ACCT425 – V1WW

Assignment 6-2: Application Problems Week 6

4. FLOWCHART ANALYSIS
Examine the diagram fro Problem 4 and indicate any incorrect initiation and/or transfer of
documentation. What problems could this cause?

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 The purchase order that is sent to the receiving department is not indicated as a “blind copy.” If a
complete purchase order showing the quantities and amounts are listed, it could cause employees
to bypass their tasks by not actually counting and inspecting the goods prior to completing the
receiving report. Goods should be counted and inspected prior to accepting and signing the bills
of lading; otherwise, a shipment may be accepted that is damaged or missing items. If the values
of the goods are listed on the purchase order, employees may steal some of the items since they
would know their value. This could cause inventory levels to be distorted since the actuals counts
would be less than what is reported. If the actual inventory levels are lower than what is
recorded, it would increase expenses, decrease cash, decrease profits, and negatively affect an
organization’s budget for that time period.

The inventory control department should not issue the purchase requisition. If the same
employee reviews the records to ascertain how much inventory needs to be ordered, the
purchasing agent, who is able to authorize purchase requisitions, may be tempted to purchase
additional inventory items that are not needed to receive vendor benefits and/or kickbacks. This

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also allows opportunities for theft, fraud, and deception. The actual inventory levels could be
distorted or low if theft occurs. The inventory expenses would increase, cash would decrease,

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which would also cause a decrease in the profit and distorting the inventory ratios.

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The receiving department should keep a copy of the receiving report in their files along with a
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copy of the purchase order and the packing slip. Keeping copies of the documents in the
receiving department provides an audit trail and another avenue for auditors to trace back the
source documents if discrepancies were discovered. This allows auditors to trace back all the
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documents in each department and can provide them with information as to exactly when an
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error or fraud may have occurred. Auditors can then view and compare the receiving
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department’s copies of the receiving report, purchase order, and the packing slip against the
accounts payable department’s records.
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The inventory control department should not prepare the journal voucher that is sent to the
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general ledger department. Instead, summary information should be provided to the general
ledger department, which can be used to reconcile the inventory control account with the
inventory subsidiary summary. If the inventory department prepared the journal voucher that is
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sent to the general ledger department, it bypasses the three-way match procedure that is generally
conducted by the AP clerk and allows opportunities for fraud. Since the inventory control
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department has custody of the assets, they should not be responsible for submitting
documentation for the recording of the assets. There should be a separation of duties. If an
employee in the inventory control department was committing fraud or theft of goods, the
journal voucher would not reflect the stolen items. Not only would inventory valuations be
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incorrect, but the inventory costs could be inflated, thus causing cash to decrease as well as
profits. The employee could also be receiving a kickback from the vendor or may be
collaborating with other employees for the theft of goods. The employee may also have an
interest in the vendor’s payment if the vendor is a related party to the employee.

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 The AP clerk would reconcile the receiving report and PO in the AP pending file once the
vendor’s invoice is received. The three-way match verifies what was ordered to what was
received and the amounts that were charged for the goods. After the AP clerk reconciles all the
documents and records the necessary information, then a journal voucher is prepared and sent to
the general ledger department.

The accounts payable department should post the liability to the accounts payable subsidiary
ledger. The subsidiary accounts payable ledger will not balance with the control account in the
general ledger if the liability is not posted. This would cause the accounts payables and expenses
to be understated while the inventory has increased.

5. ACCOUNTING RECORDS AND FILES

Indicate which department – accounts payable, cash disbursements, data processing,
purchasing, inventory, or receiving – has ownership over the following files and registers:

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a. open purchase order file – purchasing department

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The purchasing department has ownership of the open purchase order file to track orders that

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have not yet been received. It also provides a separation of duties from the receiving
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department since the same individuals who control the assets should not have the
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responsibility of the record keeping of the assets. After the receiving department verifies and
inspects the goods, a receiving report is prepared in which one copy is sent to the purchasing
department. When the purchasing department receives the copy of the receiving report, the
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clerk reconciles it with the open purchase order then closes the open purchase order from the
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open purchase order file.

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b. purchase requisition file – inventory control department

The inventory control department has ownership of the purchase requisition file since they
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access the file to generate purchase requisitions when inventories drop to the reorder point,
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which is triggered when sales orders are placed. Since the inventory control department is a
separate function from the purchasing department, a copy of the purchase requisition is sent
to the purchasing department and another copy is kept in the open purchase requisition file.
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Once the goods are received, the receiving department will send a copy of the receiving
report to the inventory control department where it is used to update the inventory subsidiary
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ledger. Afterwards, the open purchase requisition will be closed since it is no longer flagged
to show items were on-order.

c. open purchase requisition file – inventory control department

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 The inventory control department has ownership of the open purchase requisition file since
they use a copy of the receiving report from the receiving department after goods are
received. The inventory subsidiary ledger is updated to show items are no longer on order
after the goods are received. The inventory control department also has ownership of the
open purchase requisition file to serve as an internal control function since purchasing is a
separate function and the custody of assets are separate from the recording of assets.

d. closed purchase requisition file – inventory control department

The inventory control department has ownership of the closed purchase requisition file since
they use a copy of the receiving report from the receiving department to update the inventory
subsidiary ledger to show items are no longer on order after the goods are received. The
inventory control department also has ownership of the closed purchase requisition file since
they have the task of updating the inventory subsidiary ledger. It also serves as an internal
control function since purchasing is a separate function and the custody of assets are separate
from the recording of assets.

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e. inventory - inventory control department

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The inventory control department has ownership of the inventory file since they are tasked

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with generating purchase requisitions when inventory levels are at their reorder point and
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updating the inventory subsidiary ledger after a copy of the receiving report is received from
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the receiving department. It also serves as an internal control function since purchasing is a
separate function and the custody of assets are separate from the recording of assets.
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f. closed purchase order file – purchasing department

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The purchasing department has ownership of the closed purchase order file. It provides a
separation of duties from the receiving department since the same individuals who custody of
the assets should not have the responsibility of the record keeping of the assets. After the
receiving department verifies and inspects the goods, a receiving report is prepared and one
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copy is sent to the purchasing department. When the purchasing department receives the
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copy of the receiving report, the clerk reconciles it with the open purchase order then closes
the open purchase order from the open purchase order file. This also provides an audit trail
for the inventory and the supporting source documents for the payables since the goods were
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actually received.
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g. valid vendor file – purchasing department

The purchasing department has ownership of the valid vendor file since the purchase
requisitions originate from the inventory control department. The vendor’s data is taken from
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the inventory subsidiary ledger and the valid vendor file, which provides more efficiency to
the purchasing agent. Since purchasing is a separate function from the inventory control
department, the vendor can be verified against the valid vendor file before the actual order is
placed by the purchasing department. This helps to mitigate opportunities for vendor fraud,
theft, and billing schemes while providing a form of internal control.

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 h. voucher register – accounts payable department

The accounts payable department has ownership of the voucher register since the AP clerk
prepares a cash disbursement voucher to approve the vendor payments after a three-way
match has been verified. The cash disbursement vouchers are recorded in the voucher register
which provides an audit trail with all the supporting source documents.

i. open vouchers payable file – accounts payable department

The accounts payable department has ownership of the open vouchers payable file since the
AP clerk files all the disbursement vouchers with the supporting source documents in the
open vouchers payable file after a three-way match has been performed and the voucher
register has been updated. This provides a form of internal control and an audit trail since the
tasks of generating a disbursement voucher and issuing the actual payments are performed by
separate individuals.

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j. receiving report file – receiving department

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The receiving department has ownership of the receiving report file since they receive the

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goods and verify the shipment. When shipments are received, the receiving department
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verifies and inspects the goods with a blind copy of the purchase order. After the goods have
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been verified, the receiving department prepares the receiving report from their inspection
and count of the goods. A copy of the receiving report is kept in the receiving report file
while other copies are disbursed to other departments. This process provides a form of
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internal control and an audit trail with copies of source documents to ensure that the goods
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received were what was actually ordered and to mitigate opportunities for theft and fraud.
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Auditors are able to track the process since all the involved departments have copies of the
receiving report which originated from the receiving department.

k. closed voucher file – accounts payable department

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The accounts payable department has ownership of the closed voucher file since the AP
packet is filed by the AP clerk. After a three-way match has been processed and the voucher
register has been updated, the AP subsidiary ledger would then be updated. The AP clerk
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would then post entries into the purchases journal and prepare a journal voucher for the
general ledger personnel. The AP packet would then be filed and the open voucher file would
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be considered closed. This process provides an audit trail verifying that all the goods ordered
were received, counted and inspected, and the vendor would be issued payment for the
goods, thus closing the voucher file.
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l. check register (cash disbursements journal) – cash disbursement department

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 The cash disbursement department has ownership of the check register since they are actually
issuing payments. When a check is prepared, it is recorded in the check register which can
be reconciled with the accounts payable department’s AP subsidiary ledger and the general
ledger. This provides an audit trail and a separation of duties since a different individual has
reconciled the AP packet, updated the general ledger, and disbursed payments. The process
provides less opportunities for personnel to steal or fraud an organization since tasks are
separated by different departments and personnel.

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