Question

Results of Purchasing Cycle Operational Audit

Following the operational audits of the Purchasing function, 800 purchase orders were reviewed and the following weaknesses were found:

1. 51 orders were not signed by a purchasing officer.
2. 15 were not authorised by the correct purchasing officer for that product.
3. 12 purchases of goods or services were made with verbal requests from store managers and purchase orders were not raised for them.
4. 35 orders have been outstanding for more than three months.

1. 8 additional orders have been raised duplicating orders for goods included in those orders outstanding for more than three months.
   1. 5 orders were for goods for the personal use of staff but consequently and correctly charged to them.

(g) 2 order sets were missing.

In addition to the above, the organisation structure of the Purchasing function was reviewed and found to be ineffective in being able to comply with the basic tenets of internal control.

Required:

1. Describe the procedures used in the operational audit that may have discovered each of the above errors of procedure or control.
2. Write a report stating that recognises the current organisation structure of Book Worm and fully detail:

• The error found.
• The possible consequences of the error.
• A recommendation that will prevent or detect future instances of the error.
• A modified organisation chart with any additional details, job descriptions and
• duties that may be needed.

Answer 1

OPERATIONAL AUDIT is the review and appraisal of operations pertaining to the processes behind running an organisation.It involves analysing the regular operations like production,purchase and sales to check if they are in tune with companies policies,objectives and goals.

AUDIT PROCEDURES TO IDENTIFY THE ERRORS OF PROCEDURE AND CONTROL ARE:-

A)Appraisal of controls:-auditor must check operating effectiveness of interal control for the purchase order by evaluation of companies and policies for purchases,how it is being implemented and how are the defects dealt within it.The unauthorised purchases,purchases without purchase order and non signing by purchase officer clearly depicts week controls.The auditor needs to perform substantive procedures to gather evidences as controls are weak.

B)Evaluation of performance-The operational auditor cannot be expected to possess technical background in so many diverse processes going on in an organiation.In such a case he must be dependent on acceptable standards,input output ratio and other benchmarks provided by management.

C)Appraisal of plans:-ensure effectiveness,efficiency and economy with which the operations are carried on.

Upon audit of 800 purchase order while conducting audit of purchase cycle of the company weakness observed and auditors observation to elimate the same based on his professional judgement is:-

51 orders were not signed by a purchasing officer.	Authorised party(Purchasing officer) lack of control.Could be misappropiation of assets of entity by people within the organisation
15 orders were not authorised by the correct purchasing officer for that product.	Weakness in control being exploited by the people within.Indicator of misappropiation
12 purchases of goods or services order were made with verbal requests	Lack of documentation
35 orders have been outstanding for more than three months,8 duplicate	Lack of authorised person reviewing the orders.
5 goods for the personal use of staff 2 order set missing	Improper accounting.Personal expenses charged to company books. Lack of controls on physical counting at appropiate intervals and weak controls leading to theft.