In: Accounting
The following is the description of the purchases system of a
wholesaler:
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
The Internal Control Weakness in Purchase System is as follows:
1. Lack of Segregation of duties: There must be different persons responsible for effecting the buying functions:
In the given case, the purchasing clerk is sole responsible for:
This Internal control weakness might pose a rish such as:
2. Preparation of Manual Reports: Manual Receiving reports poses a risk of errors as compared to Disgital Reports with prespecified templates. The Receiving clerk preapres the manual receiving report and send the same to the accounts payable department which leads to delay in updating the Inventory Control Account. Digital report works in a simultaneous manner where Receiving report, Invoice Approvals and updation of Inventory can take place in a bit of time with less chances of error in reconciliation.
3. Review and Reconciliations:
1. The purchasing clerk decides for a purchase order when the quantity is too low. This provides that the entity does not have any standard level of quantity at which Inventory levels needs to be refilled.
2. The task of looking for Inventory Purchase requirement is upon a single person who may not consider a particular quantity to be low while the production department consider it to be a danger level.
3. Before placing a Purchae Order, Quotations must be issued to different suppliers from the Valid supplier sheet. In this case the Purchasing Clerk places a Disgital Purchase Order based upon his own discretion which might pose a risk.
4.