Question

super-savers ltd is a major manufacturer of industrial machinery. when the stores department requires items to be purchased, they issue a three-part pre-numbered purchase requisition that needs to be approved by the stores’ manager. copy 1 is sent to the purchasing department, copy 2 is sent to the accounts payable department and copy 3 is filed in the stores department. on receipt of an approved purchase requisition, the purchasing department issues a five-part pre-numbered purchase order. copy 1 is sent to the supplier, copies 2 and 3 are forwarded to the receiving department, copy 4 is forwarded to the accounts payable department and copy 5 is filed in the purchasing department.

when goods are received, the receiving department just stamps ‘order received’ on its two copies of the purchase order, which then forms its receiving record. one copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department. the accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment. the accounts payable department prepares a pre-numbered payment voucher and forwards it, along with the supplier’s invoice, purchase requisition, purchase order and receiving record, to the financial accountant, who signs the payment voucher, completes the payment by bank transfer to the supplier and returns the supporting documents to the accounts payable department. at the end of the month, the assistant accountant undertakes a sequence check of all pre-numbered documents. the financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items.
required:
(a) identify the weaknesses in super-savers’ internal control concerning the purchases and payments functions.
(b) explain why each is a weakness and provide a recommendation as to how to overcome the weakness

Answer 1

Facts of the Case: Dealing in the manufacturer of Industrial machinery. Bullet points for Purchase

- Requisition is made by  Store department, ( 3 Copies)

- one copy sent to Purchase, second Copy to A/c Payable, Third copy kept for documentation purpose.

Second Phase: Purchase department prepare PO and Sent ( 5 copies)

- one copy to Supplier , Second and third copy to goods receiving department, fourth copy to A/c Payable Dept, Fifth copy for documentation. ( Weakness upto Tolerable level: Observing point here modification in PO is possible but very low because, PO is based on PR which is issued by store department, even if no PO copy is issued to store department for reference purpose, the risk will be very low, Here at this level Risk is under acceptable level)

Third Phase: One receipt of goods Receiving department simply put" ORDER RECEIVED" on the Second and Third copy received from purchase department, ( Weakness 1: Observing point here no quantity or quality being notified, here process controller playing role just to stamp the Second and third copy blindly. Chances of Loss is higher as no quantity is verified at this point. Solution 1: It is advisable at this point that copy one need to be sent to store department that order is as per requisition raised by then " First authentication" and keep control over PO issued by Purchase department, "Second Authentication" over the qunatity and quanlity of the goods supplied by the suppliers. ) and forward the third copy to A/c Paybale Department.

Fourth Phase: A/c Payable Department matches the PR second copy received from Store, PO Copy received from Purchase department and PO with " ORDER RECIVED" stamped copy from receiving department, after finalising payment voucher prepared and autheticated by the Assistant accountant on verification, documents are returned back to A/c payable department  ( Weakness 2: Observation point here, return back of verified department increases the chance of dupilcation payment of vouchers agianst single invoice, as documents are not kept in record with a/cs department as per the process followed in the organisaton. Solution 2 It is advisable to kept the document forwarded by A/c payable department to be kept for future reference purpose to avoid the duplication of payment against same suppliers invoice and store manager authentication or cross verification is required if any shortage is noticied debit note can be addressed and accordingly payment voucher can be amended. )

Fifth Phase: Payment Phase on satisfaction on the matching details of voucher with PR, PO, Suppliers invoice and order receive copy, Payment initiated and credited to supplier account. ( Weakness 3, It is observed that  No L2 officer payment authentication is in process, SOlution 2, It is advisable to keep limitation of authorisation for payment for level upto Assitant accountant for level above that his reporting or immediate manager will approve the payment against the payment voucher requested.)

Finally monthly reconciliationis made by the Financial accountant match the Bank Reconciliation and invetigate further if required.

Although In Bold Italic both part are emphasised for understanding,  please find the answers below:

a & b:

Weakness 1:  no quantity or quality being notified, here process controller playing role just to stamp the Second and third copy blindly. Chances of Loss is higher as no quantity is verified at this point.

Solution 1: It is advisable at this point that copy one need to be sent to store department that order is as per requisition raised by then " First authentication" and keep control over PO issued by Purchase department, "Second Authentication" over the qunatity and quanlity of the goods supplied by the suppliers.

Weakness 2: Observation point here, return back of verified department increases the chance of dupilcation payment of vouchers agianst single invoice, as documents are not kept in record with a/cs department as per the process followed in the organisaton.

Solution 2: It is advisable to kept the document forwarded by A/c payable department to be kept for future reference purpose to avoid the duplication of payment against same suppliers invoice and store manager authentication or cross verification is required if any shortage is noticied debit note can be addressed and accordingly payment voucher can be amended.

Weakness 3, It is observed that  No L2 officer payment authentication is in process,

SOlution 2,  It is advisable to keep limitation of authorisation for payment for level upto Assitant accountant for level above that his reporting or immediate manager will approve the payment against the payment voucher requested.