Case Study
Findings / Conclusions
Strengths:
1. Prenumbered purchase requisitions are completed when raw materials or supplies
inventory falls below a certain reorder point, as established by a mathematical formula.
2. The sources, terms, and completion of the prenumbered purchase order are all under
the control of a centralized purchasing department.
3. The functions of purchasing, accounting, and receiving are segregated from one
another, with separate controls over each functional area.
4. A physical inventory is performed once a year, and inventory balances
are adjusted accordingly.
5. Raw materials are safeguarded by the presence of a storage clerk.
6. Reorder point is programmed into the computer.
Weaknesses:
1. Emergency orders do not undergo the purchasing department and associated
controls. And because of this, items that are not needed might be ordered.
2. The purchasing department prefers to use sole sources as much as possible. Hence,
the entity cannot be assured of a steady supply or of getting the best possible prices.
3. The receiving department receives an exact copy of the purchase order, and that
copy should not contain quantities. So, then the receiving department personnel do not
have to independently determine the quantities received.
4. The receiving department does not count the goods received or inspect the goods for
damage before sending them to storage. Therefore, inferior or damaged goods could be
discovered too late.
5. The accounting department pays the vendor invoice without comparing it to a copy of
the purchase order and receiving a report. This may result in accounting risks such as
paying an invoice for goods that may have been returned, received in the wrong
amount, or never received.
6. The purchasing department does not send a copy of the receiving report upon receipt
of goods. Thus, purchasing has no way of knowing that a potential problem exists with
certain vendors, such as being temporarily out of goods.
7. The accounting department occasionally pays "monthly statements" rather than
itemized invoices. In this case, accounting may be making duplicate payments.
8. Production workers verbally request raw materials they need. Honoring verbal
requests may encourage theft and create difficulties in relating material to specific
production runs.
Recommendations:
1. Adequate control can be obtained over these emergency orders by requiring written
agreements, approval of goods on receipt, and user approval of the invoices.
2. The purchasing department should establish a number of different sources for each
good and aggressively pursue the different sources to obtain the lowest possible prices.
3. The receiving department copy of the purchase order should not show quantity.
Receiving should independently determine quantity by a count or other measurement.
4. The receiving department should independently determine the quantity of goods
received, as well as inspect the goods for damage and ensure that the goods received
match the specifications of the goods ordered.
5. Prepare the voucher for payment only after the vendor invoice, purchase order, and
receiving report have been matched to one another
6. The purchasing department should routinely receive a copy of the receiving report
7. Implement a policy stating that only itemized vendor invoices (reconciled to purchase
orders) will be paid.
8. Require written requisitions for raw materials to be issued from storage to ensure
better accountability.