7-16: Supremo: Controls over purchases and payment cycle: inclduing the following detailed

fucntions/steps/activities:
- Request the purchase (identify the purchase need)
- Purchase/Buy the items requested (send a purchase order to supplier)
- Receive the items requested
- Pay for the items requested and received
1. How many departments/persons invloves to this functions?
2. What could go wrong of such controls?
Departments:
- Stores: requires the purchased items – 3-part prenumbered Purchase Requisition that
needs to be approved by the store manager
- Purchasing: receives the 1st copy of Purchase Requisition approved prepare 5-part
prenumbered Purchase Order. No approval for Purchase Order  should be approved by
Purchasing Manager and CEO.
- Receiving: received Copy 2 and 3 of Purchase Order; receives the goods arrived and
stamps “Order Received” on Copy 2 and 3 of Purchase Order. Should issue Receiving
Report on the basis of double check of the quantity and quality of the items received
against the Purchase Order.
- AP: receives Copy 2 of Purchase Requisition approved, Copy 4 of Purchase Order, Copy
3 of Purchase Order stamped “Order Received” – receiving record  check the existence
and should check consistency of a Purchase Requisition, Purchase Order, and receiving
record for each Supplier Invoice  approve the invoice for payment  prepare
prenumbered Payment Voucher.
- Accounting:
o Financial accountant: receives the Payment Voucher, Supplier Invoice, Purchase
Requisition, Purchase Order, and receiving record; sign the Payment Voucher and
prepare bank transfer. No approval for payment. --> Chief Accountant, CFO and
CEO should approve the payment with supporting documents.
He receives Bank Statement and prepares bank reconciliations should be by
another accountant, not the financial accountant.
Should send the Monthly Statement of Account to all suppliers and follow up any
differences (AP reconciliation)
o Assistant: undertake a sequence check of all prenumbered documents
7-19 Festival
a. Control environment
1. A commitment to integrity and ethical values:  not meet
Head office mgt has a high integrity (S)
It has an ethical code of conduct (S), but little monitoring of compliance by employees.
Mgt’s conservatism of accounting principles and practices (S).
Employee compensation packages depend on largely on performance, not code of conduct
(W).
The compensation of GM’s electronics division is based largely on the division’s profitability
(W).
Employing aggressive cost cutting to improve the division’s profitabilty (W).
2. Independent oversight of governance body:  likely acceptable
 BOD and AC are not very active.
3. Organizational structures, reporting lines, and appropriate authorities and
responsibilities: not meet
3 divsions operate autonomously with a little intervention from head office (W).

4. A commitment to attract, develop, and retain competent individuals:  meet

It has a policy of hiring very competent people (S).
Employee compensation packages depend on largely on performance (S).
The compensation of GM’s electronics division is based largely on the division’s profitability
(S).
5. Enforcement of accountabilty:
In conclusion, Festival’s control environment is not strong and solid because they could not
exercise a committment to integrity and have not a relevant structure with a modest oversight
from BOD and AC.
b. 3 Fraud Risk factors (fraud triangle theory)
- Incentives/pressures/motivations:
o The compensation of GM’s electronics division is based largely on the division’s
profitability.
o The division’s profitabilty has been improved for the past 4 years.
o GM’s concern is to maitain the division’s growth and profitibility.
o The competition is very strong, and selling price is cutting (price war).
- Opportunity:
o Subtantial reduction in control activities over inventory due to price cutting.
o A weak control environment.
- Rationalization:
o GM views the inventory manipulation as a short-run solution to the profit
decline.
o Once the competitor stops cutting, the misstatements in inventory can be easily
corrected.
s