Question

At the beginning of each day, the purchasing clerk checks the inventory subsidiary ledger on personal computer terminal. When the quantity of an item is considered as too low, the clerk selects a supplier from the valid suppler file and prepare a digital purchase order. Two hard copies of the order are printed: One copy is sent to the supplier and the other is filed in the purchasing department. The digital purchase order record is added to the purchase order file.

The receiving clerk inspects the goods arrived at the receiving department and reconciles the items against the information in the digital purchase order and the packing slip. The clerk then prepares two hard copies of the receiving report manually. One copy of the report is sent to the accounts payable department. The other copy of receiving report accompanies the goods to the warehouse where the warehouse clerk shelves the goods, updates the inventory subsidiary ledger from the warehouse terminal and files the report in the department.

The accounts payable clerk files the receiving report upon receipt. When the supplier’s invoice arrives, the clerk pulls the report from the file, print a hard copy of digital purchase order, and reconciles the three documents. After the check, the accounts payable clerk updates the accounts payable subsidiary ledger, the accounts payable control account and the inventory control account. The clerk then sends the invoice, receiving report and a copy of the purchase order to the cash disbursement department.

Discuss the internal control weaknesses in this purchases system and the associated risks.

Answer 1

Weekness 1: Purchase requisition note to be received from Production department:

For every purchase to be made by the purchase department, there has to be a proper Purchase requisition note that has to be received from production department mentioning the quantity of materials that are required. Here, purchase department automatically procures the goods as soon as they are low. There may be an innstancce that such stock may not be required at all. But the purchase department placed the order by simply seeing that the stock in hand for that goods is very low.

Weekness 2: Purchasing clerk automatically placing order

The purchasing clerk from purchase department places order with the suppliers as soon as the stock of any goods is low. The risk associated with is as follows:

There has to be an authority above the purchasing clerk to authorise the Purchase orders placed by him. Since there is no approval for the order placed by him, there might be a risk that he might have placed the order more than what is required.

Weekness 3: Receiving report being prepared manually:

Here, the receiving clerk prepares the material receipt note manually that has to be automated. There may be a risk of manipulation of stocks if the same has been done manually. The process has to be systemised by entering the quantity received in the ERP and the same has to be reconciled in the system itself.

Weekness 4: Reconciliation by accounts department:

The accounts clerk reconcile the PO, Receipt note and invoice manually. That system has to be changed. The accounts clerk have to feed the information contained in the invoice to the system. As alredy the information regarding PO and Receipt of material (to be systemised based on weekness3) is there in system, all the three has to be reconciled by the system itself. and the entry to the all the control accounts has to be made by the system itself once the invoice details are feeded.

Weekness 5: Missisng authorisation for Payment:

The clerk directly sends the invoice once he verified the same. This has to be changed. Manager or some person top of him has to verify his work and has to be authorise the payment against invoice. There should be atleast 3 levels of authority (entering and checking and authorising)  for authorising payments in order to avoid manipulations.