Question

Cook’s Furniture Purchase and Cash Disbursement Cycle

Cook’s Furniture sources raw materials domestically as much as possible, but it also has multiple suppliers in different locations globally. Customised products range is made to order and the lead time for manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on anticipated level of sales. As part of interim audit, Jane Owen the audit senior on this engagement has completed a 'walk-through' of the procedures for the inventory purchases and cash disbursement cycle. The following is a summary of the procedures she documented on the audit file:

1) Rowan Jones, the factory manager is responsible for initiating orders for raw materials by using the production and warehouse management functions within the EMS. EMS system holds information of inventory item name, item code, quantities and costs. When an order for the customised products range is placed, Rowan assesses and calculates what the raw materials needed to manufacture the order. He checks EMS for the availability of raw material because some materials they may already have. If the raw materials are insufficient, Rowan generates a purchase order using the EMS. The EMS automatically assigns a reference number to the purchase order. For the ready-made range of products, Rowan usually re-orders when there is one month of products left in the warehouse. Given that Carl wants to maintain sufficient level of inventory to minimise backorders, Rowan normally generates a purchase order for three months' production needs.

2) The purchase orders completed by Rowan are sent to Thomas Chapman (the account payable clerk) via emails generated by the EMS at end of each working day. Thomas contacts any of the approved suppliers by phone or email regarding the availabilities of the materials they wanted. After he confirms with a supplier, he forwards the purchase order to the supplier and updates EMS to show the order is sent. No record is kept of the phone conversation with a supplier, nor does the purchase order needs to be approved before sending to a supplier.

3) If a purchase order cannot be fulfilled by any of the approved suppliers, Thomas may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier’s information to Claire, the CFO for approval. Once approved, Claire adds the new supplier into the approved supplier list.

4) When goods are received in the warehouse, Tony Young, the warehouse assistant, checks the supplier’s delivery note against the physical stock coming in. Once it is confirmed that the materials agree to the delivery note, Tony initials and dates the delivery note and then passes it to Craig Tukiri the warehouse manager. Craig will then login to the inventory function within the EMS system to update the received materials. Once the inventory records are updated, the system updates Rowan that the orders have been received. Craig makes a copy of the supplier’s delivery note, files the original copy of the delivery note and forwards a copy of the delivery note to the accounting department. 8

5) When inventory is updated in the prior step, EMS accounting function automatically generates a journal entry to update the accounting records. (Note: the journal suggested by the system is Dr Raw materials inventory; Cr Creditor). The system rejects the journal if the inventory item code or the name of supplier is not recognised. When the journal is accepted, the computer will generate a journal number. Thomasthen writes the journal number onto the delivery note forwarded by the warehouse. Thomas files the delivery note by supplier names.

6) Thomas the payable clerk receives all supplier invoices. On receipt of an invoice, he checks the details against the delivery note received from the warehouse. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forward the payment requisition together with the invoice and a copy of the corresponding delivery note to Claire for authorisation. Claire forwards to Carl the CEO for further authorisation any payments of over $30 000 for a single transaction.

7) Claire and/or Carl signs the payment requisition to confirm authorisation and forwards the documentation to Kumar Singh, the banking clerk, who keys each payment into the accounting system (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the payment requisition. Kumar then files the payment requisition together with supporting documentations by the payment requisition number.

8) The banking clerk then loads the payments on the online banking facility with reference to the payment requisition number. Both Claire and Carl must approve and release the payments. The banking system automatically sends electronic transfer records to Claire who subsequently forwards them to Thomas. Thomas then checksit against supplier invoices and then sends a remittance advice to individual suppliers.

Identify six control strengths in the purchase and cash disbursement cycle and explain why each control is a strength (i.e. which accounts and assertions does it strengthen). For each control strength, identify audit procedures to test the effectiveness of control.

You are required to present your answers according to this format:

Identify a control strength	Why it is a strength	Audit Procedures to test the control

Answer 1

Sr. No.	Identify a control strength (brief about the strength)	Why it is a Strength	Audit procedures to test the control
1.	Segregation of duties (Transaction processing are allotted to different persons in such manner that no one person is made complimentary to the work of another person)	Since one person will be not be handling all the process from start to end which will lead to better control over all the processes.	- To check whether all the transactions are authorized by respective personnel - To check whether periodic rotation of duties of personnel is made
2.	Authorization of transaction (This will enable delegation of authority to different levels and to particular persons are required to establish by the management for controlling the execution of transaction in accordance with prescribed conditions)	It will provide assurance that authorizations are issued by persons acting within scope of their authority	- To check the responsible persons have authorized the respective transaction within their limits - To check whether specific or general authorization have been provided to persons depending on their roles.
3.	Adequacy of records and documents (It will assure that transactions have been recorded promptly, accurately and are appropriate & complete)	It will facilitate preparation of financial statements as per statutory requirements	- To check whether transactions are classified in appropriate accounts & in correct period - To check whether assets & records are protected from unauthorized access or use.
4.	Accountability and safeguarding of assets (Accountability commences from acquisition of asset, its use and final disposal whereas Safeguarding of assets involves maintaining records & their periodic reconciliation)	This will ensure that no employee can misuse or make gain out of enterprise’s assets	- To check whether only authorized personnel should be given access to critical assets - To check whether critical assets have more frequency of reconciliation based on their critical nature.
5.	Independent checks (It involves independent verification of internal control systems, designed and implemented by the management)	Which ensure that internal control system are robust and are being updated regularly to adapt to changing environment.	- To check whether periodically or regularly review is taken by independent persons - To check the competency of such third party
6.	Standardization (Entire process should be standardized by allocating tasks to capable persons based on their attributes)	It will lead smooth functioning of the various processes in the organization.	- To check whether suitable policies commensurate with nature of organization are in place - To check whether from top to bottom it is being followed regularly.