Question

Internal Audit

The PIXEL Company performs its expenditure cycle activities using its integrated ERP system as follows:

 Employees in any department can enter purchase requests for items they note as being either out of stock or in small quantity.

 The company maintains a perpetual inventory system.

 Each day, employees in the purchasing department process all purchase requests from the prior day. To the extent possible, requests for items available from the same supplier are combined into one larger purchase order in order to obtain volume discounts. Purchasing agents use the Internet to compare prices in order to select suppliers. If an Internet search discovers a potential new supplier, the purchasing agent enters the relevant information in the system, thereby adding the supplier to the approved supplier list. Purchase orders above $10,000 must be approved by the purchasing department manager. EDI is used to transmit purchase orders to most suppliers, but paper purchase orders are printed and mailed to suppliers who are not EDI capable.

 Receiving department employees have read-only access to outstanding purchase orders. Usually, they check the system to verify existence of a purchase order prior to accepting delivery, but sometimes during rush periods they unload trucks and place the items in a corner of the warehouse where they sit until there is time to use the system to retrieve the relevant purchase order. In such cases, if no purchase order is found, the receiving employee contacts the supplier to arrange for the goods to be returned.

 Receiving department employees compare the quantity delivered to the quantity indicated on the purchase order. Whenever a discrepancy is greater than 5%, the receiving employee sends an email to the purchasing department manager. The receiving employee uses an online terminal to enter the quantity received before moving the material to the inventory stores department.

 Inventory is stored in a locked room. During normal business hours an inventory employee allows any employee wearing an identification badge to enter the storeroom and remove needed items. The inventory storeroom employee counts the quantity removed and enters that information in an online terminal located in the storeroom.

 Occasionally, special items are ordered that are not regularly kept as part of inventory, from a specialty supplier who will not be used for any regular purchases. In these cases, an accounts payable clerk creates a one-time supplier record.  All supplier invoices (both regular and one-time) are routed to accounts payable for review and approval. The system is configured to perform an automatic 3- way match of the supplier invoice with the corresponding purchase order and receiving report.  Each Friday, approved supplier invoices that are due within the next week are routed to the treasurer’s department for payment. The cashier and treasurer are the only employees authorized to disburse funds, either by EFT or by printing a check. Checks are printed on dedicated printer located in the treasurer’s department, using special stock paper that is stored in a locked cabinet accessible only to the treasurer and cashier. The paper checks are sent to accounts payable to be mailed to suppliers.

 Monthly, the treasurer reconciles the bank statements and investigates any discrepancies with recorded cash balances.

Required: a. Identify at least five activities (or sub-processes) within the expenditure process described above. (3 points)

b. Identify five risks associated with the five activities identified on a. (5 points)

c. Propose a control for each risk identified on b. (5 points)

Note:

Present your answer in a risk/ control matrix reduced to only three-column table with these headings: Activity (or Sub-processes), Risks, and Controls.

Answer 1

Internal Controls are techniques and procedures established with a view to ensuring safegaurding of business' assets, preventing fraud,increase efficiency and establish accuracy of finacial records which in turn reflects the performance of the business. Apart from this local laws and regulations may mandate establising and compliance of adequate internal controls.

In the given situation, PIXEL Company has some set rules and procedures surrounding the process of Purchase of items until the vendor has been paid for this. This function is described in the above expenditure cycle activities.

Activity	Risk	Control Proposed
Purchase requisition	1) No system of approval of purchase requisitions 2) Employee from any dept can raise purchase requisition	1) User dept head to approve purchase requisitions 2) Only user dept to request to ensure items are purchased only on need basis
Processing of purchase orders	1) Addition of supplier to approved supplier list without appproval of purchase manager 2) Selection of supplier apart from approved vendor list on the sole basis of price might affect quality	1) Approved vendor list to be amended only with approval and concurrence of purchase manager 2) Selection of supplier apart from approved vendor list must be with the concurrence of purchase manager
Receiving of purchased goods	Receiving dept has access to qty details of PO	Receiving report to be created at time of receiving on actual quanitity receipt basis. PO view access provided to Receiving dept. not to have quantity details. Receiving dept to match invoice with actual quantity received & inform Purchase dept & Accounts payable in case of any discrepanices
Issue of Inventory	Request for inventory issue / approval missing.	Inventory to be issued to employees only on the basis of request as approved by the user dept head
Special Purchase	Approval of purchase manager missing. No segregation of duties ensured if the accounts payable clerk itself creates a one-time supplier record and is prone to abuse.	One-time suppliers must be created by purchase agents only after approval of both the user dept head and the purchase manager.