Exercise topic 7

writing (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)

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7.16 MEDIUM
Supremo Ltd is a major manufacturer of industrial machinery. When the
stores department requires items to be purchased, they issue a three-
part pre-numbered purchase requisition that needs to be approved by
the stores manager. Copy 1 is sent to the purchasing department, copy 2
is sent to the accounts payable department and copy 3 is filed in the
stores department. On receipt of an approved purchase requisition, the
purchasing department issues a five-part pre-numbered purchase order.
Copy 1 is sent to the supplier, copies 2 and 3 forwarded to the receiving
department, copy 4 is forwarded to the accounts payable department
and copy 5 is filed in the purchasing department.
When goods are received, the receiving department just stamps
'order received' on its two copies of the purchase order, which then
forms its receiving record. One copy of the receiving record is filed in
the receiving department and the other is forwarded to the accounts
payable department. The accounts payable department checks that there
is a purchase requisition, purchase order and receiving record for each
supplier invoice and then approves it for payment. The accounts payable
department prepares a pre-numbered payment voucher and forwards it,
along with the supplier's invoice, purchase requisition, purchase order
and receiving record, to the financial accountant, who signs the payment
voucher, completes the payment by bank transfer to the supplier and
returns the supporting documents to the accounts payable department.
At the end of the month, the assistant accountant undertakes a
sequence check of all pre- numbered documents. The financial
accountant receives the monthly bank statement, prepares a bank
reconciliation and investigates any reconciling items.
REQUIRED
a. Identify the weaknesses in Supremo’s internal control concerning the
purchases and payments functions
Internal control weaknesses include the following:
● The receiving functions do not check the quality and quantity when they
receive products. If goods are damaged or defected, they will not be
discovered. The receiving department needs to inventory and check the
received products.

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 ● The matching process requires more than just verifying that a purchase
requisition, purchase order, and receiving report exists for every
purchase. If the details are not checked, then incorrect payments may
occur. The clerk should verify that there is a match between the dates,
descriptions, amounts, prices, terms, and reference numbers on the
supporting documents.
● The accuracy of suppliers’ invoices is not checked. This may result in
making payments is inaccurate. Therefore, checking the mathematical
accuracy of suppliers’ invoices assures that the billing is correct.
● It is possible for goods to be resubmitted and the same item to be paid
twice if supporting documentation for payments is not canceled. The
cancellation of supporting documents should happen simultaneously
with the bank transfer.
● There is a lack of segregation of duties in that the financial accountant
has cash payments duties and performs the bank reconciliation.
Therefore, the financial accountant may be able to misappropriate
funds without being found out. The bank reconciliation should be carried
out by someone independent of payments and receipts functions to
provide a cross-check on these operations.
b. Explain why each is a weakness and provide a recommendation as to
how to overcome the weakness. LO 7.2
● The receiving department does not check whether the goods match the
purchase order before creating the receiving record. As the goods when
delivered may be damaged or not of the correct quantity or quality as
requested on the purchase order. Therefore, goods need to be
inventoried and reconciled with the purchase order.
● The payment voucher is not canceled after making the payment, it can
be used to commit fraud by requesting to make the payment again.
● The supplier's invoice should be reconciled and checked for accuracy
before making a payment voucher to avoid unnecessary payments. The
supplier's invoice is subject to error as it is prepared by an external user.
● There is no division of responsibility between making payments and
receiving the monthly bank statement, prepares a bank reconciliation
and investigates any reconciling items. The tasks are all performed by
financial accountants, facilitating frauds related to embezzlement of
public funds.

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