Question

A small landscaping company buys rocks and lumber. One of the project managers is responsible for ordering the lumber, which he does by calling up the lumber dealer and ordering a shipment over the phone. No purchase order is used. The lumber dealer delivers lumber directly to the job site and invoices the company once a month, on one bill. Is there an Internal Control Issue in this situation? What is it? What principles, if any are violated? What are the risks? (Response should be brief, about six sentences).

Answer 1

Internal control issues

a) No single person should have control over purchases, the person making the purchase requisition should be different from the person authorizing the purchase

b) There are possibilities that the project manager can avoid liability on him by blaming the supplier that he did not order any goods, to prevent the company from such losses there must exists proper authorization like sign or seal on the purchase order of the person requesting it.(Existing of any internal document is a requisite to pin liability on a person)

c) The quantity and the price of the goods must be fixed at the time of raising purchase order and documented to prevent the company from rate fluctuations.This might not be possible for oral communication existing at the moment since they can be easily manipulated.

d) Delivery of Lumber directly to the job site must be ensured for quantity and quality before being accounted for, if not, this might lead to losses for the company.

Risks associated with not having the requisite Internal control

a) Unauthorized or unnecessary purchases being made

b) Fraudulent practices are possible when the project manager and the supplier act in collision.

c) Payments being made to supplies that had not happened.

d) Inventory shortages.