The warehouse staff writes the information down log book
13.10 Last year the Diamond Manufacturing Company purchased over $10 million worth of office equipment under its “special ordering” system, with individual orders ranging from $5,000 to $30,000. Special orders are for low-volume items that have been included in a department manager’s budget. 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. The special ordering system functions as follows:
Purchasing A purchase requisition form is prepared and sent to the purchasing department. Upon receiving a purchase requisition, one of the five purchasing agents (buyers) verifies that the requester is indeed a department head. The buyer next selects the appropriate supplier by searching the various catalogs on file. The buyer then phones the supplier, requests a price quote, and places a verbal order. A prenumbered purchase order is processed, with the original sent to the supplier and copies to the department head, receiving, and accounts payable. One copy is also filed in the open-requisition file. When the receiving department verbally informs the buyer that the item has been received, the purchase order is transferred from the open to the filled file. Once a month, the buyer reviews the unfilled file to follow up on open orders.
b. Recommend control procedures that must be added to overcome weaknesses identified in part a.
c. Describe how the control procedures you recommended in part b should be modified if Diamond reengineered its expenditure cycle activities to make maximum use of current IT (e.g., EDI, EFT, bar-code scanning, and electronic forms in place of paper documents). (CPA Examination, adapted)
| Weakness | Control | Effect of new IT |
| 1. Buyer does not verify that the department head’s request is within budget. | Compare requested amounts to total budget and YTD expenditures. | System can automatically compare the requested amount to the remaining budget. |
| 2. No procedures established to ensure the best price is obtained. | Solicit quotes/bids for large orders. | EDI and Internet can be used to solicit bids. |
| 3. Buyer does not check vendor’s past performance. | Prepare a vendor performance report and use it when selecting vendors. | Vendor performance ratings can be updated automatically and made available to buyer. |
| 4. Blind counts not made by receiving. | Still provide incentives to detect discrepancies. |
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| 5. Written notice of equipment receipt not sent to purchasing. | Send written notice of equipment receipt to purchasing. | Receiving data and comments entered via on-line terminals and routed to purchasing. |
| 6. Written notice of equipment receipt not sent to accounts payable | Send written notice of equipment receipt to accounts payable | Configure system to notify accounts payable automatically of equipment receipt. |
| 7. Mathematical accuracy of vendor invoice is not verified. | Verify mathematical accuracy of vendor invoice. | Automatic verification of mathematical accuracy of vendor invoice. |
| 8. Invoice quantity not compared to receiving report quantity. | Compare/verify invoiced quantity with quantity received. | System verifies invoice quantity with quantity received. |
| 9. Notification of acceptability of equipment from requesting department not obtained prior to recording payable. | Obtain confirmation from requisitioner of the acceptability of equipment ordered prior to recording payable. | Configure system to require confirmation of equipment acceptability prior to approving invoice for payment. |
| 10. Voucher package not sent to Treasurer. | Send voucher package (purchase order and receiving report) to Treasurer along with approved invoice. | Configure system to match invoices automatically with supporting documents. |
| 11. Voucher package not cancelled when invoice paid. | Treasurer should mark voucher package as PAID when check is signed. | Configure system to mark supporting documents as used when invoice is paid. |
| 12. No mention of bank reconciliation. | Bank account should be reconciled by someone other than Accounts Payable or the treasurer. | Bank account should be reconciled by someone other than Accounts Payable or the treasurer. |
10.8 (CMA Examination, adapted)
| 7. The Receiving Department and the Shipping Department share a computer terminal. In addition, the personnel in both departments have access to the physical inventory and can update the perpetual inventory records through the terminal. This could result in theft of inventory with no means of tracing the theft. | Each department should have its own terminal and the terminals should be for inquiry purposes only. The physical custody and recordkeeping of inventory should be separated (perpetual records should be updated on the computer by Purchasing/Accounts Payable and Billing). Access to the physical inventory should be limited to Receiving; it would add incoming goods to the physical inventory and select the goods from the warehouse for shipping. |
| 8. The Receiving Department does not compare incoming deliveries to purchase orders. This may lead to the acceptance of unordered goods. | Copies of purchase orders without quantity information should be sent to Receiving. Receiving should match the shipment to the purchase order and indicate the quantity received. |
| 9. A complete inventory listing is printed only once a year. Errors in the perpetual inventory records may remain undetected for too long a time period. | Inventory listings should be printed periodically throughout the year, and physical counts compared to the listing on a cycle basis. |
Have the system check inventory availability as order data are entered; if the customer is on the phone at this time, inventory availability may be confirmed directly to the customer.
Have the system perform a credit check as order data are entered, and reject orders from customers who are not credit-worthy.
12.7 O’Brien Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an integrated ERP system. The administrative offices are located in a downtown building and the production, shipping, and receiving departments are housed in a renovated warehouse a few blocks away.
Customers place orders on the company’s website, by fax, or by telephone. All sales are on credit, FOB destination. During the past year sales have increased dramatically, but 15% of credit sales have had to written off as uncollectible, including several large online orders to first-time customers who denied ordering or receiving the merchandise.
(CMA Examination, adapted)