Question

Please use your own words. 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

Identification of internal control weaknesses in the system and and the uncontrolled risks that result from this weaknesses:

Internal control weaknesses	Uncontrolled risks
1. No authorisation is required for placing the order by purchasing agent	He may order more than the required quantity as there is no authorisation required for placing an order.
2. There is no review of work done by one person with another	As there is no review of work done by one person with another, there is a possibility of happening fraud.
3. No bidding process for choosing a supplier	The purchase agent himself chooses the supplier, there is a chance of manipulation of prices.
4. There is no check to agree quantities stated on invoice order and received	There is a possibility that the required order quantities are not received and there is no cross verification is done.
5. No monitoring of work	lack of monitoring means there is no check that every person is fulfilling his duty or not.
6. There is no verification recording of entries passed by AP clerk	AP clerk pass entries based on the report generated by warehouse manager but verification that correct entries are passed or not is not verified.
7. No segregation of duties	Cash disbursement clerk has authorisation for AP subsidiary ledger and can manipulate the entries and can create a false liability.
8. No authorisation required for payments	The clerk have access to make the payment irrespective of any authorisation required. There is no cross verification regarding the payment of liability with the AP clerk. This may lead to serious frauds.
9. No controlled environment	Due to the lack of proper internal controls, there is no control within the entity which may lead to unhealthy practices in the entity.