Question

Internal Control Case1
True Aussie Co. is a manufacturing company located in Melbourne. The company has liberal policy among its staff. The company allows managers in the various departments to acquire supplies, furniture, equipment and other required items on a needs basis. The purchasing process begins when a requisition order is prepared by the department. The purchasing manager receives the requisition and inserts the name and number of a suitable vendor and the estimated cost of the item. The purchasing manager then asks the purchasing clerk to enter the requisition data into a state-of-the-art order and payment system. The purchase order and routes the purchase order as follows: copy 1 to the supplier, copy 2 to accounts payable, copy 3 to the store, and copy 4 to the requisitioning department.

When the ordered items arrive, the receiving clerk takes the copy of the purchase order and upon a visual inspection, signs over the delivered goods. The receiving clerk then accesses the order and payment system and generates a pre-numbered receiving report. The receiving clerk signs the receiving report and sends it, together with the items, to the requisitioning department.

The requisition department receives the items and counter signs the receiving report. The receiving report is routed to accounts payable. When the supplier’s invoice arrives, the accounts payable clerk takes the purchase order and the receiving report and matches them with the invoice amount. At the end of each day, the clerk generates cheques to pay all vendors. The cheque is forwarded to the accounts payable manager to sign before being forwarded to the vendor.

Required: Identify all control weaknesses in the above case and recommend improvement for all weaknesses you identified.

Internal Control Case 2

Carefully study the scenario below and highlight all internal control strengths and weaknesses.  Discuss how all internal control weaknesses can be addressed.

Sam Simpson is the accountant of a medium size company.  Every weekday, his first task is to check whether any suppliers have transmitted their invoice electrically to him.  If there is an invoice, Sam then checks for a corresponding purchase order.  If he locates the purchase order, he then contacts the receiving department and checks whether the goods have arrived.  If the goods have arrived, Sam then prepares a cheque and forwards to the supplier.

If Sam cannot locate the purchase order, he places the invoice in the ‘pending invoice’ tray until he receives a reminder notice from the supplier.  He then checks whether he had received the purchase order and repeats the process above of checking with the receiving department and then forwarding the cheque on to the supplier if the purchase order was found and the goods were received.  

In the unlikely case that Sam cannot locate the purchase order after receiving the reminder notice from the supplier, he calls the purchasing department and requests another copy of the purchase order.

Answer 1

Case 1

Following are internal control weakness :-

1. The company follows liberal policy to acquire supplies and required items on needy basis among its staff.
2. Receiving clerk accesses the payment system after receiving the order.
3. The receiving clerk takes the copy of the purchase order and upon a visual inspection, signs over the delivered goods.

Following areas of improvement:-

1. There should be firm purchase policy across the organization.
2. Only authorized person should have access to payment system.
3. There should be proper inspection of order received by receiving clerk.

Case:-2

Following are internal control Strengths:-

1. Whenever Sam receives an invoice from supplier he cross check the same with purchase order from purchase department.
2. Sam makes payment only after satisfying himself with the accuracy of invoice.

Following are internal control weakness :-

1. When the goods have arrived, Sam then prepares a cheque and forwards to the supplier.
2. If Sam cannot locate the purchase order, he places the invoice in the ‘pending invoice’ tray until he receives a reminder notice from the supplier.  He then checks whether he had received the purchase order and repeats the process.

Following areas of improvement:-

1. Before making payment permission should be taken from authorized person.
2. Sam should immediately proceed with “Pending invoice” cases instead of waiting for the supplier’s reminder and repeating the process.
3. In case of no purchase order found with the purchase department, he should instead of directly asking for the purchase order copy from purchase department, he should ask supplier for supplier’s copy of purchase order.