Question

Identify the problems with this Expenditure Cycle

Inventory Manager:

Q1	What is your title and what you do?
A1	Inventory manager—job is to make sure we have necessary items to complete our wine production.
Q2	How do you know how much wine to make each year?
A2	Each spring the head wine maker prepares a production schedule for the upcoming season based on his experience and anticipated demand for the year. He gives me a copy of this schedule and I use it in conjunction with the inventory subsidiary ledger to determine future requirements—bottles, labels, wines, etc., and wine needs.
Q3	Does anyone else get a copy of this schedule?
A3	Yes, a copy goes to the farming leaders.
Q4	What do you do to place the actual orders?
A4	I create purchase requisitions for all the items that need to be ordered. Then I send copies to the purchasing clerk and the head wine maker and I file a copy chronology for myself.
Q5	Who does the company typically buy items from?
A5	We purchase bottles, corks, and labels from various wine producers in California, and vines from producers in France.
Q6	Can you walk me through the process the clerk would follow to complete the purchase?
A6	The purchasing clerk would take the purchase requisition and first review the inventory subsidiary ledger to see what we have on hand. Then, the purchasing clerk solicits a bid from prospective vendors, selects a vendor, and mails out a purchase order.
Q7	Who gets a copy of the purchase order?
A7	The inventory manager who files with his copy of purchase requisition. A copy is sent to receiving. The purchasing department keeps one.
Q8	What kind of training do your purchasing clerks receive?
A8	In addition to learning the basics of our system we require the clerks to attend an ethics seminar focused on what to do when a supplier offers a kickback.
Q9	You mentioned the system—does the system enforce any kind of authorization limits?
A9	Yes, there are enforced authorization limits for both purchase requisitions and purchase orders
Q10	Do you get involved with recording transactions?
A10	Yes, I receive copies of packing slips for items received, which I use to update the inventory subsidiary ledger. I also create a journal voucher supporting a general ledger entry; but the bookkeeper does the actual posting.

Answer 1

The following problems were noticed with this Expenditure Cycle;

1. Production schedule is prepared by the head wine maker and there is little involvement of the purchasing clerk and stores manager. The same must be prepared in conjunction with other departments also.
2. . The purchasing clerk solicits a bid from prospective vendors, selects a vendor, and mails out a purchase order. There must be proper authorization and approval processes from the inventory manager or other Authorities inorder to prevent or detect frauds and also purchase orders selected by the purchasing clerk sholld be scrutinized.