Question

In: Accounting

The following is the description of the purchases system of a wholesaler: At the beginning of...

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

Solutions

Expert Solution

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:

  • To approve purchases
  • To receive ordered materials
  • Payment approval aganst invoices
  • Reconciliation of Financial Records
  • Physical count of Inventory

In the given case, the purchasing clerk is sole responsible for:

  • Checking Inventory levels
  • Selection of Supplier
  • Placing a Purchase Order
  • Finalization of Purchase

This Internal control weakness might pose a rish such as:

  • No standard purchase order level are there, this might lead to unauthorized or unnecessary purchases
  • Unnecesaary purchases might add up to the charges in Budgets
  • The Purchase orders must be approved by the Purchase Manager to ensure that orders are not placed at excessive high prices or are within the Budgets

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:

  • It is a best practice to review invoices of supplier and purchase orders and to ensure that goods have actually been received There is no person who reviews or make a physical check of inventory receipts other than the receiving clerk. The receiving clerk himself is responsible for the quantity and quality of goods received. This poses a risk with respect to
  • Payments being made for goods or items not received / Improper goods received.
  • Theft of goods
  • Goods being utlised for personal purpose.

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.


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