What is the role of vendor verification in internal controls over disbursements?

• A. Reduces cost overruns by a fixed percentage.
• B. Ensures vendor legitimacy and prevents fraud.
• C. Is optional and rarely used.
• D. Is required only for capital purchases.

Answer: (B)

Focusing on vendor verification helps protect disbursement processes by making sure payments go to real, authorized suppliers. When a vendor is verified, the organization confirms the vendor’s legal existence, official name, tax ID, and banking details, and ensures the vendor is approved in procurement policies. This step is a preventive control that reduces the risk of paying fictitious or fraudulent entities, which is a common avenue for disbursement fraud. It also keeps the vendor master data accurate, which supports the three-way match (purchase order, receipt, and invoice) and helps prevent mispayments and duplicates. Periodic re-verification or review of existing vendors adds an ongoing check against changes, such as altered banking information, that could be exploited to misdirect funds. In short, vendor verification strengthens the integrity of disbursements by ensuring payments are legitimate, authorized, and properly documented.