Question

Prepare a document flowchart to depict the following partial process from the Purchasing transaction cycle of Smith Corporation. When raw materials are needed for production, the factory manager sends a written request (requisition form) to the Purchasing Department to initiate the ordering process with the vendor. A copy of this form in kept with the factory manager and the file is organized by date of the request. For orders above $10 thousand, a written approval from the CFO is needed for the Purchasing Dept to proceed to placing the Purchasing Order "PO") with the vendor. The process in the CFO order is for staff to initially review the request and to tract the cumulative amount of PO's issues for raw materaials for the quarter. Assuming everything looks in order, the request is forwarded to the CFO for signature. If there are problems with the request, the staff will loop back to the Purchasing Department for clarification. Once the signed approval is in hand, the Purchasing Dept issues the PO and staples a copy of the PO to the approval form and also to a copy of the initial request - all of these are filed by vendor name. As a courtesy (or "heads up"), the Purchasing Dept also send a copy of the PO to the accounts payable Dept to help the financial people forecast cash flow/liquidity. Additionally, please answer the following questions:

Do you see a good control or two in place?

Do you remaining risks as to efficiency or similar attricbute relative to the current state of the process described above?

What are the actual documents generated in this process?

If you were auditing this process, where might be the best place to look first? Why?

Any improvements you might suggest to the process from an advisory perspective?

Answer 1

1. Yes there are good controls in place.

One good control is CFO Approval above order of $10,000

Other good control is the documentation which forms a trail of transaction.  

3. Actual Documents generated are as follows:

a) Requisition Form - from the Factory manager (1 copy kept with him & the other

forwarded to the Purchasing Department)

b) Request Letter from Purchase Department to CFO office for order above $10,000

c) Approval Form - from CFO to proceed for the purchase.

d) The "PO" i.e Purchase order generated by the Purchase Department to place order with the

vendor.

e) Copy for PO , Approval Letter & the initial request letter , all attached together is kept

with the Purchase department & a copy of the same is also forwarded to the accounts payable

Department.

4. While Auditing, the best place to look at is the REQUISITION OF THE FACTORY MANAGER.

Reason : It is necessary to endorse whether there is a real requirement at the factory

or the process is initiated for some unethical means.

5. Improvements : There are 2 suggestions

i) The Factory manager should place the requisition not at the time of requirement but few

days before the day when the requirement would actually come up.

ii) The requisition should come not only from the Factory manager but also from some other

person like the one who must be analysing all the Purchase , production & Sale Process

since he also has the data with him about whether the material is really required or not.

This would endorse the same.