CASE

General Information

Just In Time Electronics Inc. (company) builds traveling robots used in hospitals that kill the Covid-19 virus using ultraviolet light.

Its manufacturing plant is also a warehouse. Below is a description of its purchasing, payable and cash disbursement procedures regarding the acquisition of component parts / supplies used in the production of the robots.

The company has the following departments that are involved in the purchase process:

1. Purchasing Department
2. Receiving Department
3. Accounts Payable

Purchasing

The Purchasing Department is responsible for obtaining the requested quantity of the components / supplies for the company at the lowest price possible.

The company does not maintain any pre-approved list of suppliers. The Purchasing Department simply goes on the Web each time a purchase is requested and searches for suppliers who can supply the required components / supplies.

Anyone in the Purchasing Department can access the system and prepare a purchase order (PO) without having to use a password.

The company does not use purchase requisitions available in its computer system. Rather, someone in the warehouse verbally advises (by telephone) someone in the purchasing department what components / supplies are needed and the purchasing department issues a PO thats sent to the supplier. Purchase orders are not pre-numbered at time of entry as management feels that it would be too difficult to account for all the numbers in the sequence.

The PO is printed by the accounts payable department (A/P) only after AP is notified by an e-mail received from the Receiving Department confirming that the goods have been received (see below Receiving - for explanation). The companys order entry and tracking system in the computer automatically assigns the next number in a series to the PO when it is printed.

Receiving

When parts are received from a supplier shipment, the receiver compares the description of the goods and quantity with the details stated on the PO. The PO is easily retrieved through the companys computer system (by entering the suppliers name) and does not require any password to be accessed. Once online, the receiver can see all the unit quantities, prices and extensions of the goods ordered. If the quantity received differs from the quantity ordered appearing on the PO, the receiver adjusts the PO amount online.

When the goods are checked by the receiver, the receiver sends an e-mail to A/P, recording the type of goods (i.e. product #, description) quantity and date received. A/P uses the e-mail to create a receiving report. The receiving report does not show any evidence of a pre-numbered sequence. Once the receiving report is generated and printed the PO is printed out with a system generated sequential PO # (which is only assigned a PO# at the time of printout).

The PO and the receiving report are then filed in a pending file in A/P waiting for the eventual receipt of the suppliers invoice.

Payment of Supplier Invoice

When the suppliers invoice is received by the purchasing department, one of the purchasing departments staff sends an e-mail to A/P, noting the supplier name, invoice #, invoice date, parts description, $ amount of the invoice (broken down by # of units, price per unit, extended cost, cost subtotal, GST, QST and Grand total) and payment terms. The suppliers invoice is then filed in the supplier file located in the purchasing department.

A/P then matches the e-mails invoice information to the receiving report and PO found in the pending file. If all the supporting documents are correct A/P then posts the invoice using the information from the e-mail. Once the invoice information is posted all the supporting documentation is filed in the A/P department in the suppliers file. Nowhere on the documentation is there any reference regarding the posting of the invoice to the books and records. There is no physical evidence appearing on the invoice that it was verified, posted and paid by someone in the accounts payable department.

When the payment is due A/P prepares a pre-numbered cheque for the controller to sign. Only the cheque is then forwarded to the controller for signing. The controller signs the cheque and returns it to A/P who then sends the cheque out to the supplier.

Required: ANSWER PART A AND PART B USING THER EXCEL SPREADSHEET PROVIDED

Part A

Using the excel grid attached to enter your responses:

1. List three (3) examples of a weakness in controls for EACH of the following activities:

1. purchasing,
2. receiving
3. payment of accounts payable

In other words, you should have a total of 9 internal control weakness identified.

2. For EACH weakness explain in proper detail (i.e. not in sentence fragments or one-word answers) why each would be a weakness by using an example of what could go wrong (WCGW).

3. For EACH weakness provide a recommendation to the company as to what control should be implemented to address the weakness.

Part B

During your review of the companys purchasing system you determined that the company does not maintain any pre-approved list of suppliers for the highly technical robot components. Essentially, there is no control in place that requires the Quality Control Department (QC) to approve suppliers in advance of the purchasing department ordering parts from a new supplier.

The Purchasing Department simply goes on the Web each time a purchase is requested and searches for suppliers who can supply the required components at the best price and meet the delivery date.

1. Explain why this approach to purchasing components may be of concern to QC and should be to the company in general. (state your answer below)

2. To address QCs concern, what internal control(s) would you (as the internal auditor) recommend to implement with respect to the process of opening up new suppliers in the computer system for robot components. (state your answer below)