MONARCH INSTITUTE 2.4 The operational audit of the purchasing cycle has already been conducted. The Book Worm's organisational chart for the purchasing department is: BOOKWORM Extract: Purchasing Department Organisation Chart MANAGING DIRECTOR LINDA TRINH SUPPLY MANAGER WARREN PAGE PURCHASING OFFICER PURCHASING OFFICER MARK SHRESTHA STEFAN CHAPTER ADMINISTR SUPPORT CHRIS LEE ADMINISTRATIVE ADMINISTRATIVE FREDA NOVEL TOM FICTION The internal control procedures within the Purchasing Department require: . All Purchase Requisitions must be approved by the operating manager whose department is allocated the cost of the items purchased. An approved Purchase Requisition must support all Purchase Orders. All Purchase Orders must authorised by the Purchasing Officer. . The ledger accounts charged in the Purchase Order must checked for accuracy by an authorised member of the accounting department. Purchase Orders must be raised for all purchases of inventory items, administration and other expenses A regular report must be prepared showing unaccounted or missing Purchase Orders. . All Purchase Orders outstanding for more than two months must be investigated.The senior auditor has provided you with the Purchasing Department Operational Audit Plan, which includes the audit procedures. This is available in the Assessment Resources folder. During the operational audit of the Purchasing department, 800 purchase orders were reviewed and the following weaknesses were found: o 51 orders were not signed by a purchasing officer. s 15 were not authorised by the correct purchasing officer for that product. o 12 purchases of goods or services were made with verbal requests from store managers and purchase orders were not raised for them. s 35 orders have been outstanding for more than three months. additional orders have been raised duplicating orders for goods included in those orders outstanding for more than three months. o 5 orders were for goods for the personal use of staff. Once this was discovered the staff were made to repay Book Worm for the purchases. In addition to the above, the organisation structure of the Purchasing department was reviewed and found to be ineffective in being able to comply with the basic principles of internal control. OPERATIONAL AUDIT PLAN AND PROCEDURES - PURCHASING DEPARTMENT Overview a. Obtain and identify the relevant objectives of the purchasing department. b. Determine the pertinent facts and conditions of the department. i. Conduct a physical tour. ii. Obtain all internal forms and documents. iii. Interview departmental employees. iv.Prepare financial analyses. c. Define problem areas or opportunities for improvement. d. Discuss initial report with department management. Prepare final report for management. Audit Plan and Procedures The activities of the purchasing department have an indirect influence on the external audit assertions that will be the focus of their audit of accounts payable or accruals balances. What will be most relevant to the external auditer is the possibility that there could be unrecorded liabilities at the end of the financial year. The reasons for this include: a. Non-compliance with established procedures b. Other system weaknesses such as; . The frequency and risk of the extent of goods being received and paid for that have no purchase order. ii.Missing purchase order sets that may have been used for legitimate purchases or have been used for private purchases. iii. Purchase orders that have been outstanding for unusually lengthy periods. To mitigate the risk of this occurring, the internal audit program, and the data collection phase would possibly include a questionnaire with the following questions: a. Are Purchase Requisitions used as the criginating document for a Purchase Order? b. Are Purchase Requisitions approved by the operating manager whose department is allocated the cost of the items purchased? c. Are the ledger accounts to be charged checked as accurate by an authorised member of the accounting department? Are Purchase Orders raised for all purchases of inventory items as well as dministration and other expenses? e. Is an officer responsible for accounting for all Purchase Order sets? f. Is a report prepared at a regular interval showing whether Purchase Orders are unaccounted for or missing? g. Are all Purchase Orders outstanding for more than two months investigated as to why delivery has not occurred? h. Are all Purchase Orders autherised by the Purchasing Manager or his nominee? To ensure the operational audit met the standards for a financial audit, the following steps would be included during the data collection phase: Obtain listing of balances for all Accounts Payable accounts. Vouch fo suppliers' statements. Explain any differences or missing account balances. Reconcile and analyse any material differences in suppliers' balances. Vauch listing of aceruals and check all relevant caleulations. mo oo o Review all outstanding Purchase Orders for unrecorded deliveries of inventory or expense items or services that have been provided. In identifying slow moving inventory there will be 2 procedures for the review: 1. An analysis of hard copy records, whether manual or computerised. This waould involve a review of the demand or usage for each item. One possible statistic would be to caleulate the average number of months inventory on hand for each item. Each result would be compared to a desired result and those items furthest from it would be investigated to establish strategies to lower the inventory levels of these items or to implement strategies to increase turnover quickly. If a faster turnover is not practical, scrapping the items needs to be considered seriously. 2, A physical inspection of the inventory. Although some inventory items may yield acceptable results for inventory held according to the records, specific cases or boxes may not be turned around on a physical FIFO basis. These would be noted on inspection to be dust covered, rusting or showing other types of physical deterioration depending on the type of item. o [ ' 1 a. Describe two (2) procedures used in the operational audit that may have discovered each of the above errors of procedure or control