1. INTERNAL CONTROLS AND RISK Review the following description of the purchasing
ID: 2337736 • Letter: 1
Question
1. INTERNAL CONTROLS AND RISK Review the following description of the purchasing and AP procedures for a company 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 termi- nal, 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 pre- pares 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.Explanation / Answer
Part a)
The major internal control weakness that could be identified with the current procurement and payment system is that while there is segaration of duties within function, there is no supervisory check at any level. The purchasing agent has the authority to select any vendor and issue a purchase order without requiring any approval from the management or a second level authority. Similarly, the accounting clerk is preparing the check and sending it directly to the supplier without any second level authorization and approval. The internal control with respect to authorization and approval is completely missing in the system. Another, weakness that appears to be relevant is that the warehouse manager is only counting the number of units received. He/She should also perform a random check of quality in order to ensure that the products are received as per the purchase order. Additionally, there is no payment reconciliation that is performed by an independent employee to ensure that payment for all invoices are disbursed in accordance with payment policies and that the suppliers have actually received payments for their invoices.
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Part b)
The uncontrolled risks that result from these weaknesses is that the purchasing agent may collude with his/her preferred suppliers and issue purchase orders in their name for some personal benefits. Substandard products may be ordered at higher prices in order to benefit suppliers. Similarly, the accounting clerk may issue checks in the name of fictitious sellers and deposit them in his/her personal account. As, there is no supervisory check, employees may themselves collude to create purchase orders, accept poor quality products, record false invoices and issue disbursements to preferred suppliers or even in their own names.The absence of authorization and approval process may provide employees with an opportunity to commit frauds and cause financial loss to the company.
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