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    13.10 Last Year The Diamond Manufacturing Company Purchased Over $10 Million Worth of

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    Jara Takuzawa
    The document describes the purchasing process for special orders at the Diamond Manufacturing Company. It details how purchase requisitions are submitted, purchase orders are processed, items are received, and invoices are paid. It then asks to identify weaknesses in controls over special orders and payments, and recommend improvements. Key weaknesses include a lack of budget verification for requests, no price comparisons, no vendor performance reviews, blind counts by receiving, and lack of documentation between departments. Recommendations are to add budget checks, solicit bids, use vendor ratings, implement receiving incentives, and configure IT systems to automate documentation and approvals.

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    13.10 Last Year The Diamond Manufacturing Company Purchased Over $10 Million Worth of

    Uploaded by

    Jara Takuzawa
    2K views7 pages
    The document describes the purchasing process for special orders at the Diamond Manufacturing Company. It details how purchase requisitions are submitted, purchase orders are processed, items are received, and invoices are paid. It then asks to identify weaknesses in controls over special orders and payments, and recommend improvements. Key weaknesses include a lack of budget verification for requests, no price comparisons, no vendor performance reviews, blind counts by receiving, and lack of documentation between departments. Recommendations are to add budget checks, solicit bids, use vendor ratings, implement receiving incentives, and configure IT systems to automate documentation and approvals.

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    The document describes the purchasing process for special orders at the Diamond Manufacturing Company. It details how purchase requisitions are submitted, purchase orders are processed, items are received, and invoices are paid. It then asks to identify weaknesses in controls over special orders and payments, and recommend improvements. Key weaknesses include a lack of budget verification for requests, no price comparisons, no vendor performance reviews, blind counts by receiving, and lack of documentation between departments. Recommendations are to add budget checks, solicit bids, use vendor ratings, implement receiving incentives, and configure IT systems to automate documentation and approvals.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    2K views7 pages

    13.10 Last Year The Diamond Manufacturing Company Purchased Over $10 Million Worth of

    Uploaded by

    Jara Takuzawa
    The document describes the purchasing process for special orders at the Diamond Manufacturing Company. It details how purchase requisitions are submitted, purchase orders are processed, items are received, and invoices are paid. It then asks to identify weaknesses in controls over special orders and payments, and recommend improvements. Key weaknesses include a lack of budget verification for requests, no price comparisons, no vendor performance reviews, blind counts by receiving, and lack of documentation between departments. Recommendations are to add budget checks, solicit bids, use vendor ratings, implement receiving incentives, and configure IT systems to automate documentation and approvals.

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    At a glance
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    O'Brien Corporation's revenue cycle has several weaknesses including lack of validation for new customer orders, not checking customer credit histories, lack of security over inventory, infrequent physical inventory counts, shipments not reconciled to orders, and delays in updating inventory records.

    Three weaknesses identified were: 1) Lack of validation for new customer orders, 2) Not checking customer credit histories, 3) Lack of security over inventory stored near the loading dock.

    Problems that could result include uncollectible shipments, excessive bad debt, and potential theft of inventory.

    13.

    10 Last year the Diamond Manufacturing Company purchased over $10 million worth of
    office equipment under its special ordering system, with individual orders ranging from
    $5,000 to $30,000. Special orders are for low-volume items that have been included in a
    department managers budget. The budget, which limits the types and dollar amounts of
    office equipment a department head can requisition, is approved at the beginning of the
    year by the board of directors. The special ordering system functions as follows:
    Purchasing A purchase requisition form is prepared and sent to the purchasing
    department. Upon receiving a purchase requisition, one of the five purchasing agents
    (buyers) verifies that the requester is indeed a department head. The buyer next selects
    the appropriate supplier by searching the various catalogs on file. The buyer then phones
    the supplier, requests a price quote, and places a verbal order. A prenumbered purchase
    order is processed, with the original sent to the supplier and copies to the department
    head, receiving, and accounts payable. One copy is also filed in the open-requisition file.
    When the receiving department verbally informs the buyer that the item has been
    received, the purchase order is transferred from the open to the filled file. Once a month,
    the buyer reviews the unfilled file to follow up on open orders.
    Receiving
    The receiving department gets a copy of each purchase order. When
    equipment is received, that copy of the purchase order is stamped with the date and, if
    applicable, any differences between the quantity ordered and the quantity received are
    noted in red ink. The receiving clerk then forwards the stamped purchase order and
    equipment to the requisitioning department head and verbally notifies the purchasing
    department that the goods were received.
    Accounts Payable Upon receipt of a purchase order, the accounts payable clerk files it in
    the open purchase order file. When a vendor invoice is received, it is matched with the
    applicable purchase order, and a payable is created by debiting the requisitioning
    departments equipment account. Unpaid invoices are filed by due date. On the due date,
    a check is prepared and forwarded to the treasurer for signature. The invoice and
    purchase order are then filed by purchase order number in the paid invoice file.
    Treasurer
    Checks received daily from the accounts payable department are sorted into
    two groups: those over and those under $10,000. Checks for less than $10,000 are machine
    signed. The cashier maintains the check signature machines key and signature plate and
    monitors its use. Both the cashier and the treasurer sign all checks over $10,000.
    a. Describe the weaknesses relating to purchases and payments of special orders by the
    Diamond Manufacturing Company.
    b. Recommend control procedures that must be added to overcome weaknesses identified
    in part a.
    c. Describe how the control procedures you recommended in part b should be modified if
    Diamond reengineered its expenditure cycle activities to make maximum use of
    current IT (e.g., EDI, EFT, bar-code scanning, and electronic forms in place of paper
    documents).
    (CPA Examination, adapted)
    Weakness
    1. Buyer does not verify that
    the department heads request
    is within budget.
    2. No procedures established
    to ensure the best price is
    obtained.

    Control
    Compare requested amounts
    to total budget and YTD
    expenditures.
    Solicit quotes/bids for large
    orders.

    Effect of new IT
    System can automatically compare the
    requested amount to the remaining
    budget.
    EDI and Internet can be used to solicit
    bids.

    3. Buyer does not check


    vendors past performance.
    4. Blind counts not made by
    receiving.

    5. Written notice of
    equipment receipt not sent to
    purchasing.
    6. Written notice of
    equipment receipt not sent to
    accounts payable
    7. Mathematical accuracy of
    vendor invoice is not verified.
    8. Invoice quantity not
    compared to receiving report
    quantity.
    9. Notification of
    acceptability of equipment
    from requesting department
    not obtained prior to
    recording payable.
    10. Voucher package not sent
    to Treasurer.

    11. Voucher package not


    cancelled when invoice paid.
    12. No mention of bank
    reconciliation.

    Prepare a vendor performance


    report and use it when
    selecting vendors.
    Black out quantities ordered
    on copy of Purchase Order
    sent to receiving
    Provide incentives if
    discrepancies between
    packing slip and actual
    delivery are detected.
    Send written notice of
    equipment receipt to
    purchasing.
    Send written notice of
    equipment receipt to accounts
    payable
    Verify mathematical accuracy
    of vendor invoice.
    Compare/verify invoiced
    quantity with quantity
    received.
    Obtain confirmation from
    requisitioner of the
    acceptability of equipment
    ordered prior to recording
    payable.
    Send voucher package
    (purchase order and receiving
    report) to Treasurer along
    with approved invoice.
    Treasurer should mark
    voucher package as PAID
    when check is signed.
    Bank account should be
    reconciled by someone other
    than Accounts Payable or the
    treasurer.

    Vendor performance ratings can be


    updated automatically and made
    available to buyer.
    Do not permit receiving clerks to access
    quantities on purchase orders.
    Request bar coding or RFID tagging of
    all items and use readers to check in all
    deliveries.
    Still provide incentives to detect
    discrepancies.
    Receiving data and comments entered
    via on-line terminals and routed to
    purchasing.
    Configure system to notify accounts
    payable automatically of equipment
    receipt.
    Automatic verification of mathematical
    accuracy of vendor invoice.
    System verifies invoice quantity with
    quantity received.
    Configure system to require confirmation
    of equipment acceptability prior to
    approving invoice for payment.

    Configure system to match invoices


    automatically with supporting
    documents.
    Configure system to mark supporting
    documents as used when invoice is paid.
    Bank account should be reconciled by
    someone other than Accounts Payable or
    the treasurer.

    10.8

    (CMA Examination, adapted)


    a. O'Brien Corporation: Internal control weaknesses and recommended improvements:
    Weaknesses and Potential Problem(s)

    Recommendation(s) to Correct Weaknesses

    1. Orders received over the telephone are


    not confirmed by customers in writing.
    This could result in errors or in filling
    bogus orders.

    Require a written customer purchase order


    as confirmation of telephone orders.

    2. Customer credit histories are not


    checked before approving orders. This is
    resulting in excessive late collections and
    uncollectible accounts.

    Customers credit should be checked and


    no sales should be made to those that do
    not meet credit standards.

    3. Sales orders are filed by date in the


    Marketing Department. This leads to
    difficulty in handling customer questions
    and complaints.

    Establish customer files and file sales


    orders by customers.

    4. Only two copies of sales orders are


    prepared. This is not enough to insure a
    proper matching in the Billing Department.

    Prepare, at a minimum, a three-part sales


    order, sending one to Shipping and one to
    Billing. Billing should match its copy with
    a signed copy from Shipping before
    preparing a sales invoice.

    5. Items that are out of stock are merely


    noted. Inaction in these cases could cause
    lost sales.

    Establish procedures to schedule


    production for back orders and to ship and
    bill the product once it is available.

    6. There is no reconciliation of inventory


    amounts shipped with billings. This could
    result in undetected underbilling.

    Billing and shipping records should be


    integrated on the computer system to
    provide for reconciliation of inventory
    amounts shipped and billed.

    7. The Receiving Department and the


    Shipping Department share a computer
    terminal. In addition, the personnel in both
    departments have access to the physical
    inventory and can update the perpetual
    inventory records through the terminal.
    This could result in theft of inventory with
    no means of tracing the theft.

    Each department should have its own


    terminal and the terminals should be for
    inquiry purposes only. The physical
    custody and recordkeeping of inventory
    should be separated (perpetual records
    should be updated on the computer by
    Purchasing/Accounts Payable and Billing).
    Access to the physical inventory should be
    limited to Receiving; it would add
    incoming goods to the physical inventory
    and select the goods from the warehouse
    for shipping.

    8. The Receiving Department does not


    compare incoming deliveries to purchase
    orders. This may lead to the acceptance of
    unordered goods.

    Copies of purchase orders without quantity


    information should be sent to Receiving.
    Receiving should match the shipment to the
    purchase order and indicate the quantity
    received.

    9. A complete inventory listing is printed


    only once a year. Errors in the perpetual
    inventory records may remain undetected
    for too long a time period.

    Inventory listings should be printed


    periodically throughout the year, and
    physical counts compared to the listing on
    a cycle basis.

    b.

    How O'Brien Corporation could use its new computer system to improve control and
    efficiency:
    Maintain an online master file for customer account and credit data in addition to
    inventory data.
    Use online terminals to enter sales order data into the system as orders are received.
    Have the system check inventory availability as order data are entered; if the customer is
    on the phone at this time, inventory availability may be confirmed directly to the
    customer.
    Have the system perform a credit check as order data are entered, and reject orders from
    customers who are not credit-worthy.
    Immediately following approval of a sales order, have the system (1) print or display a
    shipping order for Shipping Department use, (2) print a packing slip and mailing label
    for use in shipping the goods to the customer.
    Once the order has been shipped, the system should generate a customer invoice.
    Maintain order data online to facilitate response to customer inquiries re order status.
    Use password access controls to restrict access to the customer and inventory files, and the

    operations that can be performed on these files, to appropriate personnel.

    12.7

    OBrien Corporation is a midsize, privately owned, industrial instrument manufacturer


    supplying precision equipment to manufacturers in the Midwest. The corporation is 10
    years old and uses an integrated ERP system. The administrative offices are located in a
    downtown building and the production, shipping, and receiving departments are housed
    in a renovated warehouse a few blocks away.
    Customers place orders on the companys website, by fax, or by telephone. All sales are on
    credit, FOB destination. During the past year sales have increased dramatically, but 15%
    of credit sales have had to written off as uncollectible, including several large online
    orders to first-time customers who denied ordering or receiving the merchandise.
    Customer orders are picked and sent to the warehouse, where they are placed near the
    loading dock in alphabetical sequence by customer name. The loading dock is used both
    for outgoing shipments to customers and to receive incoming deliveries. There are ten to
    twenty incoming deliveries every day, from a variety of sources.
    The increased volume of sales has resulted in a number of errors in which customers were
    sent the wrong items. There have also been some delays in shipping because items that
    supposedly were in stock could not be found in the warehouse. Although a perpetual
    inventory is maintained, there has not been a physical count of inventory for two years.
    When an item is missing, the warehouse staff writes the information down in log book.
    Once a week, the warehouse staff uses the log book to update the inventory records.
    The system is configured to prepare the sales invoice only after shipping employees enter
    the actual quantities sent to a customer, thereby ensuring that customers are billed only
    for items actually sent and not for anything on back order.

    Identify at least three weaknesses in OBrien Corporations revenue cycle activities.


    Describe the problem resulting from each weakness. Recommend control procedures that
    should be added to the system to correct the weakness.
    (CMA Examination, adapted)
    Weaknesses and Potential Problem(s)

    Recommendation(s) to Correct Weaknesses

    1. Orders from new customers do not


    require any form of validation, resulting in
    several large shipments being sent and
    never paid for.

    Require digital signatures on all online


    orders from new customers.

    2. Customer credit histories are not


    checked before approving orders, resulting
    in excessive uncollectible accounts.

    Customers credit should be checked and


    no sales should be made to those that do
    not meet credit standards.

    3. Outgoing shipments are placed near the


    loading dock door without any physical
    security. The loading dock is also used to
    receive incoming deliveries. This increases
    the risk of theft, which may account for the
    unexplained shortages in inventory.

    Separate the shipping and receiving docks.

    4. Physical counts of inventory are not


    made at least annually. This probably
    accounts for the inaccuracies in the
    perpetual inventory records and may also
    prevent timely detection of theft.

    Physical counts of inventory should be


    made at least once a year.

    5. Shipments are not reconciled to sales


    orders, resulting in sending customers the
    wrong items.

    The system should be configured to match


    shipping information to sales orders and
    alert the shipping employees of any
    discrepancies.

    6. The perpetual inventory records are only


    updated weekly. This contributes to the
    unanticipated shortages that result in
    delays in filling customer orders.

    The warehouse staff should enter


    information about shortages as soon as
    they are discovered.

    Require a written customer purchase order


    as confirmation of telephone and fax
    orders.

    Physically restrict access to the loading


    dock area where customer orders are
    placed.

    Inventory records discrepancies should be


    corrected and investigated.

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