The organization structure of a manufacturing firm includes the following departments: purchasing, receiving, inspecting, warehousing, and controllership. An internal auditor is assigned to audit the receiving department. The preliminary survey reveals the following information:

1. A copy of each purchase order is routinely sent to the receiving department by the purchasing department. Intercompany e-mail is used for the notification followed by the physical copy via regular intercompany mail. Each purchase order is filed by purchase order number. In response to a job enrichment program, everyone in the receiving department is authorized to file the purchase orders. Whoever happens to be available when the company mail is received is expected to file any purchase orders it contains.

2. When a shipment of goods is delivered to the receiving dock, the shipper’s invoice is signed and forwarded to the controller’s office, the vendor’s packing slip is filed in receiving by vendor name, and the goods are stored in the warehouse by receiving personnel. In response to a job enrichment program, all persons in the receiving department have been trained to perform all three activities independently. Whoever happens to be available when a shipment arrives is expected to perform all three of the activities associated with that shipment.

Required

a. What are the major deficiencies and inefficiencies in the process as described?

b. How could the process be improved? First, consider the need for strategic production and suppliers. Second, consider how greater computerization could improve the process.

c. Why is it important to have segregation between the purchasing, receiving, and payment functions? How is that segregation maintained when all three functions are automated?

d. Assume the purchasing and receiving function operates as described. What would your assessment be of control risk? What are the implications for substantive testing of the related account balances? Describe the substantive procedures the auditor should consider for inventory, expenses, payables, and other related accounts.