Question

Review the following description of the purchasing and AP procedures for a company and answer the questions at the end.

The purchasing agent receives an inventory status report on his computer terminal from the inventory control application, which identifies the items that need to be reordered. The agent selects the suppliers and enters this information into the computer terminal to create a digital purchase order. He then prints and sends a copy of the PO to the supplier.

When the goods are received directly into the warehouse, the warehouse manager counts and inspects them. The manager then creates a digital receiving report and updates the inventory subsidiary ledger from the warehouse terminal.

A few days later, the supplier sends an invoice to the AP clerk who reconciles it with the digital copy of the receiving report. From her computer terminal, the clerk records the purchase in the purchases journal and records the liability by adding a record to the AP subsidiary ledger and assigning a due date.

Each day, the cash disbursement clerk visually searches the AP subsidiary ledger from her terminal for invoices that are due to be paid. The clerk prepares the check and records it in the digital check register. The negotiable portion of the check is mailed to the vendor, and a check copy is filed. The clerk then closes the liability in the AP subsidiary ledger to mark the liability paid.

Required

Identify the internal control weaknesses in this system.

Describe the uncontrolled risks that result from these weaknesses.

Answer 1

Answer:

a)

The major internal control shortcoming or weakness that could be related to the present acquisition and payment system is that while there is segregation of duties inside capacity, there is no supervisory check at any level. The purchasing agent has the position to choose any merchant and issue a purchase order without requiring any endorsement from the administration or a second level power or authority. So also, the accounting clerk is setting up the check and sending it directly to the provider with no second level approval and endorsement. The internal control as for approval and authorization is totally absent in the system. Another, shortcoming that seems, by all accounts, to be relevant is that the warehouse manager is just checking the quantity of units got. He/She ought to likewise  perform a random check of quality in order to ensure that the items are received according to the purchase order. Moreover, there is no payment reconciliation that is performed by an autonomous representative to  ensure that payment for all invoices are dispensed as per payment strategies and that the providers have really received payments for their invoices.

b)

The uncontrolled risks that outcome from these shortcomings is that the purchasing agent may connive with his/her favored providers and issue buy orders in their name for some personal benefits. Substandard items might be ordered at more significant expenses so as to profit providers or suppliers. Likewise, the accounting assistant may give checks in the name of fictitious sellers and deposit them in his/her own or personal account. As, there is no supervisory check, representatives may themselves collude to make buy orders, acknowledge low quality items, record false invoices and issue disbursements to preferred providers or even in their own names.The nonappearance of approval and authorization procedure may give workers a chance to  commit frauds and cause financial loss to the organizations.

Answer 2

CONTROL   ACTIVITIES	WEAKNESSES	SUGGESTION
Transaction   Authorities	Authorization of   the transaction has been carried out by the supervisor of each department.	Authorization   should be done by the manager of each individual department.
Segregation of   Duties	There is no Cash   Disbursement Department so check is created by Account Payable Department.	There is no   separation between a payable department account and a cash disbursement department.   Checks should be created by cash disbursement department not by Account Payable   Department.
Supervision	None	None
Accounting Records	No time cards,   job tickets, employee records.	Purchase orders   are not sent to a Payable Department Account.