AUDIT OF PURCHASES CYCLE

QUESTION 2

World Machinery Sdn. Bhd. is a company in Sungai Petani building special machinery made to order. You are provided with the following information regarding the company's internal control system for material requisition.

The material requisition form should first be approved by the plant foreman before sending them to the purchasing department. A pre-numbered purchase order form is then prepared in triplicate by one of the purchasing staff and distributed as follows:

The original copy is sent to supplier.

The second copy is sent to the receiving department for the purpose of preparing a receiving report.

The third is kept on file by the purchasing department together with the material requisition form.

Materials are received from the supplier by a receiving clerk. He prepares a receiving report after verifying particulars on the supplier's delivery note with the purchase order. The materials are then handed over to the store room for storage. Copies of the receiving report are sent to the storeroom and purchasing department respectively for filing. Materials can be issued to the factory employees only after verbal approval is sought from the plant foreman.

Supplier's invoices are received by the mail room clerk who forwards them to the purchasing staff for verification. The staffs compares particulars of each invoice with copy of the respective purchase order on file in order to confirm accuracy of price and terms. The quantity as per invoice is also compared with the receiving department's report. After checking footings, extensions, and discounts, the employee indicates approval for payment by initialling on the invoice. The invoice is then forwarded to the accounting department for updating of the acquisitions journal and accounts payable master file. The invoices are filed together to the date due for payments.

For the purpose of settling outstanding invoices, the accounting department staff would requests for blank cheques from the cashier. After filling in the particulars, the cheques would be returned back to the cashier, who puts them through the cheque-signing machine. The cheques are then forwarded again to the accounting department, where cash disbursement journals and accounts payable master file would be updated. The cheques are placed in envelopes and sent to the mailroom. At the end of each month, a listing of the accounts payable master file is generated and the total is compared with the general ledger balance.

Required:

a) State two (2) inherent risk factors that directly affect the purchasing cycle.

b) Describe two (2) control procedures to ensure validity of purchase transactions and for each control procedure, suggest a test of control.

c) Identify five (5) control weaknesses in the above system and briefly explain the possible effects that could result from each of the weaknesses.

d) Give an audit procedure to test for purchase cut-off.