Question

a soap manufacturing company has three employees who work in a warehouse All of the warehouse workers are authorized to order inventory when it falls below order level.The workers complete a purchase order and mail it to supplier of their choice .The inventory is delivered directly to the warehouse .The workers send a memo to accounts payable reporting receipt of inventory accounts payable compares warehouse memo to suppliers invoice .Accounts payable prepares a memo which treasurer signs .discuss internal control inherent in this system

Answer 1

To ensure internal control is in order, an auditor must go through the hierarchy of the transaction taking place. To ensure internal control is effective auditor must check following things of the transaction.

1) To ensure whether their is actual need of order to be held.

2) To ensure purchase manager have given certain restrictive limit to purchase order, he should have authority to order not beyond the limits management has allowed.

3) To verify the warehouse stock register whether stock has actually ordered, their must order number slip attached to it.

4) Warehouse keeper must attach necessary specification of order purchased in his warehouse keeping slip, that slip should be passed along with all other documents to the accounts payable.

5) Accounts payable department must verify all the documents such as warehouse keeping slip, purchase order slip, attach to slip warehouse keeper has send, pay thereafter. Accounts payable must not given all the authorities to pay , looking to the payment cycle he must pay.

6) Management should have eye on payment made by the accounts payable department.  

In the given case, internal control is not in order, loophole is in order made by the warehouse workers, only one warehouse worker have authority to make an order. only 1 worker should have authority to place the order requirement to purchase manager , further purchase manager will order the goods by comparing the price in the market.

Thereafter, payment must be done after consent of the management , accounts payable should be allowed to pay all the order placed. there must be restriction to pay the order placed.

Thus, necessary changes must be adopted by the manufcaturing company.