
department and the receiving department are different. Normally the user department
receives items. In some cases items are received by another department, a third one. It
inspects the items received and after inspection the product is sent to user department.

Recognizing the Liability and cash disbursement


Invoices are matched with purchase orders and receiving reports before approval for
payment. Invoice computations and pricing are verified before approval for payment and are
paid in a timely manner so that discounts may be taken. Monthly statements are compared
with accounts payable balances. Payable Subsidiary Ledgers are reconciled to the control
accounts monthly. Copies of the order forms are distributed to receiving and accounting
departments. Claims are filed promptly for goods damaged in shipment.
40

The responsibility for disbursement procedures is clearly documented and assigned to


specific personnel of IPL. Disbursements are handled in such a manner as to ensure that the
proper funds and accounts are charged; that the disbursement is used only for authorized
purposes; and that laws, rules, and regulations governing the disbursement are followed.
Controls are established to assure that all payments are made on a timely basis and in
accordance with all purchase orders and contracts and to ensure that duplicate payments are
not made.
In IPL original invoices totaling the amount of the disbursement are to be attached to each
voucher before payment. Employee duties in the handling of disbursements are separated to
the extent possible with regard to:

The initiation of purchase requisitions and field orders.


The approval of vouchers, invoices, and warrant registers.
The preparation of checks.
The recording of disbursements.
Each cash disbursement is properly vouched and approved by the proper authorities
of the agency before the actual disbursement occurs. This will ensure the proper and
regular review of all disbursements.

To the extent possible, employee duties in this area are to be complementary to or checked
by another employee. Disbursements are to be made by and counter signatures provide an
additional control. Blank checks are to be kept in locked storage under the control of a
designated, responsible employee.
A separate record is maintained for each check series issued or voided. The record for
voided warrants is to include the date voided, inclusive serial numbers, quantity voided,
reason for voiding, and initials of individual taking action.
The bank checks of IPL are pre-numbered. They are completely filled out before being
presented for signature. Someone maintains physical control of checks other than persons
originating disbursement requests. Normally dual signatures are required on all checks.
Bills or vouchers are presented with checks for signature and are marked "Paid only at the
time checks are signed. The same person mails and prepares checks someone approves bills
for payment other than the persons who sign checks. Bank statements are reconciled at least
monthly by an employee not involved in cash receipt or disbursement procedures.

5.3 Internal Control Keys for Accounts Payable


In this section I am trying to compare my practical knowledge with theoretical. As described
earlier key internal controls for accounts payable are;
1. Authorization of Purchases
2. Separation of Asset Custody from Other Functions
3. Timely Recording and Independent Review of Transactions
4. Authorization of Payments
41

Major Internal Control Issue


This control is essential because it ensures that goods or services acquired are actually
needed by the organization. It avoids the excessive or unnecessary items. There are some
important controls regarding this area;

There should be an authorized person for acquisition of products

Different authorized personnel are required for acquiring different items

Approval of departmental head is required

There should be a specified limit. If the ordered amount cross that limit approval of
Board of Directors is required
No purchase order would initiate without purchase requisition

Purchase order should be in written form because its a legal document to buy

The purchase department should not be responsible for authorizing the acquisition or
receiving the goods.
All purchase order should be pre-numbered and have enough space to minimize
unintentional omissions

Internal Control Procedure Followed by IPL


As described earlier in recording process section, at IPL the user department sent purchase
requisition to purchase department with the approval of departmental head. An authorized
person check that requisition and made the purchase order. Without purchase requisition no
purchase order will be made. In case of materials, the planning department identifies the
required quantities of materials and sent requisition to purchase department. And in case of
fixed asset IPL required approval of CEO or deputy chairman. But before requisition a
budget has been made for that asset. In each case there is a limit amount for ordering goods.
The purchase order document contains a unique number. This unique number is used as
reference for further proceeds. It also contains the signature of the person raising requisition.
The purchase department is responsible for making the order only. It is not responsible for
authorizing or receiving goods. It maintains a purchase register where all given orders are
recorded with ordered item, quantity, unit price and suppliers name.

Separation of Asset Custody from Other Functions


Major Internal Control Issue
This control key says that

The receiving department should initiate the receiving report and the inspection
report.
42

Both documents should be prepared in multiple set. Among them one set should be
kept by the receiving department and others should be sent to accounts department
and store room.
Goods should be physically controlled from the time of their receipt to disposal. This
will help to prevent theft and misuse.
The personnel in the receiving department should be independent of the storeroom
personnel and the accounting department.
The accounting records should transfer responsibility for the goods as they are
transferred from receiving department to storage and from storage to manufacturing.

Internal Control Procedure Followed by IPL


Usually, the ordered items are received by user department. But in case of inventorial item,
that is raw or packing material, it is received by factory. The receiving department produces
the MRR/ GRR. The same report is also used as inspection report. In case of raw or packing
material, Quality Assurance Department generates Quality Assurance report. One copy of
MRR/ GRR/ QA is kept by the receiving department, one copy is sent to purchase
department and another copy is sent to accounts department. So the personnel are separate
from each other. Again there is a physical control over item from their acquisition to
disbursement. A cross departmental monitoring activity is a common scene here.

Timely Recording and Independent Review of Transactions


Major Internal Control Issue
The accounts payable department recognizes the liability at the time of receiving goods or
deferred until the vendors invoice is received. The department has the responsibility for
verify the propriety of acquisitions.

The department should compare the details on the purchase order, receiving report
and the vendors invoice
Extensions, footings, and account distributions should be verified.
Personnel who record acquisitions do not have access to cash, marketable securities,
and other assets.
Adequate documents and records should be kept

Internal Control Procedure Followed by IPL


IPL recognizes accounts payable as its liability at the time of vendors invoice is received. It
recognizes the liability by analyzing the following documents;

Not negotiable copy of purchase order


MRR/ GRR
Not negotiable copy of invoice/ bill
43

Vat report

If the person is satisfied with those documents he will then give the provision voucher. This
person does not have the access to handle the cash, securities or other assets.

Authorization of Payments
Major Internal Control Issue
Its a very important control. This control includes
Checks should be signed by an individual with proper authority
The personnel signs the check and performs accounts payable function should be
separate
The check signer should carefully examine the supporting documents at the time of
signing the check
The checks should be pre-numbered and printed on special paper

Care should be taken on voided and signed checks.


Internal Control Procedure Followed by IPL
IPL pays its vendors after the date has been matured for payment. Normally the payment is
made by pre-numbered check. A separate person gives the payment voucher. Before giving
payment voucher he checks all the documents and reports relating to that transaction and
also examined that the bills are approved by purchase department. The payment voucher
includes original bills, MRR/ GRR, VAT (MUSHOK 11) and challan.
When the authorized person signs the checks, he just skims through the attached documents
with the payment voucher. Normally these signs are made by managers or director of
accounts and finance.

CHAPTER SIX
FINDING
&
RECOMMENDATION
44

6.1 Findings
Recording process of Accounts Payable in IPL is the most modern in Bangladesh
Pharmaceuticals Business. The following Findings are made on the basis of the research for
further improvement of the organization.

Source of documents (which are provide from Purchase Department) are not timely
available to initiate the process of recording transaction and associated works.

Even when purchase department sends the documents timely. Some of these are
missing due to indecent file maintenance. A separate file is maintained in a slapdash
manner, especially without any sequence. Sometimes they are kept in other files. It
requires extra time for searching the right one as and when needed.

Purchase department do not verify all relevant information sincerely. For that reason
finance & accounts department respective person fall in many problem to complete
party bills and record. Its time consuming.

The existing IPL accounts payable software is looking pretty difficult and not enough
friendly for the user. Without trained person fall in difficult to operate it.

Some times documents are received in time but unrecorded and piled up for
processing in the future when some other documents will come.

Incepta provide very good job environment for their personnel. That is very
important for better business.

IPL need to provide priority (Job) for the BBA internees. Other wise may they cant
show their best performance in the work, and also IPL may loss someone they are
looking for.

6.2 SWOT analysis of Incepta Pharmaceutical Ltd


Strengths

The company has successfully built up a good reputation.

45

The market share of the company is now around 4.67% with 42.47% annual
growth rate.

There is no financial liabilities of the company and the cash flow is steady and
stable

Over the last five years, the company has successfully launched numerous
products that provided the utmost demand of the customers as well as good
customer satisfaction.

Incepta pharmaceuticals ltd has the necessary technical experts in respective


fields-

(Chemists, Microbiologists, Doctors, Biochemists. Medical promotion officer


etc)

The product quality of the company is better than any other company

The service quality of the company is outstanding. The company regularly


provides doctors with the latest information regarding the development of the
medical science.

The distribution network of the company covers every corner of the country.

The product promotion effort of the company is outstanding and beat the
company in that industry with a big margin.

The sales force of the company is one of the youngest, largest and most dedicated
to lead in the country.

The company is capable is introducing the latest innovative products in the


country.

There is a well-developed formulation research and development laboratory.

The manufacturing facility of the company is one of the largest and most
advanced in the country.

The company management is proactive and the company practice a flexible


market oriented planning and execution.

Weaknesses

The company is entirely dependent on imported raw materials for production.

46

As the company is new and is heavily investing in capital machineries and


infrastructure import from other countries.

Although the company has plan for export but at the moment is too occupied in local
market development and recently started to explore market outside the country.

Rules and regulation are still in the process of development.

A dedicated human resource development is lacking now.

Employees benefits are not up to the mark in many cases.

Recruitment in many areas is lacking in systematic approaches and procedures.

The employees of the company are relatively young and lack of experience,
especially in sales and distribution.

There are very few experts on reverse engineering analogue research and chemical
synthesis available in this country so company is hiring employees from abroad
giving high remuneration.

Opportunities

From 2000 onwards Bangladesh being a member of LDC country will be allowed to
produce cheap copies of patented drugs and their raw materials.

Incepta having a CGMP(Current Good Manufacturing Practice ) compliant factory


and one of the best technological know Who in the industry can take the expert
opportunities that lie ahead.

The current level of penetration of allopathic medicine in Bangladesh is low and is


expected to increase significantly in the coming days. This is a great opportunity for
Incepta to penetrate the market at this growing stage.

If the government extends necessary support to the industry, it has the potential to
become, a very big export sectors both API and formulation products to all the LDC
countries and off patented formulation products to developing and developing
countries.

As Indian and Chinese companies will not be able to produce patented active
ingredients but they have the necessary technology and expertise in reserve

47

engineering and chemical synthesis they will be more interested in cooperation with
Bangladesh after 2004

As multinational companies will be allowed to come to Bangladesh for business.


Similarly, Bangladeshi companies will also have access to other countries for export
of both formulation products and raw materials under the open market system.

Taking advantages Of TRIPS Agreement, Patented products for LDC.

Chief labor and cost advantage ,compare to world Generic Market

Threats

The present regulation does not allow local companies to advertise their OTC drugs
in the mass media whereas these are allowed in neighboring countries already
creating a market for those products. This situation is very likely to worsen in the
post 2010 scenario.

The drug act 1940 & the drug policy of 1982 need to be revised soon on order to
copy with the post 2004 scenario.

In the post 2010 scenario Bangladesh may end up not having the necessary raw
materials for its products .Incepta may also be forced to buy raw materials from the
innovator company at a much higher price leading to price hike and market
shrinkage.

The implementation of WTO, s TRIPS and public Health agreement is very likely to
result in the rise of production cost of medicine and their distribution which may
adversely affect Incepta and the local industry.

48

6.3 Recommendations
The following Recommendations are made on the basis of the research findings for further
improvement of the organization. To make my recommendations more authentic and
realistic I have used primary data. I communicate with the personnels where I was
completed my internship program, for taken their views and tried to make it more
appropriate & precise.

Recording Process
So far I understand the recording process of accounts payable is quite satisfactory as it uses
accounting software. But the software is using only by the accounts department. The
documents are recorded manually. So lots of paper works have to be done by IPL personnel.
Its very time consuming and may create errors in recording and filing. Again if any one
wants to know about any information relating to those documents he has to search for the
right files. Sometimes it is difficult to find out the exact file.
I think integrated software is a solution for this problem. If the same software will be used
by all departments it will be easy to find out required information. You have to press some
keys only for this job. But it is true that integrated software is a very complex one for a large
organization like IPL. To avoid this complexity it could use the same software in the
selected departments.

Internal Control
According to my view point, the controlling system of accounts payable of IPL is very
strong. Its recording process and disbursement procedure designed in such a way that the
account is controlled automatically. Because in all steps from purchase requisition to cash
disbursement all the documents are reviewed several times by different personnel of
different departments. So the chance of misstatement, theft or fraud is very low. IPL operates
its accounts payable according to their policy designed for recoding and reporting of that
account.
Incepta Pharmaceuticals Ltd is also the largest exporter of pharmaceuticals from
Bangladesh, spreading its presence in many developing and developed countries across the
globe.
In this report, I have tried my level best to identify the existing recording procedure of
accounts payable.. I think that IPL performs an excellent job in compliance with applicable
rules and regulations regarding accounts payable. Its recording and reporting process are
linked with each other in such a way its internal control system of accounts payable is very
much strong.
Incepta believes in creating the difference in the market place by offering impeccable
quality. I believe that the Accounts & Finance department is equipped with knowledgeable,
professional, skilled, experienced and dedicated staffs possess the power necessary to reach
the landmark of quality financial reporting
49

6.4 Conclusion

IPLs every employee computer knowledge is not same to operate their daily works.
So IPLs try to make their employee fit for their works, with the helps of proper
training.

Various new technique to be adopted to increase promotional condition like-

To introduce IPL more attractively in front of the general people (bottom level), to
arrange some special program like- Travel Medicine Show, Free Treatment Festival,
Travel Camp Treatment, Free Treatment with Medicine and etc.

Social-welfares are a positive sight for an organization to get the public sympathy. So
IPL needs to involve itself with social welfares related works.

Advertisement to be given through the various medias about the products of IPL for
the awareness of the general mass.

50

CHAPTER SEVEN
REFERENC,
Annexure A (Sample)
7.1 References
1. Arens Alvin A and Loebbecke James K.; Auditing- An Integrated Approach ;
Prentice Hall International; Eighth Edition; 2000.
2. Schaeffer, Mary S.; Accounts Payable: A Guide to Running an Efficient Department;
Wiley; 2004.
3. Casher, Jonathan D.; How to find and Eliminate Erroneous Payments; APA's
Employer Practices; winter 2000.
4. John Wiley and Sons; Accounting Information Systems- Essential Concepts and
Applications; Fourth Edition; 2000.
5. Wilkinson Joseph W, Cerullo Michael J, Raval Vasant and, Wong-On-Wing Bernard;
6. Romeny Mashall B & Steinbart Paul John; 2003, Accounting Inf. Annormation
Systems; Pearson Education; Ninth Edition
7. Paragraph 2, Risk Assessments and Internal Control, International Standards on
Auditing
8. Study Manual on Auditing, Intermediate Group- A, The Institute of Chartered
Accountants of Bangladesh
9. Annual report 2008,2009.2010
10. http://britannica.com
11. http://en.wikipedia.org/wiki/Accountspayable
12. http://www.bizmanualz.com?src=ART81
13. http://oacr.ufl.edu/Investigations.htm#5
14. http://en.wikipedia.org/wiki/Accountspayable

7.2 Annexure-A
51

Figure 8: Sample of CEP


Incepta Pharmaceuticals Finance &
Accounts Department.
CAPITAL EXPENDITURE PROPOSAL
(CEP)
SPARE PARTS APPROVA
1. Classification:
Replacement
Addition

Unit
Depth
Date
Serial #
Development

2. Description of item with ID Number (if Any):


3. Reason/ Justification for proposed expenditure:

8. Remarks

4. Economic life (Years)


5. Supplier:
6. Estimated Expenditure
7. Budget Provision:
Signature of Budget Officer
Approved By
Purchase Order No.Purchase Requisition NoDate of Receipt by
PD SL No.Name and Description of Material / ServiceUnit
NoQuantity OrderedUnit
PriceQuantity
CEO/ Deputy
Chairman OrderedAmount1234_______________
Sign
of Person
Submitted
By Raising Requisition________________
Recommended By
Recommended By
Approval of Departmental Head _______
DateTotal Mode of Purchase
Cash / Against Order
Purchase Ref._________________
Departmental
HeadTk.__________
Director, Commercial
Director, Finance
Advance
Required
Date:
ate:
Date:
Pay Cash/Issue Check/Order to be Placed_________________________________
Name of the Party_____________________________
MRR NO. ___________
Order / Advance Payment Authorized
Terms and Condition of Order:

Figure 9: Sample of Purchase Order


Date
From
Invoice/ Voucher No________Date_________
To
Date
52
Amount for Refund______________________
Action
Process Approval Approval
Amount Due for Payment_________________
_________________
Required
__________________________
________
Authorized
Signatures Signature
Passed for Payment/ Adjustment
Date

Figure 10: Accounts Payable Provision Voucher

53

Incepta Pharmaceuticals
..
Voucher No
Vendor No
Invoice / Bill
Due Date
Description

Date:

: ..

Original Voucher No: ..


:
: Date:
MRR/QC/WO : .
:
:

Payable
:
Vat
:
Commission :
Item

AP Journal Voucher

..
..
..

Amount Cr.
Amount Dr
Amount Dr

Description

Signature
Prepared by
Checked by
Approved by
Posted by

Figure 11: Tax and VAT Report

54

0/00/00

Total (Tk) :

Account no

Date

0/00/00

Notes

Amount
(Tk)

Dr./
Cr

Vendors
no

Vendors
name

Tax and VAT Report


Period Total
Tax
VAT
Other
Net
amount amount Amount deductions amount
due
due

Figure 12: Accounts Payable Payment Voucher


AP Payment Voucher
Incepta Pharmaceuticals ..
(Cash / Bank)
Batch/item No : ..
Voucher No :

AP JV No

JV Date

Date:

Original Voucher No: ..

Vendor
No

Signature

Check
No

Date

Prepared by
Checked by
Approved by
Posted by

55

type

Account
no

Payee

0/00/00

Amount
(Tk)

Dr.
/Cr