1.1 Identify and fully discuss at least 11 (eleven) weaknesses in the purchases requisitions and procurement department of BedsAreUs. (11)

1.2 Develop ten (10) audit engagement procedures to audit the effectiveness of at least ten control activities you can identify in BedsAreUs' internal control system over purchases and payments. (10)

CASE STUDY

(21 marks)

BACKGROUND

BedsAreUs (Proprietary) Limited (BedsAreUs) is a wholesale company that sells beds, pillows and other sleeping apparel across South Africa. The head office as well as the warehouse from where all goods are distributed is situated in Midrand. You have recently been appointed as a junior internal auditor at BedsAreUs. A few problems which includes insufficient inventory levels, inventory of inferior quality and payments made to suppliers for inventory never received, immediately came to your attention after your appointment.

SYSTEM DESCRIPTION: PURCHASES AND PAYMENT CYCLE

Purchase requisitions and procurement department Inventory is ordered directly from the manufacturers of beds, pillows and sleeping apparel. The procurement department, under the management of Mr Feather, is responsible for placing orders at manufacturers by means of a manual control system. Orders are based on pre-numbered and pre-printed purchase requisitions, received from the warehouse and the warehouse only sends these to the procurement department when inventory is entirely out of stock. Individual warehouse staff completes these purchase requisitions when inventory in their allocated sections of the warehouse is depleted. Only a single copy of the purchase requisition is completed and send to the procurement department. This is done by internal mail by the individual who completed the document. One of the five procurement clerks is responsible for completing a pre-printed and prenumbered purchase order for each purchase requisition received from the warehouse with reference to quantity and description of inventory required according to the purchase requisition. The procurement clerks are all familiar with the industry and are Page2of3 allowed to obtain a quotation and to order inventory from any supplier offering competitive prices according to their discretion. The only control in place before the procurement clerk who completed the purchase order sends the purchase order to the supplier via e-mail, is a second procurement clerk re-performing the casts and calculations on the purchase order. The first procurement clerk does not regard it as necessary to file any purchase requisitions or orders together and the procurement manager only follows up on long outstanding deliveries when goods are not received from suppliers within three months. Receiving bay and warehouse Inventory-receiving clerks receive inventory delivered by supplier representatives in a separate well-secured area, where after it is transferred to the warehouse for proper safeguarding until it is sold. One of the ten inventory-receiving clerks is responsible for receiving the inventory delivered and accepts all deliveries accompanied with a valid delivery note. A second inventory-receiving clerk is responsible for completing a pre-printed and pre-numbered goods received note upon the instruction of the first inventory-receiving clerk (who received the inventory). The second inventory-receiving clerk is then responsible for transferring the inventory to the warehouse where one of the warehouse-clerks is responsible for receiving the inventory and allocating it to an applicable area in the warehouse. The warehouse clerk does not accept any inventory without a copy of the goods received note. Accounting department Invoices are normally received from suppliers on the same day that the delivery takes place and are directed to Ms Cotton, the accounts payable clerk, for the immediate recording of the transaction. Ms Cotton only re-performs the calculations on the supplier invoice where after she records it in the purchases journal and creditors ledger. Invoices are never recorded if not supported with a valid purchase order, goods received note and supplier delivery note from the supplier. A senior accounts payable clerk is responsible for verifying that recordings are substantiated with the supporting documents and agrees the purchase order number according to the order number allocated in the purchases journal. Copies of goods received notes received from the warehouse are numerically filed together with the invoice for each transaction in the supplier control file in the accounting department. The purpose of this file is to serve as a back-up for Mr Pillow, the accounts payable manager, in case any queries are received from suppliers relating to outstanding payments or incorrect payments that occurred during the year or after year end. Mr Pillow does not regard it as necessary to perform any other procedures relating to goods received notes or invoices in the file. Ms Cotton is responsible for performing creditors' reconciliations at month end by comparing the creditors' accounts in the creditors' ledger with the total purchases according to the purchases journal. Sound controls are in place for supplier statement reconciliations when suppliers statements become due at month end