Question

Krandolph Metals, Inc., is a manufacturer of aluminum cans for the beverage industry. Krandolph purchases aluminum and other raw materials from several vendors. The purchasing process at Krandolph occurs as follows: When inventory of any raw material seems low, a purchasing agent examines the records to determine the vendor who supplied the last purchase of that raw material. The purchasing agent prepares a three‐copy PO and mails the top copy to the vendor. One copy is filed in the purchasing department, and one copy is forwarded to the inventory control department (inventory record keeping). Inventory control personnel update the inventory subsidiary ledger and file the PO by number in the inventory control files. When the goods arrive at the receiving dock, a receiving report is prepared from information on the packing slip. One copy of the receiving report is filed in the receiving department, and one copy is forwarded to purchasing so that the purchasing department is informed of the receipt of goods. The vendor mails an invoice for the raw materials directly to the accounts payable department. When the invoice is received, accounts payable personnel prepare a cash disbursement voucher to approve payment. The voucher is forwarded to the cash disbursements department. The accounts payable department also updates the accounts payable subsidiary ledger and files the invoice by invoice number. Upon receiving the cash disbursement voucher, an employee in the cash disbursements department prepares a two‐copy check. The top copy of the check is mailed to the vendor, and the second copy is forwarded to the general ledger department. The cash disbursement voucher is stamped “paid” and returned to the accounts payable department. The voucher is filed with the invoice in the accounts payable department. The general ledger department records the check in the general ledger and returns the check copy to the cash disbursements department, where it is filed.

Problem: Describe any weaknesses in these processes or

internal controls. As you identify weaknesses, also

describe your suggested improvements.

Answer 1

The internal control weakness in these processes is the absence of a control environment. The control environment refers to the policies and practices as put in place by the top management of a company. The control environment consists of organizational structure, management’s philosophy, HR policies etc.

In this case there is no supervisor and the inventory control personnel updates the inventory subsidiary ledger and files the PO by number in the inventory control files. There should be someone above the inventory control personnel who is either responsible or has the authority to review the work of that personnel. This will help in removing the problem of assignment of authority and responsibility.

Secondly the accounts payable department directly receives the invoice and on receiving the invoice the department a cash disbursement vouchers is prepared and a check is made by the cash disbursement voucher. The check is made without tallying the invoice with the purchasing agent or the purchasing department from where the order was placed. The invoice should be tallied with regards to quantity, rate and final net price before releasing the payment.