QUESTION 1

A)

Gergasi Meat Enterprise buys and processes livestock for sale to supermarkets. In connection with your examination of the company's financial statements, you determine the following information about purchases and cash disbursements transactions in the expenditure cycle.

Each purchasing staff submits a daily report of purchases to the plant superintendent. This report shows the dates of purchase and expected delivery, the vendor and the number, weights and type of livestock purchased. As shipments are received, any available plant employee counts the number of each type received and places a check mark besides this quantity on the purchasing report. When all shipments listed on the report have been received, the report is returned to the purchasing staff.

Vendors' invoices, after a clerical check, are sent to the purchasing staff for approval and returned to the accounting department. A disbursement voucher and the checklists for the approved amount are prepared in the accounting department. The checklists are forwarded to the treasurer for signing. The treasurer's office sends the signed checklists directly to the purchasing staff for delivery to the vendor.

Required:

a) Distinguish the function of a purchase requisition and a purchase order .

b) Explain the possible errors that might result from conflict of duties between:

i)Purchasing functions and receiving functions;

ii) Disbursement functions and accounts payable.

c) Identify five (5) weaknesses in the above system and suggest a suitable recommendationfor each ofthe weaknesses.

d) Suggest three (3) tests of control for purchase transactions.

B)

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.

C)

Syarikat Pustaka Amin Press is a medium size entity involve in the printing business. The company consists of five different departments. You have been assigned to review the operation manual in purchasing and payment system implemented by the company. Brief descriptions of the operating procedures are as follows:

Samad is the clerk in the Purchasing Department. Upon receiving the purchase requisition (from any department) he will select an appropriate vendor by searching through the vendor catalogues registered with the company. He will call the selected vendor and request a price quotation from the vendor. After negotiating the price and getting a verbal confirmation from the vendor, he will issue four copies of pre-numbered purchasing order and sends them to the following departments; a copy each to the requisition department head, receiving department, accounts department and one copy will be kept in his own file.

Taufiq, is the receiving department officer. Upon receiving the pre-numbered purchase order, he will keep the document in open file. When the particular goods have been received, he will take out the pre-numbered purchase order and matched it with the delivery note which is attached with the goods delivered by the supplier. He will stamp the pre-numbered purchase order with the date received, and if applicable, using marker, he will note down any differences between the quantity stated in the purchase order and the quantity stated in the delivery notes from the supplier. He will issue a good received note and forward it to the accounts department for payment processing and verbally notify the requesting department to collect the goods.

Samira, the accounts clerk will file the purchase orders and goods receive notes from the receiving the department. When the vendor's invoice has been received, she will match it with the related purchase order and the goods received note and prepare the payment voucher. The voucher is then forwarded to En. Mazlan, the Assistant Accountant for his approval. Samira will prepare cheque which will be signed by the Accountant, En Azhar, who is the head of Accounts Department. When signing the cheque, En Azahar will counter sign the payment voucher as an authorization and approval for the payment made to the supplier. Samira will send the cheque to the respective supplier and record the transaction in the accounts. Lastly, he will file the payment voucher and its supporting documents in the paid invoice file.

Required:

a) Identify ten (10) weaknesses in the system and give five (5) recommendations to improve the system.

b) Segregation of duties is an important element in internal control. Briefly explain why it is important to maintain proper segregation of duties.

c) What are the problems that may exist in implementing a formal system of internal control in small companies.