You are provided with the following description of the accounting system and internal controls for materials purchases by the Johnson Machinery Company, a medium-sized firm that builds special machinery to order:
Materials purchase requisitions are first approved by the plant foreman, who then sends them to the purchasing department. Purchasing department employees enter the purchase requisition information into the computer, which automatically generates a purchase order in sequential order. The system automatically generates an electronic copy of the purchase order, which is sent by purchasing department employees to the vendor. The receiving department electronically accesses a copy of the purchase order, which is printed to serve as a receiving report.
Delivered materials are immediately sent to the storeroom. The completed receiving report, which is a printed copy of the purchase order, is sent to the purchasing department. A copy of the receiving report is sent to the storeroom. Materials are issued to factory employees subsequent to the verbal request by one of the foremen.
When the mailroom clerk receives vendors’ invoices, he or she forwards them to the purchasing department employee who placed the order. The invoice is compared with the electronic copy of the purchase order for price and terms by the employee. The invoice quantity is compared with the receiving department’s report. After checking footings, extensions, and discounts on the vendor invoice, the employee indicates approval for payment by initialing the invoice. The invoice is then forwarded to the accounting department (voucher section) where it is coded for account distribution, assigned a voucher number, and entered into the accounting system for recording in the voucher register. The system tracks invoices due by payment date due. The purchase order and receiving report are filed in the purchasing department.
On payment dates, the system automatically generates a request for payment. The system automatically prepares checks and a transaction list for preparation of a cash disbursements journal, updates the accounts payable master file, and indicates the payment date for the voucher register. Prenumbered checks are sent to the cashier, who puts them through the check-signing machine. The checks are then sent to the voucher section that makes sure that the checks were correctly prepared. The checks are placed in envelopes and sent to the mailroom. The vouchers are subsequently filed in numerical order. At the end of each month, a computer listing of voucher and cash disbursement transactions, and an outstanding accounts payable list is prepared.
The Treasurer reviews monthly reports of acquisitions by vendor to identify key vendors. This is used to determine whether any represent key vendors that should be disclosed, and whether the company faces risk due to overreliance on a few vendors.
1- List the controls in existence for each of the seven transaction-related audit objectives for acquisitions.
2- For each control in part 1, list one test of control procedure for verifying its effectiveness.
3- List the most important deficiencies in the acquisition and payment cycle. You should be able to identify 10 important deficiencies.
4- Identify the most likely error or fraud that could result from each of the deficiencies listed in part 3.
5-Suggest a system alteration for JMC that would correct each of the deficiencies identified in part 3. Be sure to keep cost/benefit in mind.
6- Design an audit program to test internal control. The program should include, but not be limited to, tests of controls from part 3 and procedures to compensate for the deficiencies in part 4. There is a 300 word minimum requirement for this section of your term project.
Our customer support team is here to answer your questions. Ask us anything!