Question

Problem 13-15 The Ashland Company recently hired you to review its control procedures for the purchase, receipt, storage, and issuance of raw materials. You prepared the following comments, which describe Ashland’s procedures. Raw materials, which consist mainly of high-cost electronic components, are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are well trained, competent, and adequately bonded. Raw materials are removed from the storeroom only upon written or oral authorization from one of the production foremen. There are no perpetual inventory records; hence, the storeroom clerks do not keep records of goods received or issued. To compensate for the lack of perpetual records, a physical inventory count is taken monthly by the storeroom clerks, who are well supervised. Appropriate procedures are followed in making the inventory count. After the physical count, the storeroom supervisor matches quantities counted against a predetermined reorder level. If the count for a given part is below the reorder level, the supervisor enters the part number on a materials requisition list and sends this list to the accounts payable clerk. The accounts payable clerk prepares a purchase order for a predetermined reorder quantity for each part and mails the purchase order to the vendor from whom the part was last purchased. When ordered materials arrive at Ashland, they are received by the storeroom clerks. The clerks count the merchandise and see that the counts agree with the shipper’s bill of lading. All vendors’ bills of lading are initialed, dated, and filed in the storeroom to serve as receiving reports. a. List the internal control weaknesses in Ashland’s procedures. b. For each weakness that you identified, recommend an improvement(s).

Answer 1

a. List the internal control weaknesses in Ashland’s procedures.

A) The lack of perpetual records for the inventory

B) The inventory count s undertaken monthly by the storeroom clerk himself, hence there is no maker and checker concept here

C)The inventory counting should be matched with authorization of foremen and inward register

D) The authorization from the production foremen is also accepted orally

E) The requisition list is sent directly to accounts payable clerk.

F) The purchase order is placed with vendor with whom last order was placed

G) The order is received by storeroom clerk

H) The clerks count the merchandise and see that the counts agree with the shipper’s bill of lading.

b. For each weakness that you identified, recommend an improvement(s).

1. The lack of perpetual records for the inventory

The company as it has high value inventory items should ensure that it keeps perpetual inventory system, unless it is impossible to be kept

2. The inventory counts undertaken monthly by the storeroom clerk himself, hence there is no maker and checker concept here

The inventory count should not be undertaken by person authorized for its safeguarding, usually the maker should be different from checker similarly we should not authorize accounting and safeguarding work to the same person.

C) The inventory counting should be matched with authorization of foremen and inward register

The inventory counting is undertaken for checking if its below reorder level, however the inventory should be matched with inward and outward register to check if there has been any theft or any accounting mistake

3. The authorization from the production foremen is also accepted orally

The oral authorization has no validity legally, hence the oral acceptance in business should usually be avoided

4. The requisition list is sent directly to accounts payable clerk.

The requisition list should first be sent to the production manager and then to the accounts payable clerk as the production manager even looks after the demand for the product and any changes if required and accordingly raw materials quantity and quality may be different

5. The purchase order is placed with vendor with whom last order was placed

The company should ideally take quotations from different suppliers and then place order based on lowest quote and best credit terms, rather than placing order with previous supplier

6. The order is received by storeroom clerk

The order should be received by person other than the one responsible for safeguarding the order, the order should be even inspected for its quality and quantity

7. The clerks count the merchandise and see that the counts agree with the shipper’s bill of lading.

The clerk should ideally check the inventory with the purchase order and not shippers bill of lading