Question

Sweets R Us Pty Ltd. is a large confectionary company that manufactures a range of standard sweet products and some specialty products for the Australian market. Most of the company’s production is in standard chocolate goods and they offer personalised packaging for promotional or fundraising purposes. They also provide uniquely moulded and decorated chocolate items for special events such as grand finals. You have been allocated the role of assessing the controls in the Purchases, Accounts Payable and Payments system, and have obtained the following details:

Raw material ordering process

1. To maintain and control product quality a limited number of trusted suppliers are used.
2. The production manager oversees raw material inventory. Orders are placed based on current production orders and quantities of raw material currently on hand with next day delivery where possible.
3. No formal purchase order system is used.

Raw material warehousing procedures

1. The warehouse personnel are trusted, long-term employees.
2. One of the warehousing staff ensures that all goods received, primarily raw materials, are in good order and signs the couriers’ delivery dockets in acknowledgment of materials received.
3. Movement of in and out of the warehouse is not recorded, but the production manager monitors stock levels and movements daily.

Accounts payable system

1. Supplier invoices are received in the accounts department via email and printed. The details are entered into the accounts payable system by the accounts payable clerk, who then stamps the invoice as processed. The computer system automatically calculates the payment due date based on the supplier's credit terms that have been entered into the system.
2. As there are only a few suppliers each week, the accounts payable clerk validates the outstanding invoices via a phone call with the production manager. The production manager has an excellent memory for what he has ordered, and the deliveries received.
3. The computer system automatically generates a weekly list of invoices due for payment. The accounts payable clerk flags the invoices for cheques to be processed as direct deposits are not used. The system does allow the user to exclude an invoice from the payment run. The accounts payable ledger and general ledger are automatically updated once the payment runs are complete.
4. The cheques are forwarded to the financial controller for signature. Supporting documentation is only attached to the cheques for non-major suppliers. The financial controller calls the production manager to verify the review process (step 2) has taken place, and other payments are verified to the attached invoice. If the financial controller is not available the accounts payable clerk usually has the cheques signed by the marketing manager. The payables clerk avoids asking the CEO to sign cheques as he asks too many questions. Any supporting documentation to the cheque is signed to avoid duplicate payment.
5. Monthly statements are received from the suppliers. However, the accounts payable clerk does not believe statement reconciliations are necessary.

1. Identifies and explains ten (10) control weaknesses associated with the purchases, accounts payable and payments system outlined above.
2. Identifies and explains the account balance assertions for raw material inventory and accounts payable that are most impacted by control weaknesses.
3. Recommends and justifies a control improvement for each of the weaknesses identified in requirement one.

Answer 1

The verification of obligation to pay can be accomplished through one of several possible controls

Raw material ordering process

1.Its is good to have limited number of trusted suppliers because the quality will remain the same

2 The production manager oversees raw material inventory. Orders are placed based on current production orders and quantities of raw material currently on hand with next day delivery where possible, this will help in controlling wastage and spoilage of stock and at the mean time production manager should ensure that there will be no shortage of stock.

3.there should be a formal system of purchase because it will be clear and accurate and maintaining data will be easier and fraud will be controlled soon.

Raw material warehousing procedures

1.The person in a position to authorize payment signifies his or her approval of a supplier invoice. However, this is actually a relatively weak control if the approver only sees the supplier invoice, since there is no way to tell if the goods or services were received, or if the prices being charged were what the company originally agreed to. The approver may also want to know which general ledger account will be charged.

Even though the warehouse personnel are trusted, long-term employees there should be regular monitor for their activity. Firm cannot trust them blindly

2.following steps has to be followed

• Safety
• Materials
• Motions
• Workstation design
• Process for reporting issues
• Documentation
• Follow-up

3.Movement of stock in and out has to be recorded even though production manager monitors stock levels and movements daily because there may be chances of fraud as the recorded document will help for detecting fraud

Accounts payable system

1.Buy an off-the-shelf accounting software package that contains an accounts payable module. Look for such standard features as the ability to set up standard payment information for each supplier, spot duplicate invoices, take advantage of early payment discounts, and make electronic payments.

2 Designate a person to be the primary check signer, as well as another person to be the backup check signer. Inform these people of their duties in examining the backup documentation attached to each check. and the method used my the company is not correct as there is chances of fraud.

3.Do a test run to print from the software a listing of all invoices that are due for payment, and verify that the report is including all invoices that should be paid within the selected date range

4. supporting documents has to be attached in every documents which will help in processing payment and misappropriation in the document payment has to be withheld.

5. Monthly statements has to be reconciled otherwise true picture of the supplier will not be available and books of account will not show up correct position of the company.