1. Introduction and Objectives
Effective material control prevents production delays, minimizes capital tied up in inventory, and reduces losses from spoilage or theft. This lesson defines the chain of custody for raw materials, mapping the internal control documentation required under US GAAP, IFRS, and SOX (Sarbanes-Oxley Act) auditing standards.
 
2. The Material Procurement Lifecycle
The acquisition and consumption of materials follow a rigid, audited lifecycle across separate departments to maintain a clear separation of duties:
[Production / Warehouse] ──> Bill of Materials & Purchase Requisition
                                      │
                                      â–¼
[Purchasing Department]  ──> Supplier Selection & Purchase Order (PO)
                                      │
                                      â–¼
[Receiving Dock]         ──> Physical Verification & Goods Received Note (GRN)
                                      │
                                      â–¼
[Quality Assurance]      ──> Inspection & Material Rejection Note (if applicable)
                                      │
                                      â–¼
[Accounting Dept]        ──> Three-Way Match (Invoice + PO + GRN) ──> Payment Approval

3. Critical Documentation Framework
  • Bill of Materials (BOM): A comprehensive, authorized list of raw materials, assemblies, and sub-components required to manufacture a specific finished product.
  • Purchase Requisition: An internal document generated by the storekeeper or production manager requesting the purchasing department to buy materials. It establishes authorizing access before capital is spent.
  • Purchase Order (PO): A legally binding external document sent by the purchasing department to a vendor, specifying quantities, agreed prices, delivery dates, and terms.
  • Goods Received Note (GRN): Form completed by the receiving dock staff confirming the physical receipt, quantities, and condition of incoming materials. Internal Control Rule: The receiving copy of the PO should have the quantities blanked out to force dock workers to physically count the goods.
  • Material Requisition Note: An internal tracking document authorized by production supervisors to draw raw materials out of the warehouse store and into the active Work-in-Progress (WIP) cycle.
PreviousNext