Question

Madeline Jones, Lecimore Company’s Purchasing Department manager, has established new policies and procedures to guide the day-to-day operations of purchasing agents and medical staff. She is satisfied that the policies and the procedures conform with management’s objectives and that there are no major deficiencies either in the department’s policies or in the procedures that control the department’s operations. Some of the policies and procedures follow:

 All significant purchases are put out to competitive bid, although the likelihood of timely delivery and vendor reliability are considered in awarding contracts.

 Purchasing provides vendors with memoranda detailing minimum acceptable product-quality specifications.

 The Materials, rather than the Purchasing, department manager is responsible for assuring that vendors adhere to quality specifications

 The Material department manager prepares purchase request based on a four month production schedule

 Ninety percent of a critical raw materials is supplied by a single vendor. The vendor the low bidder in each of the past few years, has a good delivery record and is quite reliable

 As production plans change, rush and expedite orders are made directly to the Purchasing department by production manager. Materials ordered for cancelled production runs are stored for future used. Although the cost rush and expedite orders are borne exclusively by the Purchasing Department, Jones considers the cost essentials to the department’s reputation as a contributing team player.

 Materials needed to accomplish engineering changing are ordered by the Purchasing Department immediately after the Engineering department approved changes. Jones is proud of the Purchasing department’s quick response. Material on hand are not reviewed before any order are placed

 Partial shipment and advanced shipments (that is, those received before the requested date of delivery) are accepted by the Materials manager, who notifies the Purchasing department of the receipt. The Purchasing department is responsible for following up on partial shipments. No action is taken to discourage advance shipment.

Required:

1. Identify weakness and inefficiencies in Lecimore Company’s purchasing policies and procedures, and make recommendation to improve each.

2. Describe two tests of control that the auditor should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency.

3. Describe two substantive tests for each deficiency that the auditor should perform to assess whether the related items contains material misstatements

Answer 1

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