Question

Notting, Inc., has the following processes related to purchasing: When it is determined that an item should be ordered, the purchasing department prepares a three‐copy PO. The first copy is mailed to the vendor, the second copy is filed by PO number in the purchasing department, and the third copy is forwarded to inventory control. Inventory control updates the inventory ledger with the quantities that were ordered and files the PO copy by date.

When ordered items arrive at the receiving dock, the packing slip is inspected and a two‐copy receiving report is prepared. The first copy is forwarded to the purchasing department, where it is filed with the PO. The second copy is filed in the receiving department by date. The packing slip is forwarded to the accounts payable department.

Vendors mail invoices directly to the accounts payable department. The accounts payable department reviews the invoice and related packing slip, prepares a cash disbursement voucher, updates the accounts payable ledger, and files the invoice by date. The cash disbursement voucher is forwarded to the cash disbursements department. The packing slip is returned to the receiving department. The cash disbursements department prepares a two‐copy check, mails the first copy to the vendor, and forwards the second copy to the general ledger department. The cash disbursement voucher is forwarded to the accounts payable department where it is filed with the invoice. The general ledger department updates the general ledger accounts, using the second copy of the check, and then forwards the check copy to cash disbursements to be filed by check number.

 

Required:
1. Draw a document flowchart of the purchase processes of Notting.

2. Identify any weaknesses in internal controls within the purchase processes and indicate the improvements you would suggest.

Answer 1

1.

 

2.

Weakness: No one person or department has been assigned responsibility to monitor inventory levels and determine when to order. Improvement: Assign responsibility to a department such as inventory control.
 
Weakness: There is no purchase requisition completed and forwarded to purchasing to initiate the purchasing process. Improvement: Use a purchase requisition, approved by inventory control, to initiate purchases.
 
Weakness: No copy of the purchase order is forwarded to accounts payable for a document match. Improvement: Forward a copy of the PO to accounts payable.
 
Weakness: the inventory control department updates inventory records based on a PO, not the goods received. Improvement: the inventory control department should update inventory from the receiving report.
 
Weakness: No copy of the receiving report goes to inventory control or accounts payable. Improvement: Copies of the receiving report should be forwarded to accounts payable and inventory control so the records can be updated.
 
Weakness: The packing slip is forwarded to accounts payable instead of the receiving report. Improvement: The receiving report is forwarded to accounts payable.
 
Weakness: The accounts payable matches the invoice to the packing slip. Improvement: the accounts payable department should match the invoice to the PO and receiving report.
 
Weakness: the cash disbursements department forwards a copy of the check to the general ledger department. Improvement: The cash disbursements department should send a summary journal voucher of check amounts, not a copy of each check. These subtotals are posted to the general ledger, not each individual check amount.