10-39 (Objective 10-5) Anthony, CPA, prepared the flowchart (p. 330) which portr

ID: 2462513 • Letter: 1

Question

10-39 (Objective 10-5) Anthony, CPA, prepared the flowchart (p. 330) which portrays the raw materials purchasing function of one of Anthony’s clients, Medium-Sized Manufacturing Company, from the preparation of initial documents through the vouching of invoices for payment in accounts payable. Assume that all documents are prenumbered.

Required

Identify the deficiencies in internal control that can be determined from the flowchart. Use the methodology discussed in this chapter. Include internal control deficiencies resulting from activities performed or not performed.*

Date Prepared by Approved by MEDIUM-SIZED MANUFACTURING COMPANY FLOWCHART OF RAW MATERIALS PURCHASING FUNCTION MANUFACTURING DIVISION ACCOUNTS PAYABLE STORES PURCHASE OFFICE RECEIVING ROOM CONTROLLER'S DIVISION Purchase requisition Purchase requisition,2 Purchase requisition requisition no Purchase order requisition no Purchase order 3 vendor Purchase Purchase order 4 order 5 purchase order Purchase requisition Purchase requisition vendor Purchase order 3 Purchase order 6 Purchase order 5 Purchasee Purchase order 3 order 4 urchas order Explanatory Notes A. Prepare purchase requisition (3 copies) as needed Receiving report 1 Receiving report 1 B. Prepare purchase Purchase order (6 copies) order 6 Inv C. Attach purchase Req requisition to purchase order vendor D. Merchandise received From vendor Receiving report 1 counted, and receiving report (3 copies) prepared based on count and purchase order Voucher with documents Invoice E. Match purchase order, purchase requisition, receiving report, and invoice. F. Prepare voucher after Receiving report Receiving comparing data on purchase order, invoice, receiving report report 2 Inv G. To cash disbursements in controller's division for payment. Req. = Purchase purchase order requisition P.O. Purchase order Inv. Invoice

Explanation / Answer

Control procedures are crucial to your company’s purchasing activities. Basic activities, such as segregating duties, can reduce your company’s risk of financial fraud. Employees responsible for making purchases, for example, should not be the same employees receiving the goods or handling payments to vendors.

Another purchase control that can be simple to implement is a periodic bidding process for suppliers and also for outsourced providers. You may choose to stay with a higher cost provider for very good reasons. Those reasons may be for things such as consistent delivery, ease of working with them, or many other factors that have intangible savings or benefits to you. However, sending the work out to bid periodically will help you make sure you are either close to market or at least understand the premium you are choosing to pay for those intangible benefits.

1. No segregation of duties among office employees,

manager, bookkeeper, and clerk.

2. Over counter and mail receipts received by all employees.

3. Over counter sales made by all office employees.

4. Bookkeeper and clerk both post accounts receivable

records.

5. Bookkeeper posts general ledger and prepares

and delivers deposits to bank.

6. Manager signs payroll and operating checks.