Question

The Accounts payable clerk for manufacturing company receives a purchase order copy for raw materials from the purchasing agent. The clerk files the PO in a temporary file and awaits the vendor’s invoice before setting up a liability. A week later the clerk receives the vendors invoice, reconciles it with the PO, posts the liability to the AP Subsidiary ledger, and establishes a due date for payment. On the due date the clerk prepares a check for the invoiced amount and mails the check to the vendor.

The AP clerk then updates the check register, accounts payable subsidiary ledger, and the AP control account from his terminal. Finally, the clerk files the invoice, purchase order copy and check copy in the AP department. Required:

1. Discuss the risks associated with this system.
2. Describe the internal controls needed to mitigate the risks.

Answer 1

a) In this case, the risk associated is Limited Segregation of Duties in which on or few employees are authorized to perform many activities.

The accounts payable clerk is solely responsible to perform many activities like-receiving a purchase order copy, receiving the vendor's invoice, reconciliation it with the PO, posts the liability to the AP Subsidiary ledger, establishment of due date for payment, preparing a cheque for the invoiced amount, sending the cheque to the vendor, updating the cheque register, accounts payable subsidiary ledger, and the AP control account from his terminal as well as he files the invoice, purchase order copy and check copy in the AP department.

b) This risk can be minimized by-

1. No single person like a clerk should be responsible for the authorization of transactions, recording of transactions, and custody of the Cheque with reconciliation.

2. Cross checking, oversight and supervision, must be maintained in the organisation so that frauds or risk can be controlled

3. Top management must monitor payment procedures from time to time to make control over it. If controls are not operating effectively, management should modify these controls.

Thanks & all the best........