10. INTERNAL CONTROL

The following is a description of a manufacturing companys purchasing procedures. All computers in the company are networked to a centralized accounting system so that each terminal has full access to a common database.

The inventory control clerk periodically checks inventory levels from a computer terminal to identify items that need to be ordered. Once the clerk considers that inventory is too low, he chooses a supplier and creates a purchase order from the terminal by adding a record to the purchase order file. The clerk prints a hard copy of the purchase order and mails it to the vendor. An electronic notification is also sent to accounts payable and receiving, giving the clerks of each department access to the purchase order from their respective terminals.

When the raw materials arrive at the unloading dock, a receiving clerk prints a copy of the purchase order from his terminal and reconciles it to the packing slip. The clerk then creates a receiving report on a computer system. An electronic notification is sent to accounts payable and inventory control, giving the respective clerks access to the receiving report. The inventory control clerk then updates the inventory records.

When the accounts payable clerk receives a hard- copy invoice from the vendor, she reconciles the invoice with the digital purchase order and receiving report, and she prepares an AP packet and places it into the open accounts payable file in a filing cabinet until the due date. The clerk also updates the accounts payable subsidiary ledger and records the liability amount in the purchase journal from the department computer terminal. The accounts payable clerk periodically reviews the cash disbursements file for items due and, when they are identified, prepares a check for the amount due. Finally, using the department terminal, the clerk removes the liability from the accounts payable subsidiary file and posts the disbursement to the cash account.

Required:

b. Analyze the physical internal control weaknesses in the system.

c. Describe the IT controls that should exist in the system. Be specific as to how the controls apply.