Question

Management of Tarnawski Ltd. has requested a review of internal controls over cash payments for parts and supplies purchased at manufacturing plants. Cash payments are centrally processed at head office based on vouchers prepared and approved at manufacturing plants. Each manufacturing plant purchases parts and supplies for its own production needs. As a preliminary step in planning the engagement, the plant managers have been asked to provide a written description of their respective plant’s procedures for processing payment vouchers for parts and supplies. The following are nine excerpts from one of the written descriptions:

1. The purchasing department acts on purchase requisitions issued by the stores department (which houses supplies).
2. Orders are placed on pre-numbered purchase order forms.
3. A complete purchase order copy is sent to the receiving department.
4. When goods are received, the receiving department logs the shipment in by stamping “order received” on its purchase order copy and forwards the annotated order to the accounts payable department.
5. Purchase orders, purchase order copies that have been annotated by the receiving department, and supplier invoices are matched by the accounts payable department.
6. Clerical accuracy of supplier invoices is checked by the accounts payable department.
7. A pre-numbered payment voucher is prepared and forwarded, along with supporting documentation, to the plant controller, who reviews and approves the voucher.
8. Supporting documents are returned to the accounts payable department for filing, and approved payment vouchers are forwarded to head office for payment.
9. A report listing cheques issued by head office is received and promptly filed by the accounts payable department.

Which of the following are control strengths with the payables process?

Orders are placed on pre-numbered purchase order forms.

A complete purchase order copy is sent to the receiving department.

The receiving department logs the shipment in by stamping “order received” on its purchase order copy and forwards the annotated order to the accounts payable department.

Purchase orders, purchase order copies that act as a receiving report, and supplier invoices are matched by the accounts payable department.

Clerical accuracy of supplier invoices is checked by the accounts payable department.

Supporting documents are returned to the accounts payable department for filing, and approved payment vouchers are forwarded to head office for payment.

A report listing cheques issued by head office is received and promptly filed by the accounts payable department.

Answer 1

Cononsistent	Strengthen or weaken
1. Consistent	Purchase requisitions provide the authorization for purchasing to place an order.
2. Consistent	The use of pre-numbered purchase order forms provides a control over purchase commitments.
3. Inconsistent	The copy of the purchase order forwarded to receiving should have the quantity order blanked out. Knowledge of the quantity ordered might bias the receiving department's count of items received.
4. Inconsistent	The receiving department should count and inspect the goods received, not simply make a notation that the order was received.
5. Consistent	The matching of purchase order, receiving report and vendor invoice assures that an order was placed, the shipment was received, and the vendor has a proper claim.
6. Consistent	Proving the mathematical accuracy of the vendor invoice assures that the billing is correct.
7. Inconsistent	The plant controller is responsible for record keeping and should not have the responsibility of authorizing disbursement vouchers (or cheque requisitions). Incompatible duties are vested in the plant controller.
8. Inconsistent	Corporate headquarters received the approved disbursement voucher that was approved by the plant controller. All the supporting documentation supporting the validity of the transaction and obligation are filed at the plant.
9. Inconsistent	The cheque issue list should be reconciled with the submitted disbursement before being filed.