ACCT425 – V1WW

Assignment 6-1: Discussion Questions Week 6

3. Discuss the importance of supervision controls in the receiving department and the
reasons behind blind fields on the receiving report.

Supervision controls in the receiving department is important to deter opportunities for theft and
fraud. Since the receiving clerks have access to an organization’s assets (the inventory), it is
critical that there is proper supervision. Two exposures may potentially exist: (1) the clerk fails
to perform his or her duty, and (2) the theft of assets. (page 226)

Example: In a previous merchandising company I used to work at, there was a period when the
company tried to reduce labor costs to meet their projections. During this time, there were only
two employees working in the receiving department with no manager or supervisor. It was also
during this time, that they were both terminated from their positions. Due to the lack of staff and
supervision, the receiving clerks did not piece count all the goods and they both stole some of the
inventory. This ended up costing the company a lot more due to the theft and the incorrect and
damaged items it received for several large shipments, which were not verified or inspected.

The reasons behind the blind fields on the receiving report is to ensure that the goods received
are properly counted and checked for quality, as well as ensuring the correct items that were
ordered are received. The copy of the purchase order is used for the inspection and it should not
have the quantities and amounts listed. This helps to ensure the receiving department clerks are
fulfilling their tasks by manually counting and inspecting the goods received. If the quantity and
amounts are printed on the receiving clerk’s copy of the purchase order, he or she may not
conduct a physical count or inspection of the goods and may be tempted to transfer this
information to the receiving report. The inspection and counting of goods received protects the
organization from accepting incomplete or damaged goods. Supervision is an important control
since it helps to ensure that the clerks are performing their tasks. The supervisor should take
custody of the packing slip while the receiving clerks count and inspect the goods to make sure
the receiving clerks actually inspect and count the goods. If the quantities and amounts are listed,
an employee may be tempted to steal some of the inventory. Proper supervision helps to deter
employees from stealing. (page 227)

Example: In the merchandising company I mentioned above, there was an incident when there
was no supervisor available for half a day. On this particular day, a shipment of goods was being
received from one of our big clients. The company had also contracted with the client to store
some of their inventory in the warehouse. One of the shipments contained several boxes of Visa
gift cards. Since there was no supervisor on duty when the shipment was received, the clerks had
possession of the packing slip and the purchase order with the listed quantities and amounts. The
clerks knew the amounts of the gift cards and how many were in each shipment. One of the
clerks stole a few of the $1,000 gift cards! Although it was reported that some of the goods were
not included in the shipment, the client and the company were able to verify the theft due to the
security cameras in the warehouse and because the client was able to trace the cards when it was
used. The employee resigned and the company reimbursed the client. It was decided not to press
charges against the previous employee since he returned the unused gift cards and repaid the
amount of the used gift cards. It was also because the time, labor, and legal fees would have
exceeded the value of the gift cards.

5. Discuss the following statement: even in advanced technology systems, the AP clerk must
perform a three-way match to approve all vendor invoices for payment.

In the advanced technology system, the three-way match is automated. When the supplier’s
invoice is received by the AP clerk, the clerk utilizes the system and adds a record to the vendor
invoice file. This act prompts the system to automatically create a virtual AP packet by linking
the vendor invoice to the associated purchase order and receiving report records, using the PO
number as a common attribute. The application then reconciles the supporting documents, using
programmed criteria for assessing discrepancies. Items that fall within limits are automatically
approved and paid on their due date. Discrepancies in excess of the threshold are submitted to
management for review and manual approval. Through the virtual AP packet screen,
management may view the supporting documents and exercise an override of the system controls
to force payment. The override should be performed only by authorized management and should
be fully documented in management reports. (page 234)

Example: I used to work in the accounting department of a company that conducted clinical
research trials for pharmaceutical companies. The system the company utilized was an advanced
system and was developed especially for this company. When we received vendor invoices, the
AP clerk would enter a new record in the system, which was the vendor invoice file. On Friday
mornings, the Controller would review the week’s payables report and would sometimes
override the system due to cost or quantity differences. This was critical if supplies were to be
used by the clinical staff since a particular amount of each item needed to be on hand for the
participants of the research trials. If there were quantity differences, he would have the AP clerk
forward the necessary information to the clinical nurse supervisor. After the Controller reviewed
the report, the checks could then be printed and prepared for the outgoing mail. Since the system
was programmed to verify and reconcile the data, it simplified the process for the AP
department. An advanced system like this was important to have due to the number of invoices
we received each week.

7. Discuss the objective of eliminating the receiving function. What accounting/audit

problems result that need to be resolved?

Some organizations have taken reengineering even further by eliminating the receiving function
entirely. The objective of this is to send goods directly to the production department and thus
bypass the receiving area and avoid production delays and the associated handling costs. An
accounting and auditing problem that must be overcome is how to account for inventory receipts
when there is no receiving function and no receiving report. One way of dealing with this is to
calculate the number of parts received based on the products produced in which the parts are
components. Supplier payments are distributed based on production (part usage), and by having
only one supplier per part, the question of which supplier to pay is self-evident. An additional
problem to deal with is accounting for scrap in the production process. Since scrap does not end
up in finished production, it will not be counted, and vendors will not be paid for materials that
were scrapped. Separate accounting procedures need to be implemented to record and monitor
scrap. (page 236)

Example: Years ago, I used to know someone who worked for an automobile manufacturer. She
worked in the receiving department along with a few of her friends. She told me that they used
an EDI system. They knew exactly when shipments were arriving, what items were being
received, and the quantities of each item. She still had to inspect the items for quality and
damage. The receiving clerks also randomly piece counted some of the shipments. She would tell
me how easier it was compared to another company she used to work for where they had to piece
count and inspect every shipment received then complete the purchase orders with the quantities
for each item. She said that it could take all day sometimes to go through one shipment
depending on the size of the order. It simplified the process and the receiving department was
more efficient. The goods were quickly put into inventory so they could be disbursed into
production. She told me that sometimes the driver of the delivery company would then go to the
shipping department to pick up scraps that were not usable or could not be refined into another
usable part in the plant.

In regards to the scrap, she did tell me once that the plant had a process of recording the amount
of scrap returned to the supplier. Her friend in the accounting and finance department said that
the company received credit for items and scrap returned to the supplier. The supplier would
melt down the scrap metals and reuse them to remake parts. I guess the process accounted for all
the items of scrap and an audit trail did exist for the returns.