Question

In this problem, identify strengths and weaknesses in an organization's internal control structure. Complete Chapter 7, problem 7.8 (See below)

For the situations presented, describe the recommendations the internal auditors should make to prevent similar problems in the future. (CMA, adapted)

Problem 7.8 - Tralor Corporation manufactures and sells several different lines of small electric components. Its internal audit department completed an audit of its expenditure processes. Part of the audit involved a review of the internal accounting controls for payables, including the controls over the authorization of transactions, accounting for transactions, and the protection of assets. The auditors noted the following items:

Routine purchases are initiated by inventory control notifying the purchasing department of the need to buy goods. The purchasing department fills out a prenumbered purchase order and gets it approved by the purchasing manager. The original of the five-part purchase order goes to the vendor. The other four copies are for purchasing, the user department, receiving for use as a receiving report, and accounts payable.

For efficiency and effectiveness, purchases of specialized goods and services are negotiated directly between the user department and the vendor. Company procedures require that the user department and the purchasing department approve invoices for any specialized goods and services before making payment.

Accounts payable maintains a list of employees who have purchase order approval authority. The list was updated two years ago and is seldom used by accounts payable clerks.

Prenumbered vendor invoices are recorded in an invoice register that indicates the receipt date, whether it is a special order, when a special order is sent to the requesting department for approval, and when it is returned. A review of the register indicated that there were seven open invoices for special purchases, which had been forwarded to operating departments for approval over 30 days previously and had not yet been returned.

Prior to making entries in accounting records, the accounts payable clerk checks the mathematical accuracy of the transaction, makes sure that all transactions are properly documented (the purchase order matches the signed receiving report and the vendor’s invoice), and obtains departmental approval for special purchase invoices.

All approved invoices are filed alphabetically. Invoices are paid on the 5th and 20th of each month, and all cash discounts are taken regardless of the terms.

The treasurer signs the checks and cancels the supporting documents. An original document is required for a payment to be processed.

Prenumbered blank checks are kept in a locked safe accessible only to the cash disbursements department. Other documents and records maintained by the accounts payable section are readily accessible to all persons assigned to the section and to others in the accounting function.

Answer 1

Solution

First step is to check whether these items are control strength or weakness:-

1^st Point has strength as user authorization confirms that right quantity will be ordered. It also has a weakness as purchase order should not be used by receiving department. It can be mitigated by receiving department perform counts independent of ordered quantities received with them.

2^nd point has weakness as not all user department are specialized in purchasing specialized goods or negotiating services as such, only purchase department be authorized to do such transactions.

3^rd point has weakness as any list that is not frequently updated is useless. It must be updated frequently or at regular time intervals

4^th point has strength as prenumbered invoices means good internal control and it is a better record keeping technique. It also has a weakness as open invoices are not followed to completion. To mitigate this, individual departments be penalized for not following up on invoices timely

5^th point has strength as the audit check help enables entry of correct and authorized transactions

6^th point has weakness as paying twice a month means item of urgent nature cannot be taken sooner. To mitigate it, urgent items to be paid separately

7^th point has strength as it establishes the segregation of duties amongst employees

8^th point has strength as documents are well stored and access is limited to some employees only. It also has a weakness as more persons having access can manipulate the data and the entry should be restricted to authorized / assigned officials