Question

INTERNAL CONTROL ANALYSIS

A company that       produces component parts for automobile manufacturers has grown rapidly since its incorporation several years ago. Management is concerned about internal controls over the purchasing cycle because the cost of goods sold percentage has continued to rise even though it seems that many of the raw materials and supplies used in production are costing less. The following description of te purchasing process is available.

                 

(1).Pre-numbered purchase requisitions are used to order most goods, except when a critical need is identified.

(2)If an urgent order must be placed, the production department personnel can call it in directly to the vendor, usually with same-day delivery.

(3) A purchase requisition is ordinarily completed when the supply of raw materials falls to a certain reorder point as determined by a mathematical formula.

(4)Purchase requisitions are forwarded to the purchasing department where vendors are selected, terms are negotiated, and orders are placed using pre-numbered purchase orders.

(5)Although there is no formal approved vendor list, the purchasing department tries to maximize volume discounts and prefers to sole-source purchases as much as possible.

(6)Four-part purchase orders are created-the original that is mailed to the vendor and three copies for, respectively, the requisitioning department, accounts payable, and receiving.

(7)Upon receipt of the goods, the receiving department matches the item description, quantity ordered, and vendor per the accompanying packing slip with the receiving department’s copy of the purchase order.

(8)To prevent loss or theft, the goods are not unpacked until they are moved to the warehouse where they are placed into inventory.

(9)The receiving department prepares a receiving report and forwards it along with the goods to the warehouse for safekeeping.

(10)Vendors send invoices directly to the accounts payable department where, upon receipt, the accounts payable clerk reconciles the invoice with the department’s purchase order copy.

(11) Based on this reconciliation, the accounts payable clerk prepares a voucher and forwards it to the accounting department for controller approval and general ledger entry.

(12) Once recorded, the approved voucher is returned to accounts payable to serve as the basis for check creation and eventual vendor payment.

Required—Identify in a cross-referenced list any three (3) internal control deficiencies in the process             described above, making sure to explain why each would be considered as such.

Process Reference (example: 1,2,3)	Control weakness identified	Impact of control weakness (or Risk Associated with control weakness)	Remediation Recommendation

Answer 1

Page 1 Given data that Managment is conceaned about inteoinal contajolo oveel the puojchasing cycle because the cost of goods sold pesscentage has continued to Rise even though it seems that many of the Raw mategjials and supplies used in pajoduction Integjnal contajol Analysis Internal contojol deficiencies Inadequate documentation Propes documentation gives paoof of the paimasy Toan saction. The documentation configums that all the puschase Tojan section is pove- numbes with an objective gausenteeing that all the underlying Tyansactions agje documented and accounted foy The pole number of Tejansaction help to Avest the Oyganisation form segasiding the Tajansaction two times because thesje will no identical number in the system. propes and Adequate documentation of Tsansaction will egase the psyocess of psjepaaling financial Statments and vegands of the organisation

page-2 Fogy example the pove- numbent puste used to Ogdeny most goods must be be pele-numbesy puschase sequisitions Teangactions of the company to avoid Recoeding the Tajansaction Twice. of contgol with Autostization of Transactions The Authogization of purchase Tajansaction plays a impostant Role in configyming that thoose losses asje disallowed and Avoided. The level of Authospization in important in excluding inappstoppiate spending by the company. Authogizing Tsansactions befone placing 09desy gives a chance to manageals to assess pusychasing decisions before implementing. Also the Authorizing puschasing enables the manage 916 to make suele that pusychase Tsjansaction will suppoot the objectives and goals of the company. Fogy example the act of the payoduction department to call indisjectly the vendos and deliver the psyoduct in the same day in an urgent Ondey may compromise the internal cont.yol hence fealized de feciences will be al ethical policies and peoceduses