In: Accounting
Management has requested a review of internal control over cash disbursements for parts and supplies purchased at manufacturing plants. Cash disbursements are centrally processed at corporate headquarters based on disbursement vouchers prepared and approved at manufacturing plants. Each manufacturing plant purchases parts and supplies for its own production needs. In response to management's request, a thorough evaluation of internal control over disbursements for manufacturing plant purchases of parts and supplies is being planned. As a preliminary step in planning the engagement, each plant manager has been requested to provide a written description of his or her plant's procedures for processing disbursement vouchers for parts and supplies. Presented below are some excerpts from one of the written descriptions.
a. The purchasing department acts on purchase requisitions issued by the parts department.
b. A software application generates prenumbered purchase orders based on information submitted by buyers in purchasing.
c. Receiving has complete access to purchase order information in the IT system.
d. When goods are received, the receiving department logs the shipment in the IT system by indicating that the purchase order was received and forwards this electronically to accounts payable.
e. When the vendor invoice is received, it is entered into the IT system and matched electronically with purchase order and receiving information. Discrepancies are printed on an exception report for follow-up by accounts payable personnel.
f. The software application checks the clerical accuracy of information on vendor invoices. Discrepancies are printed on an exception report for follow-up by accounts payable personnel.
g. A prenumbered disbursement is prepared and forwarded along with supporting documentation to the plant controller who reviews and approves the voucher.
h. Supporting documents are returned to accounts payable for filing, and approved disbursement vouchers are forwarded to corporate headquarters for payment.
i. A report listing checks issued by corporate headquarters is received and promptly filed by accounts payable.
Required: For each of the disbursement system procedures listed above, state whether the procedure is consistent with good internal control and describe how each procedure strengthens or weakens internal control.
a.) The purchasing department acts on purchase requisitions issued by the parts department. - This is a good system of Internal control. There is proper segregation of duties between the requestor and the approver. Based on its requirements and demands, the parts department would place requests which will be approved by the purchasing department based on the demand. This strengthens the internal control.
b.) A software application generates prenumberd purchase orders based on information submitted by buyers in purchasing -The process of generating purchase orders submited by buyers is automated. This means, there is no scope for manipulation of the number of purchase orders and that every such transaction follows a numerological numbering system. This way there is enough audit trial and this process strengthens the internal controls.
c.) Receiving has a complete access to purchase order information in the IT system - Ther receiving department has detailed information about the goods ordered and the purchase order issued by the Purchasing department. This way, when the goods are received from the supplier, the receiving department can verify if the quantiy and description of the goods match the ones that are actually delivered. This process strengthens the internal control.
d.) When goods are received, the receiving department logs the shipment in the IT system by indicating that the purchase order was received and forwards this electronically to accounts payable - Here, even though it is not mentioned in the process, the receiving department should make sure that the goods received match the description and quantity of the purchase order. This is done post the goods are received . Once the receiving department gives a go ahead and pases the approval to the accounts payable team for processing the disbursement of cash for the goods received. This process strengthens the internal controls.
e.) When the vendor invoice is received, it is entered into the IT system and matched electronically with purchase order and receiving information. Discrepancies are printed on an exception report for follow-up by accounts payable personnel. - There is a weak link in this process. The Accounts payable team needs to verify the quality and quantity of goods that are verified by the receiving department are also reconciled with the vendor invoice and the purchase order. Even though this process strengthens internal control, a 3 way reconciliation by receiving the goods received note along with goods received details may improve the effectiveness of this system. However, the existing process does strengthen the internal controls.
f.) The software application checks the clerical accuracy of information on vendor invoices. - The clerical accuracy information relates to the quantity of the goods purchased and the amounts related to such purchases. This process strengthens the interal controls by verifying the data and if the calculations are accurate.
g.) A prenumbered disbursement is prepared and forwarded along with supporting documentation to the plant controller who reviews and approves the voucher. - With all the supporting documents in place and the goods being received, the documetns are forwarded to the plant controller for approval of the payment voucher. The plant controller reviews the documents and the process followed and approved the voucher. Even though this system is effective and strengthens the internal control , it is to be noted that it is better for the company if the company can split the authorized amounts of approval between plant manager and plant controller. For example - All purchases of upto $5,000 may be approved by the Plant controller while any payments made above $5,000 may be approved by the plant manager.
h.) Supporting documents are returned to accounts payable for filing, and approved disbursement vouchers are forwarded to corporate headquarters for payment - This process strengthens the internal control system as the approval for the payment and the actual payment team are segregated and function independently.
i. A report listing checks issued by corporate headquarters is received and promptly filed by accounts payable. - Once the headquarters issues payments to the suppliers for the purchases made by the different plants, it issues a record or list of such transactions back to the plant teams so that they can use it for their filing purposes and their future conversations with the suppliers. This process strengthens the internal control.
While the majority of the process seems to be a good way of managing the internal control in the disbursements department, the following changes can be helpful if implemented :-
1.) Before the purchase order is initiated , the requirements of the purchase by the parts department should be requested based on the requirements and demands. This requirement, after careful examination , should be approved by a department head within the parts department. This way , the company can ensure there is no artificial demand is created for the parts requested.