Accounting / internal controls - Essay Example

? Accounting Internal Controls Inserts His/Her Inserts Grade Inserts 29 April INTRODUCTIONRicchiute(2006) emphasised the accounts payable processing system for purchase of inventory must include strict internal control policies to ensure the safeguarding and recording of the company’s assets. The research includes a list of internal control weaknesses such as the department, not the purchasing department, should make the purchase requisition, the receiving department should not give the original receiving report to the warehouse, the receiving repot, checks, disbursement vouchers, purchase orders, purchase requisitions does not indicate they are pre-numbered, and the cashier and treasurer functions are put on the shoulders of one person. The report shows the recommendations to treat each weakness of the receiving, warehouse, purchasing, payables, and the requesting department. INTERNAL CONTROL WEAKNESSES AND RECOMMENDATIONs TO TREAT (ELIMINATE) EACH WEAKNESS. There are internal control weaknesses in the given case study. First, the purchase requisition is prepared by the purchasing department. Second, the receiving department transfers the receiving report to the warehouse with the inventory. Third, the receiving report is prepared and signed in receiving and transferred to the warehouse inventory. There are recommendations that should be imposed to correct the internal control weaknesses. The first internal control weakness is the purchase requisition is prepared by the purchasing department. The recommendation is for the department needing the purchased items should prepare and complete the purchase requisition. The department employee seeks the approval of the department head for each purchase requisition. After approval, the purchase requisition is sent to the purchasing department. The purchasing department asks bids of 3 or more suppliers to give its price schemes. The purchasing departments selects the supplier having the most reasonable price and in terms of quality. The above procedure will prevent the purchasing department from making erroneous or fraudulent purchase transactions (purchasing department’s buying more or less of the actual items needed by the requisitioning department. The second internal control weakness is the receiving department transfers the receiving report to the warehouse with the inventory. The recommendation is the receiving department should not give the receiving report to the warehouse department in order to avoid the warehouse department from tampering with the receiving report. This is very important because the receiving report will serve as a check between the receiving department’s inventory and the warehouse department’s inventory. The proper way is for the receiving department to give a Copy of the receiving report to the storeroom and a third 2nd copy of the receiving report is present to the accounts payable department. The accounts payable department will tally the supplier’s invoice amount and the receiving report in preparing the disbursement vouchers. The payables department attaches the purchase order, purchase requisition, receiving report and the accompanying supplier’s invoice or supplier’s statement of account. The above procedure ensures that anyone check if the receiving department and the warehouse department records are similar (warehouse may alter the original receiving copy records transferred to them). The third internal control weakness is the receiving report is prepared and signed in receiving and transferred to the warehouse inventory. The recommendation is warehouse, after signing they received the goods from the receiving department keeps the second copy of the receiving report in their file to lessen errors and frauds. Further, the fourth internal control weakness is cash disbursements are posted by the general ledger department as a credit to cash and debit to raw materials inventory account. The recommendation is the company should record a liability for the raw materials purchases as a debit to merchandise inventory (merchandise inventory is debited under perpetual inventory system; purchases is debited under periodic inventory system) and a credit to account payable on the date the receiving department receives the goods. On the date of payment, the amount paid is debited to accounts payable and credited to cash to ensure proper reporting of accounts. The fifth internal control is cash disbursements are posted by the general ledger department as a credit to cash and debit to raw materials inventory account. The recommendation is the company should record a liability for the raw materials purchases as a debit to merchandise inventory (merchandise inventory is debited under perpetual inventory system; purchases is debited under periodic inventory system) and a credit to account payable on the date the receiving department receives the goods. On the date of payment, the amount paid is debited to accounts payable and credited to cash. The sixth internal control weakness is cash disbursements are posted by the general ledger department as a credit to cash and debit to raw materials inventory account. The recommendation is the company should record a liability for the raw materials purchases as a debit to merchandise inventory (merchandise inventory is debited under perpetual inventory system; purchases is debited under periodic inventory system) and a credit to account payable on the date the receiving department receives the goods to ensure proper recording of accounts. On the date of payment, the amount paid is debited to accounts payable and credited to cash to ensure proper recording of accounts. Seventh, the internal control weaknesses are there is no mention that the purchase orders, disbursement vouchers, receiving reports, and checks are pre-numbered. The recommendation is to have the purchase orders, disbursement vouchers, receiving reports, and checks are pre-numbered to easily account for the missing accountable unreported forms because the missing accountable forms could have been used for fraud or theft of company assets (especially cash). Eight, the internal control weakness is there internal control weakness is there is no mention that the internal verification of calculations and amounts are done. The remedy is the internal verification of calculations and amounts are done to ensure accounts are true and fair. Ninth, the internal control weakness is there is no mention whether the cash disbursement transactions are property classified. The remedy is the cash disbursement transactions should be property classified to avoid misrepresentation of accounts. Tenth, the internal control weakness is the receipt for the items by the warehouse personnel is indicated in on the receiving report and sent to accounts payable. The remedy is the receiving department directly sends a 2nd copy of the receiving report to accounting. The 1st copy given by the receiving department to the warehouse department is filed in the warehouse department to ensure proper recording of accounts. Eleventh, the internal control weakness is there is no mention who approved the remittance advice. The recommendation is another person, other than the cashier or treasurer, should approve the remittance advice to avoid defalcation by the cashier or treasurer. Twelfth, the internal control weakness is the cashier is the check signer. The recommendation is The authorization function (signing of checks) should belong to the treasurer. The custody, (holding and release of the checks) should be assigned to another person (cashier). This will avoid defalcation. CONCLUSION. Based on the above discussion, the accounts payable processing system for purchase of inventory should include the implementation of strict internal control policies to ensure the safeguarding and recording of the company’s assets. The list of internal control weaknesses include the department, not the purchasing department, should make the purchase requisition, the receiving department should not give the original receiving report to the warehouse, the receiving repot, checks, disbursement vouchers, purchase orders, purchase requisitions does not indicate they are pre-numbered, and the cashier and treasurer functions are put on the shoulders of one person. The report shows the recommendations to treat each weakness of the receiving, warehouse, purchasing, payables, and the requesting department. Indeed, the above internal control recommendations must be set in place to treat the weaknesses. REFERENCES: Ricchiute, D. (2006). Auditing and Assurance Services. New York: Academic Press. Read More