Example

The following example will try to illustrate the possible data flow between selected departments (purchasing, receiving and disbursement section of accounting department) of a case organization, including the internal controls that should exist to prevent materially misstated financial reporting due to errors and irregularities.

PURCHASING DEPARTMENT

Headed by a director and a manager of its own, the department operates with an enterprise resource planning system known as MERLIN. The system enables the department to perform tasks such as the preparation of a major document (purchase order) that originates from this department. The system (MERLIN) is designed and implemented in a manner that put limits on access to adjustments and modifications of purchase related data such as changes to purchase prices, for example changes to selected vendors or their prices will only be made by the purchase manager rather than buyers in the department and a simple way of exercising such control over purchase specific data would be through the use of passwords. Another example can be sighted on authorization; authorized data should only be reversed or unauthorized (if the need arises) not by buyers who performed the task but by their respective mangers that authorized the data. The aforementioned points are some of the many examples one can sight for the limit, which should exist, on access to assets in an organization that uses an EDP. If any buyer can override the limits put on his/her access to assets (purchase related data) the internal control system can easily be taken for an ineffective one.

Generally the entire activity of the department can be summarized, for the sake of this chapter and simplicity, as follows:-

Receive purchase request from different departments in the organization.

Collect proforma invoices from different vendors which the buyer think will provide the required items

Select a vendor after a thorough evaluation, that may usually be based on price, quality, delivery time etc

Issue a purchase order (a purchase order is a document showing quantity, unit price, total price, description of requested items, vendor name, buyer code, places where assigned individual will their signature etc)

Send copies of the purchase order to different department (Eg. receiving and accounting)

NOTE:-The copy of the purchase order will go to the receiving and accounting departments through the information technology department as a liaison albeit the fact the department is also responsible for sending a hard copy of the purchase order to the accounting department for processing of the payment.

RECEVING DEPARTMENT

The receiving department, like the purchasing department employees MERLIN for an efficient and effective resource planning. The department is solely responsible for the timely inspection (whether the received items are as per the set quality, quantity etc) and receipt of ordered line items. The major document that originates from this department is the receiving memo/goods receiving note/goods receiving voucher. The document contains quantity of items ordered, quantity of items received, quantity outstanding (if there is any) and the accounts to be affected by the accounting department. Like the purchase order, copy of this document will be delivered to the accounting department, the soft copy through the information technology as a liaison and the hard copy through personnel from the receiving department, for processing the payment.

ACCOUNTING DEPARTMENT (DISBURSMENT)

The enterprise resource planning the accounting department makes use of is known as ORACLE FINANCIALS. The accountant in the disbursement section will prepare checks to vendors after passing through the following simple procedures

Collect the hard copy of the purchase order from the purchasing department(Even though the data will migrate from the purchasing department, through the information technology department the hard copies must be submitted for verification purposes ,i.e, the accountant should ensure whether the purchase order is approved as per the set limits of authority)

Collect the hard copies of RM/GRN/GRV from the receiving department (for verification purposes)

Collect invoices from vendors

Check the three documents for consistency between contents such as quantity, quality, unit price, total price, vendor name etc

Prepare the payment.

Examples related with controls, during check preparation

The accountant, when preparing the check he/she can issue it for the quantities which are received by the receiving department and if by any chance he/she prepares the check for quantities other than the one migrated from the receiving department (other than the one shown in the RM/GRN/GRV) the effectiveness of the internal control system (input control) must be put under a huge question mark.

Another example can be sighted in association with the accounts to be affected. Checks should be prepared by affecting only the accounts migrated from the receiving department and if by any chance the system allows him/her to affect an account other than the one migrated or shown on the RM/GRV/GRN, effectiveness of the internal control system must be questioned.

The accountant should only be allowed to issue checks for vendor names that are migrated for the purchasing department and if the accountant manages to issue checks for any vendor other than the one migrated then the effectiveness of the internal control system must be questioned.

At the end of chapter one there is a case company (real world) that processes data electronically. The company uses MERLIN (to process both purchasing and receiving transactions) and ORACLE Financials (to process payment related transactions). This two elements of the company's Electronic Data Processing (EDP) are linked by the Department of Information Technology (DIT) as a liaison ,i.e, DIT is responsible for migrating purchasing and receiving documents to the Disbursement/Payment section of Accounting and Finance.

Required

After carefully analyzing the case (at the end of the first chapter) in connection with the above brief introduction of the system, identify possible areas of control (general and application) weakness and suggest how the weakness can be rectified.(10 points)