Question

Kida Company

Part I: Expenditures:

In 2017 Kida Company purchased more than $90 million worth of office equipment under its “special”

ordering system, with individual orders ranging from $5,000 to $30,000. “Special” orders entail low

volume items that have been included in an authorized user's budget. Department heads include in their

annual budget requests for the types of equipment and their estimated cost. The budget, which limits

the types and dollar amounts of office equipment a department head can requisition, is approved at the

beginning of the year by the board of directors.

Department heads prepare purchase requisition forms for equipment and forward them to the

purchasing department. Kida's “special” ordering system functions as follows:

•        Purchasing: Upon receiving a purchase requisition, one of five buyers verifies that the person requesting the equipment is a department head. The buyer selects the appropriate vendor by searching the various vendor catalogs on file. The buyer then phones the vendor, requests a price quotation, and gives the vendor a verbal order. A pre-numbered purchase order is processed with the original sent to the vendor, a copy to the department head, a copy to receiving, a copy to accounts payable, and a copy filed in the open requisition file. When the buyer is orally informed by the receiving department that the item has been received, the buyer transfers the purchase order from the unfilled file to the filled file. Once a month the buyer reviews the unfilled file to follow up on and expedite open orders.

•        Receiving: The receiving department receives a copy of the purchase order. When equipment is received, the receiving clerk stamps the purchase order with the date received and, if applicable, in red pen prints any differences between the quantity shown on the purchase order and the quantity received. The receiving clerk forwards the stamped purchase order and equipment to the requisitioning department head and orally notifies the purchasing department.

•        Accounts payable: Upon receiving a purchase order, the accounts payable clerk files it in the open purchase order file. When a vendor invoice is received, the invoice is matched with the applicable purchase order, and a payable is set up by debiting the equipment account of the department requesting the items. Unpaid invoices are filed by due date, and at the due date a check is prepared. The invoice and purchase order are filed by purchase order number in a paid invoice file, and the check is then forwarded to the treasurer for signature.

•        Treasurer: Checks received daily from the accounts payable department are sorted into two groups: those over $10,000 and those $10,000 and less. Checks for $10,000 and less are machine-signed. The cashier keeps the key and signature plate to the check-signing machine and records all use of the check-signing machine. All checks over $10,000 are signed by the treasurer or the controller.

Subsequent events: Earlier this year, several accountants in the accounts payment department noticed a problem when they logged into the general ledger. They noticed that their names were no longer one of the choices in the system and in one case an entire account was displayed in language other than English or Spanish.   At that point, the chief accountant immediately contacted Dell Shay of the IT division. When Dell logged into his computer and attempted to log into his account for transaction processing, he noticed that his credentials did not work. He was told that there was no account associated with his email. Then, Dell used the login option for employees who have forgotten their email address. This should have allowed him to reset his password via an email sent to an alternative account on file. However, once Dell logged in, he got a message saying that a password reset link had been sent to an email address that was most certainly not his.

         Further, other Kida accountants also reported receiving unusual or inappropriate advertisements within their Facebook accounts. These advertisements offer unapproved, forty percentage discounts on the purchase of Kida office equipment for Kida employees with bank accounts with Wells Fargo. This percentage exceeds the company policy. Dell’s little sister is the CIO of Wells Fargo, N.A.

Required:

a.       Prepare a flowchart of Kida Company's purchasing and cash disbursements system. (See below file.)

b.      Describe the internal control strengths and weaknesses relating to purchases of and payments for “special” orders of Kida Company for the purchasing, receiving, accounts payable, and treasurer functions. For each weakness, suggest at least one improvement. Be specific in your explanations.

c.      List two inherent risk factors that directly affect the purchasing process. Why should auditors be concerned about issues such as the supply of raw materials and the volatility of prices?

d.         Describe any benefits that Kida may receive by installing newer IT systems. Be specific as to how IT systems could benefit each of the processes described, or how they could eliminate any weakness identified above.

Part II: Kida’s Cash Management Assumptions:

Based on 2017 sales, Kida Company has forecasted the following monthly growth in sales and monthly cash collection measures for 2018:

Create a 12-month cash flow budget in Excel using the following assumptions:

·    Annual 2017 sales of $4,500,000 per month with forecasted monthly growth of 2%

·    35% of each month’s sales for cash; 30% collected the following month; 20% collected 2 months later; 10% collected 3 months later; and 5% never collected.

Assuming an initial cash balance of $300,000, management has concluded that they will achieve an ending cash balance of $41,000,000.

REQUIRED: Write a short summary to evaluate management’s decision. (Your answer of Part II should be within 20 words,

Answer 1

Solution

Part 1

The Management decisions show many mistakes in the organisation functioning few of them are-

• Order placed by buyer verbally
• Receiving the department orally informed buyer about receipt of purchase.
• Once a month buyer reviews unfilled file, it should be done more the frequently like once in a week / in a fortnight.
• Receiving the department clerks orally notify purchase department.
• Checks of $10000or less are machine signed which is not correct.
• The IT department is not working properly no proper authority is set up for authorised transactions in the system
• Unwanted discounts are given on social media platform which put the company public image into threat.
• Proper email id of company should be given to retrieve password which was not present in this case?

Part 2

Months	Sales for month	Cash Collected For sale Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec	Cash Balance Opening	Cash Balance Closing
January	4500000	1575000												300000	1875000
February	4590000	1350000	1606500											1875000	4831500
March	4681800	900000	1377000	1638630										4831500	8747130
April	4775436	450000	918000	1404540	1671403									8747130	13190713
May	4870945		459000	936360	1432631	1704831								13190713	17723895
June	4968364			468180	955087	1461284	1738927							17723895	22347373
July	5067731				477544	970489	1490509	1773706						22347373	27059621
August	5169086					487094	993673	1520319	1809180					27059621	31869887
September	5272468						496836	1013546	1550726	1845364				31869887	36776359
October	5377917							506773	1033817	1581740	1882271			36776359	41780960
November	5485475								516909	1054494	1613375	1919916
December	5595184									527247	1075583	1645643	1958314