Question

Melcher Enterprises is a wholesaler that purchases consumer merchandise from many different suppliers. Melcher then sells this merchandise to many different retail chain stores. The following paragraphs describe the expenditures processes at Melcher:

Warehouse employees constantly monitor the level of each merchandise item by assessing how many remaining boxes of items are on warehouse shelves. When a warehouse worker sees the need to order a particular product, he fills out a postcard‐size order requisition form with the product name and item number. The number is Melcher’s item number.

When the purchasing department receives a requisition from the warehouse employee, a buyer looks up the last purchase of that item and completes a PO to buy the item from that vendor. The manager of the purchasing department approves the PO before it is mailed to the vendor. One copy of the PO is mailed to the vendor, one copy is filed in the purchasing department, one copy is forwarded to the receiving department, and one copy is forwarded to the accounts payable department.

When the receiving department receives an order, it compares the packing slip with the PO. If no PO exists, the item is returned to the vendor. A receiving report is prepared for the number of items indicated on the packing slip. One copy of the receiving report is filed in the receiving department, one copy is forwarded to the purchasing department, and one copy is forwarded to the accounts payable department. Items received are then transported to the warehouse. When the accounts payable
 department receives an invoice from the vendor, an employee in the accounts payable department compares the PO, receiving report, and invoice. If the three documents match correctly, a cash disbursement voucher is prepared. If it does not match, the employee contacts the vendor to try to reconcile the differences. The cash disbursement voucher is reviewed by the manager of the accounts payable department. If it appears correct to her, she writes a check and forwards the check to the treasurer to be signed and mailed to the vendor.

Required:

1. List any strengths and weaknesses in the internal control procedures of Melcher Enterprises.

2. Draw a document flowchart of the expenditure processes.

3. Describe any benefits that Melcher may receive by installing a newer, IT system to process purchases, goods received, accounts payable, and checks. Be specific as to how IT systems could benefit each of the processes described.

Answer 1

1.

STRENGTHS:
A manager in purchasing approves the PO before it is mailed.
The PO is prepared in 4 parts and these copies are forwarded to appropriate departments for future use.
If no PO exists for a shipment, it is returned.
The receiving report is prepared with three copies and those copies are forwarded to appropriate departments (one improvement would be a copy to a separate inventory control department; see first weakness below.
Accounts payable does a three-way match of PO, receiving report, and invoice before approval of payment.
The matched documents are reviewed by a manager,
The check signer (treasurer) is segregated from the preparation of the check.
 
 WEAKNESSES:
 There is no separate inventory control department to maintain inventory records.
 The requisition should come from inventory control, not the warehouse.
 The packing slip is compared to the purchase order instead of counting and inspecting the order.
 The quantities on the receiving report are from the packing slip instead of a separate count by receiving employees.
 If a separate inventory control department existed, a copy of the receiving report should be forwarded there.
 In general, there is nothing in the description about record keeping – such as who updates inventory, accounts payable, and general ledger records.

2.

Refer to the separate Microsoft Excel file “Chapter 9 Solutions Process Maps.xlsx”. This would be an excellent time to reinforce to students that the process map shows processes, but not document flow. Since the document flowchart does show document flows, it is easier to see where some potential control weaknesses exist when viewing the document flowchart.

3.

There are many types of IT systems for purchases, so the exact benefits would be somewhat dependent on the system chosen. However, any IT system would reduce the number of manual tasks which would improve efficiency, reduce costs, and decrease errors. Examples would be:
 
An IT system could monitor inventory levels and automatically generate a purchase order when quantities if individual items reach a reorder point.
An IT system could store documents such as POs or receiving reports online so that there need not be actual paper handling in forwarding documents between departments.
An IT system could match the PO, receiving, report, and invoice and leave accounts payable personnel free to work on reconciliations of those that do not match correctly.
An IT system could prepare and print checks.
An IT system could update related records in realtime as goods are ordered, received, or paid.

An IT system would provide better and more timely feedback to management about inventory levels, items on order, future expected cash flow, and details about expenditures.