Question

1. Determine whether each of the following is an internal control strength or weakness. Explain your answer.

1. Receiving department manager places an order with the vendor for merchandise inventory.

2. A voucher is used to certify a transaction and authorize recording of the liability.

3. Goods are received by the receiving department and documented with a receiving report.

4. Accounting department pays the vendor's invoice before goods are received.

5. Invoices are paid after completion of the invoice approval documenting the purchase requisition, purchase order, receiving report, invoice, and approval for payment.

Answer 1

1. Weakness

Receiving department should not place an order for purchase. The Purchase orders should be released by purchase department only. Receiving department should be responsible for receiving goods only and Purchase department for placing orders. This segregation of duty is an important internal control

2. Strength

All transactions should be evidenced by vouchers. The vouchers are the base for recording any liability and hence it should be authorized. Hence using a voucher to certify a transaction and authorize recording of liability is a strength

3. Strength

Goods should be received by receiving department only. As and when goods are received it should be documented with a receiving report . This is part of segregation of duty and an important internal control. It is a strength.

4. Weakness

Accounting department should not pay the vendor's invoice before receipt of goods. This is a major violation of internal control. Accounting department can instead give advance to vendors if needed based on proper authorization and accounting of transaction. The advance should be offset against payment when goods are received.

5. Strength

This a is proper internal control for payment of vendor invoices. Purchase requisition should be given internally for purchase of material. then purchase orders should be raised by purchase department and then goods are received by receiving department . Once goods received report are prepared based on invoice they are approved for payment. Hence this is internal control strength.