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Chapter 13 Solutions

Q13.3 Since the primary benefit of procurement cards is to give employees the ability to make small non-inventory purchases necessary for their area of responsibility be it office supplies, computer or office equipment, meals and/or travel expenses, a formal approval process for all purchases would negate the benefit of the procurement card. Therefore, the controls for procurement cards should be focus on the initial issuance of the card and subsequent reviews and audits of purchases made by employees entrusted with procurement cards. Employees receiving cards must be properly trained in their proper use and in the procurement card controls implemented by the organization. If employees know that any purchase they make can be the subject of subsequent review and audit, they are more likely to make legitimate purchases. Subsequent reviews and audits must also require proper documentation related to each purchase made with the procurement card. During procurement card training, it should be emphasized that employees will be required to produce original receipts or other formal documentation for all items purchased.

P13.1 a. Require a purchase requisition from an operating department as authorization for preparation of all purchase orders. Before approving a purchase order, the purchasing manager should review the related purchase requisition. The purchasing manager also needs to ensure that orders are placed only with approved vendors. Also, company policy should require that purchasing agents disclose any financial interest or position which they hold in supplier companies, though this may be difficult to enforce. In addition, the purchasing manager should check to ensure that purchasing agents do not have investments in vendors on the approved vendor list. b. Warehouse personnel should be required to count goods received and acknowledge receipt of the specified quantity by signing a copy of the receiving report. This copy of the receiving report would then be reviewed by accounts payable personnel prior to approval of payment. In on-line systems, the warehouse personnel would enter receipt of goods into the system. The system would then match that receiving report with the purchase order and vendor invoice prior to approving payment. c. Receiving department personnel should be required to verify that a purchase order exists prior to accepting a shipment. Also, invoices should be compared to purchase order records prior to approval of the invoices for payment. d. Proper invoice filing by payment date and proper cash budgeting. e. When an invoice is approved for payment, the related supporting records (receiving report and purchase order) must be reviewed. At the conclusion of this process, the status of both the invoice and its supporting records should be changed, for example from "pending" to "paid." In this way the supporting records cannot be used twice to support payment of a duplicate invoice. f. Periodic physical inventories should be taken, and the resulting counts used to correct system records.

g. Most effective here would be closed loop verification in which the item number is entered as input, and the system displays the corresponding item description and then asks the user to verify that this is the desired item. h. Unused blank company checks should be stored in a secure location. In addition, the person signing checks should be different from the person authorizing disbursements and preparing checks, and the check signer should review the documentation (purchase order and receiving report) supporting each disbursement prior to signing each check. i. Supporting documentation reviewed by the person who authorizes disbursements should include both a purchase order and a receiving report. In addition, the person signing checks should be different from the person authorizing disbursements and preparing checks, and the check signer should review the documentation (purchase order and receiving report) supporting each disbursement prior to signing each check. Surprise counts of cash on hand in the petty cash fund should be made periodically, and the total of cash plus receipts should equal the fund amount.

j.

k. Restrict access to supplier master files, require a thorough background check, and proper approvals by management before a supplier could be added to the approved supplier list. l. This scenario requires collusion between an employee and a customer. Thus, the best control to hire honest and ethical employees by conducting effective interviews, checking references, and even conducting background checks if cost effective. To help honest employees stay honest, the store could restrict access to price tags in that cashiers should not have access to price tags and stocking clerks should not work as cashiers. In addition, sales data could be evaluated using analytical procedures to screen for significant price variances. This analytical procedure combined with linking the cashier/sales person who conducted the transaction to the transaction would likely detect the fraud and also act as a deterrent to other employees.

13.2

Match the terms in the left column with their appropriate definition in the right column. Terms 1. _n__ economic order quantity 2. __f_ materials requirements planning (MRP) 3. _e__ Just-in-time (JIT) inventory system 4. __g_ purchase requisition Definitions a. A document that creates a legal obligation to buy and pay for goods or services. b. The method used to maintain the cash balance in the petty cash account. c. The time to reorder inventory based on the quantity on hand falling to predetermined level. d. A document used to authorize a reduction in

5. __b_imprest fund 6. __a_ purchase order 7. _s__ kickbacks

e. f. g.

8. __r_ procurement card

h.

9.

__p_ blanket purchase order

i.

10. _h__ evaluated receipts settlement (ERS) 11. __m_ disbursement voucher 12. _q_ receiving report

j.

k.

l.

13. __d_ debit memo 14. _o__ vendor managed inventory 15. __l_ voucher package

m. n.

o.

16. _j__ non-voucher system 17. _k__ voucher system

p. q. r. s.

accounts payable when merchandise is returned to a supplier. An inventory control system that triggers production based upon actual sales. An inventory control system that triggers production based on forecasted sales. A document only used internally to initiate the purchase of materials, supplies, or services. A process for approving supplier invoices based on a two-way match of the receiving report and purchase order. A process for approving supplier invoices based on a three-way match of the purchase order, receiving report, and supplier invoice. A method of maintaining accounts payable in which each supplier invoice is tracked and paid for separately. A method of maintaining accounts payable which generates one check to pay for a set of invoices from the same supplier. Combination of a purchase order, receiving report, and supplier invoice that all relate to the same transaction. A document used to list each invoice being paid by a check. An inventory control system that seeks to minimize the sum of ordering, carrying, and stockout costs. A system whereby suppliers are granted access to point-of-sale (POS) and inventory data in order to automatically replenish inventory levels. An agreement to purchase set quantities at specified intervals from a specific supplier. A document used to record the quantities and condition of items delivered by a supplier. A special purpose credit card used to purchase supplies. A fraud in which a supplier pays a buyer or purchasing agent in order to sell its products or services.

13.4 Match threats in the first column to appropriate control procedures in the second column. More than one control may be applicable. Threat 1. _d,e__ Failing to take available purchase discounts for prompt payment. 2. _f__ Recording and posting errors in accounts payable. 3. _l__ Paying for items not received. 4. __h,o_ Kickbacks. 5. _b,c,g_ Theft of inventory. 6. _m,l_ Paying the same invoice twice. Control Procedure a. Only accept deliveries for which an approved purchase order exists. b. Document all transfers of inventory. c. d. e. f. Restrict physical access to inventory. File invoices by due date. Maintain a cash budget. Automated comparison of total change in cash to total changes in accounts payable. Adopt a perpetual inventory system. Require purchasing agents to disclose financial or personal interests in suppliers. Require purchases to be made only from approved suppliers. Restrict access to the supplier master data. Restrict access to blank checks.

7. _g,b,c_ Stockouts. 8. __h,i,j,o_ Purchasing items at inflated prices. 9. __k,q_ Misappropriation of cash. 10. _h,i,o,p__ Purchasing goods of inferior quality. 11. __a_ Wasted time and cost of returning unordered merchandise to suppliers. 12. __n_ Accidental loss of purchasing data. 13. __j_ Disclosure of sensitive supplier information (e.g., banking data).

g. h.

i. j. k.

l. Only issue checks for a complete voucher package (receiving report, supplier invoice, and purchase order). m. Cancel or mark Paid all supporting documents in a voucher package when a check is issued. n. Regular backup of the expenditure cycle database. o. Train employees how to respond properly to gifts or incentives offered by suppliers. p. Hold purchasing managers responsible for costs of scrap and rework. q. Reconciliation of bank account by someone other than the cashier.

13.8

The following list identifies several important control features. For each control, (1) describe its purpose and (2) explain how it could be best implemented in an integrated ERP system. a. Cancellation of the voucher package by the cashier after signing the check b. Separation of duties of approving invoices for payment and signing checks c. Prenumbering and periodically accounting for all purchase orders. d. Periodic physical count of inventory. e. Requiring two signatures on checks for large amounts f. Requiring that a copy of the receiving report be routed through the inventory stores department prior to going to accounts payable. g. Requiring a regular reconciliation of the bank account by someone other than the person responsible for writing checks h. Maintaining an approved supplier list and checking that all purchase orders are issued only to suppliers on that list
Item a. Part I - Purpose Prevent resubmission of invoices for double payment Part II ERP System Control Control field in supplier invoice record to indicate the document has been used Control field in purchase order and receiving report records to indicate the document has been used to support payment. System matches all invoices to corresponding receiving reports and purchase orders Checks signed by cashier. Sequence check of all purchase orders. Still need to count physical inventory periodically. Still need two signatures. Receiving clerks enter that goods were transferred to inventory. Inventory clerks acknowledge receipt of goods via terminals. System configured so that voucher package requires that the receiving report include the acknowledgement of receipt by inventory control. Still required. Validity check of supplier number on all purchase orders. Restrict access to the supplier master file Verify all changes to the supplier master file Restrictions on who can make changes to the supplier master file.

b.

Prevent payment of fictitious invoices Prevent unauthorized purchases. Verify the accuracy of recorded amounts and detect losses. Prevent large disbursements for questionable reasons. Verifies that items received were placed in inventory and were not stolen.

c. d. e. f.

g. h.

Detect unauthorized disbursements. Ensure the purchase of quality goods and prevent violations of laws or company policies.

13.9

For good internal control, which of the following duties can be performed by the same individual? 1. Approve purchase orders 2. Negotiate terms with suppliers 3. Reconcile the organizations bank account 4. Approve supplier invoices for payment 5. Cancel supporting documents in the voucher package 6. Sign checks 7. Mail checks 8. Request inventory to be purchased 9. Inspect quantity and quality of inventory received
The cells in the following table marked with an X indicate duties that can be performed by the same individual without creating an internal control weakness: Duty 1 2 3 4 5 6 7 8 9 Rationale: 1. The person who approves purchase orders should be in the purchasing function, which is also the function with the knowledge and skill to negotiate terms with supplierrs. However, the same person should not both initiate and approve purchases. 2. The cashier should sign checks, cancel the supporting documents before returning them to A/P, and mail the checks. However, the person performing these three duties should not also reconcile the bank account nor should that person approve payment of supplier invoices. 1 X 2 3 4 5 6 7 8 9

X X

P3.7 was handed out in class.