Question

Analyze the current system and identify specific internal control problems

Inventory control department receives a list of items in inventory and total amounts in each category. The inventory control clerk, Keith Fernando, is given the quantity-onhand for all gloves (softball, infielder, outfielder, catcher, and pitcher). The quantity-onhand of each inventory is calculated by the inventory control system, called PICS (Physical Inventory Control Scanner). PICS is an automated computer system used to determine the quantity-on-hand of inventories at specific times. It scans in the inventory when received in the receiving department and scans it out upon shipment in order to update the quantity-on-hand. As each inventory item is updated, Fernando checks to see if the quantity-on-hand drops to the predetermined reorder point. If this is the case, Fernando prepares a purchase requisition (PR). Two copies of the purchase requisition are made. One is sent to purchasing to be used to prepare a purchase order (PO) at a later date. Inventory control department keeps the other copy and waits for a copy of the purchase order from purchasing in order to reconcile the amounts on the PR with the amounts on the PO. Inventory control department receives a copy of the purchase order from purchasing and compares it to the second copy of the purchase requisition. These two forms are kept in an open purchase requisition file that is filed by purchase requisition number and kept in an open account until notification that the items have been received by the receiving department via the receiving report (RR). The RR is then compared with the PO and PR to make sure that the items received are identical to the items ordered. These three forms are posted to the inventory ledger and a summary report is generated and sent to the general ledger department. The receiving report, purchase order, and purchase requisition are then kept in a closed purchase requisition file by purchase requisition number. Purchasing department receives the purchase requisition from inventory control, sorts the purchase requisitions, and prepares a multi-part purchase order. The purchasing manager, Jack Tucker, chooses the supplier based on the five-supplier list given by management. One copy of the PO is sent to inventory control department, where Fernando keeps it in the open purchase requisition file. One copy is sent to the accounts payable (AP) department to be filed in the accounts payable pending file. Another copy is sent to the receiving department to be filed until the inventories arrive. One copy is mailed to the supplier. The last copy is kept in purchasing and is filed along with the purchase requisition received by inventory control in the open purchase order file, awaiting the receiving report sent by the receiving department to confirm that inventories have been received. Purchasing department is sent an invoice by the supplier through the mail that charges Triple Play the dollar amount for the inventories requested. This is kept in the open purchase order file until the receiving report is received. When the receiving report is received, the purchase order, purchase requisition, and supplier’s invoice are taken out of the open purchase order file and the amounts are then compared with those on the receiving report. All four of these reports are then filed in the closed purchase order file, sorted by purchase order number. Purchasing department then sends a message through a computer terminal to the accounts payable department that is a copy of the invoice and simply states the quantity and price of the shipment received. The message is received by a computer terminal in the accounts payable department. Only the purchasing keyboard clerk, Lenny Sipowicz, can access the terminal, and only he knows the password needed to enter into the system. The same authority is given to the accounts payable keyboard clerk, Danny Thomson. The message is sent to accounts payable usually two days later, after reconciling the PO, PR, RR, and supplier’s invoice. The receiving department receives the goods and reconciles the information on the packing slip attached to the shipment with the information (such as quantity and price) listed on the purchase order which was sent by purchasing department and has been filed temporarily. The receiving clerk, Manuel Barriero, pulls the PO from the file and checks to see that the inventory received is the same as the quantity and price information on the PO. After checking that the information is correct, Barriero prepares a receiving report stating that the merchandise was received. One copy of the receiving report accompanies the physical inventories to the warehouse. Another copy is sent to purchasing and is reconciled with the open PO file. A third copy is sent to inventory control and is reconciled with the open PR file. A fourth copy is sent to accounts payable and is filed with the purchase order in the AP pending file. The last copy is filed with the purchase order and packing slip in the receiving department. Accounts payable department receives a message from purchasing department through the terminal, stating that the invoice has been received. Accounts payable has also received and is temporarily keeping the PO and RR in the AP pending file. When the message about the invoice is received through the terminal, the accounts payable clerk, Ivan Pushkin Rodriguez, records the liability and reconciles the information with the PO and RR in the AP pending file. After Pushkin records the liability, he sends the PO, RR, and copy of invoice to the open AP file. He also enters the information in the purchases journal and accounts payable subsidiary ledger and then prepares a journal voucher, which is sent to the general ledger department. The general ledger department receives a journal voucher from accounts payable department and a ledger summary from inventory control department. The general ledger clerk, Ozzie Cratchit, reconciles the journal voucher and ledger summary and posts to the inventory and AP control accounts in the general ledger. The journal voucher and ledger summary are then filed.

Answer 1

The following are the internal control gaps of the present scenario:-

At Inventory control department

• Absence of Physical verification by the Inventory Control Clerk upon receipt of inventory - The physical verification of the stock is at the time of updating of the stock in the PICS instead of at the time of receipt of stock.
• Access to PICS not available at all departments - As per the system, PICS is available at the receiving department instead of all the departments dealing with inventory
• Purchase requisition prepared by the Inventory Control Department instead of the User/ Buyer Department. The Inventory Control Department is only responsible for verification whether the quantity raised as per the Purchase Requisition is in stock or not.
• Purchase Requisition not approved by the User Department.
• Purchase requisition in open status after receipt of Purchase order - The Purchase Requisition has to be closed in the system once the Purchase Order has benen prepared.

At the Purchasing Department

• Request for Proposal not sent for inviting quotations

?The Purchasing department after receiving a Purchase Requisition should send an RFP to certain potential vendors seeking the rates for materials to be purchased. This process will help in increasing competition and procurement at reduced prices.

• Budgets not approved

As per the current systems, there are no budgets approved by the management for procurement of inventory. Lack of approved budgets increases the risk of unnecessary use of funds and procurement above the company;'s capacity.

• Selection of the supplier as per the management list

The supplier should be selected after comparison of the prices quoted by the vendors upon receipt of quotation from prospective vendors. This will help in procurement at cheaper rates. The supplier list as per management should not be checked.

• Financial Powers with a Purchase Manager

There is no Delegation of Financial Powers Matrix prepared by the company as the Purchase Manager without any approval from the top management issues a PO to the supplier for goods. The financial powers to procure goods should not vest with the Purchase Department under any circumstances.

Invoice Payment

• Invoice submitted by the Vendor to Purchase Department instead of the User

The invoice should be received and first approved by the User Department as they are the end-users of inventory purchased.

• Access Rights of Computer Terminal with Purchasing Department

The Access Rights to send message of the invoice should be with the User Department, Receiving Department, AP team and General Ledger Team and should not be allowed to the Purchasing Department

• Access Rights of Computer Terminal with one official of Accounts Payable Department

All the officials of the Accounts Payable Department should have an access to the Compuetr Terminal on which the information of invoice is received. Further, the rights to approve the invoice in the system should be as per the DoFP approved by the management

• Absence of Verification of Invoice by Accounts Payable Team while payment

?The above gaps were noted as per the present scenario