Question

Tuxedo, Inc. has the following processes related to purchasing:

When it is determined that an item should be ordered, the purchasing department prepares a three-copy purchase order.  The first copy is mailed to the vendor, the second copy is filed by PO number in the Purchasing department, and the third copy is forwarded to Inventory Control.  Inventory Control updates the inventory ledger with the quantities that were ordered and files the purchase order copy by date.

            When ordered items arrive at the receiving dock, the packing slip is inspected and a two-copy receiving report is prepared.  The first copy is forwarded to the Purchasing department, where it is filed with the purchase order.  The second copy is filed in the Receiving department by date.  The packing slip is forwarded to the Accounts Payable department.

            Vendors mail invoices directly to the Accounts Payable department.  The Accounts Payable department reviews the invoice and related packing slip, prepares a cash disbursement voucher, updates the accounts payable ledger, and files the invoice by date.  The cash disbursement voucher is forwarded to the Treasury department.  The packing slip is returned to the Receiving department.  The Treasury department prepares a two-copy check, mails the first copy to the vendor, and forwards the second copy to the General Ledger department.  The cash disbursement voucher is forwarded to the Accounts Payable department where it is filed with the invoice.

            The General Ledger department updates the general ledger accounts using the second copy of the check, and then forwards the check copy to the Treasury department to be filed by check number.

Required: Identify two deficiencies in the Tuxedo, Inc. Expenditure Cycle, discuss the risk(s) related to the deficiency, and recommend controls to compensate for the exposures.

Answer 1

Weakness in the process:

1. There is no automated mechanism to verify all the items ordered have been received. Inventory ledgers are updated via purchase order only. There might be a possibility that there is a difference in quantity actually received list and inventory ledgers updated.
2. There is no mention of the quality check undertaken by the purchase department or separate quality department

Improvements:

1. Ask for two packing list from a vendor where the second copy of same is forwarded to inventory department
2. Set up a quality check department or upgrade the purchase department to undertake quality assurance of goods received.