CASE 1: EXPENDITURE CYCLE
Question - Part I
The MDEKA Sdn Bhd is a manufacturer of agriculture equipments servicing the
southern region of peninsular Malaysia. The management generally has been pleased
with the overall operations of the company to date.
Procurement System
However, the present procurement system has evolved through practice rather than
having been formally designed. The management is of the opinion that the present
procurement system is inadequate and needs revising to ensure the objectives of the
procurement system are met. With the intention of understanding the current
procurement system, the development team has analyzed and identified several
documents that are crucial to the system. The documents identified are:
1.
2.
3.
4.
5.
6.
7.
Vendor Invoice
Purchase Order
Disbursement Voucher
Purchase Requisition
Packing Slip
Receiving Report
Cheque
The management of MDEKA intends to redesign the procurement system from the point
in time when an item needs to be ordered until payment is made. The system should
be designed to ensure that all the proper controls are incorporated into the system.
Required:
a) Identify the internally generated documents and indicate the number of copies of
each document that would be needed. Why?
b) Describe the application controls that should be place if each of these internally
generated paper documents were replaced by electronic forms.
Suggested Solutions
Part I
(a)
(b)
Document
Source
# of
copies
5
Purchase order
Internal
Purchase
requisition
Receiving report
Internal
2
Internal
3
Check
Internal
2
Disbursement
voucher
Internal
1
Purpose
1 - vendor
2 - accounts payable
3 - receiving
4 - requesting department
5 - purchasing
1 - purchasing
2 - requesting department
1 - to accounts payable via
inventory stores
2 - purchasing
3 - files in receiving
1 - original to vendor
2 - copy in voucher pkg.
authorizes payment of invoice(s)
A large number of controls are possible, including:
Document
Purchase Order
Application Controls
Validity checks on item number and vendor
number; limit checks on amount; completeness
check
Purchase Requisition
Validity checks on item, clerk, and supervisor
numbers; completeness checks; reasonableness
test comparing date needed to date requested
Receiving Report
Validity checks on vendor, item, and employee
numbers; completeness check
Check
Sequence check on check number; validity check
on vendor, invoice, and employee numbers; limit
check on amount
Disbursement
voucher
Validity checks on purchase order, receiving
report, and vendor numbers
2
Question - Part II
MDEKA recently purchased over RM1 million worth of office equipment under its “special
ordering” system, with individual orders ranging from RM500 to RM5000. Special orders are for
low volume items that have been included in an authorized users’ budget. As part of their
annual budgets, department heads request equipment and specify estimated cost. The budget,
which limit the types and ringgit amounts of office equipment a head department can requisition.
The special ordering system functions as follows:
Upon receiving a purchase requisition, one of the five purchasing agents verifies that the
requester is indeed a department head. The purchasing agent next selects the appropriate
supplier by searching the various catalogs on file. The purchasing agent then phones the
supplier, requests a price quote and places a verbal order. A prenumbered purchase order
is processed, with the original sent to the supplier and copies to the department head,
receiving and account payable. One copy is also filed in the open-requisition file. When the
receiving department verbally informs the purchasing agent that the item has been received,
the purchase order is transferred from the open to the closed fie. Once a month, the
purchasing agent reviews the open file for follow up purposes.
The receiving department gets a copy of each purchase order. When equipment is received,
that copy of the purchase order is stamped with date and noted with red ink if there is any
differences between the quantity ordered and quantity received. The receiving clerk then
forwarded the stamped purchase order and equipment to the requisitioning department
head and verbally informs the purchasing department that the equipments were received.
Upon receipt of purchase order, the account payable clerk files it in the open purchase order
file. When the supplier invoice is received, it is matched with the applicable purchase order,
and a payable is created by debiting the requisitioning department’s equipment account.
Unpaid invoices are filed by due date. On the due date, a cheque is prepared and forwarded
to the treasurer for signature. The invoice and purchase order are then filed by purchase
order number in the paid invoice file.
Cheques received daily from the accounts payable clerk are sorted into two groups: those
over and those under RM3000. Cheques for less than RM3000 are machine signed. The
cashier maintains the cheque signature machine’s key and the signature plate and monitors
its use. For cheque amounting more than RM3000 are signed by the cashier and the
treasurer.
Required:
a) Draw a flowchart of MDEKA’s special ordering system procedures.
b) Discuss what could be done to improve the company’s system of internal control for “special
ordering” procedures.
3
Suggested Solutions
Part II
(a)
PURCHASING AGENT
RECEIVING CLERK
Purchase
requisition
A
A/C PAYABLE
CLERK
5
Purchase
order
Verify
PR &
select
vendor
Vendor
catalog
C
4
Unsign
cheque
Vendor
Purchase
order
Vendor
D
Match PO
&
equipment
ACCOUNTING
B
Invoice
PO Open
file
Sort
Cheque <
RM3000
Prepared
purchase
order
Match
Invoice
with
PO
Stamp
PO
Cheque >
RM3000
1
2
Payable
process
3
Machine
sign
Move
stamp PO
&
equipment
4
5
Purchase order
Unpaid
invoice
D
Vendor
D
Dept Head
A
Open
requisition
file
Dept Head
Prepare
cheque
on due
date
B
Transfer
file
Paid
invoice
Signed by
Cashier &
Treasurer
Vendor
D
Unsign
cheque
Closed
requisition
file
D
C
4
(b)
Weakness
1. Buyer does not verify that
department head’s request is within
budget.
Control
Compare requested amount to total
budget and YTD expenditures.
2. No procedures established to
ensure best price obtained.
Solicit quotes/bids for large orders.
3. Buyer does not check vendor’s past
performance.
Prepare vendor performance report
and use it when selecting vendors.
4. Blind counts not made by receiving.
Black out quantities ordered on copy of
Purchase Order sent to receiving;
provide incentives if discrepancies
between packing slip and actual
delivery are detected.
5. Written notice of equipment receipt
not sent to purchasing.
Send written notice of equipment
receipt to purchasing.
6. Written notice of equipment receipt
not sent to accounts payable
Send written notice of equipment
receipt to accounts payable
7. Mathematical accuracy of vendor
invoice not verified.
Verify mathematical accuracy of
vendor invoice.
8. Invoice quantity not compared to
receiving report quantity.
Compare/verify invoiced quantity with
quantity received.
9. Notification of acceptability of
equipment from requesting
department not obtained prior to
recording payable.
Obtain confirmation from requisitioner
of the acceptability of equipment
ordered prior to recording payable.
10. No alphabetic file of vendors from
whom purchases are made is
maintained.
Establish vendor master file. Restrict
access and vouch all updates.
5
CASE 2: PRODUCTION CYCLE
The production process of Tower Holding Bhd consisted of the usual planning, scheduling, and
controlling of the physical products through the manufacturing process. The company’s
manufacturing process begins in the production planning and control department. Hani, the
production manager, determines the materials and operations requirements and combines
information from various departments to assess the inventory requirements for production.
Marketing provides the sales forecast, engineering provides the engineering specifications and
inventory provides the inventory status. When this information is combined with the bill of
materials and route sheet, Hani is able to prepare purchase requisition document. The purchase
requisition is then sent to purchasing and inventory control.
Hassan, as Hani’s assistant, will prepare production and control documents by comparing the
bill of materials and route sheets. The documents produced are the move ticket, work order, and
materials requisitions. A copy of the work order, move ticket and material requisitions
documents are sent to cost accounting. The other two copies are sent to Roger the manager in
the work center.
Once Roger receives the production control documents, he initiates production. Unfortunately
for the company, Roger is not a good supervisor. One of Roger’s duties is to review the job
tickets which are sent to cost accounting, and the employee time cards, which are sent to
payroll. Roger doesn’t pay attention to the amount of time his employees spend working, so
they can easily enter any time onto their time cards. Roger also doesn’t pay close attention to
the production process and the use of raw materials. Roger sends the materials requisitions to
the inventory department, but never sends back any excess material or returns. Materials are
left in the work centre department and are used in the future if they run out of materials.
Seagal, the storekeeper, in the inventory department takes the materials requisitions from the
work center and releases the raw materials to the work centers. Seagal then files a copy of the
materials requisition and updates the inventory records with the other two copies. He then
updates the material inventory records and creates a journal voucher that is sent to the
accounting department. The finished goods inventory is updated and a journal voucher is
created and sent to the accounting department. A copy of the materials requisition is filed and
the other copy is sent to accounting.
The cost accounting department will monitor the flow of cost information related to production.
Information flows from the production planning, work centers, and inventory departments. The
production department sends a work order to Shania in cost accounting, which is used to initiate
work-in-process recording, and then the work order is filed. The work center sends a job ticket
and the production planning and control department sends a materials requisition. Shania then
updates the work in process and calculates the variances. Shania creates a journal voucher
and then updates the general ledger after she compares it with the journal voucher from
inventory. Finally, Shania files both journal vouchers.2
Required:
a) Prepare a flowchart of the existing production system incorporating all the documents
6
Suggested Solutions
(a) Page 1
Production Planning & Control Department
Route
Sheet
BOM
Work Center
Engineering
Marketing
Inventory
Engineering
Spec
Sales
Forecast
Inv
Status
A
Initiates
Prod.
Purchase
Requisition
Access
Inv
Req.
Review
Inv.
Control
Purchasing
Job
Ticket
Employee
Time card
B
Payroll
Material
Requisition
Route
Sheet
BOM
C
Preparation of control
documents
Work
Order
Move
Ticket
Material
Requisition
A
A
7
(a) Page 2
Inventory Department
Cost Accounting/Accounting Department
C
A
B
Inventory
Records
Material
Requisition
Issue
material
to work
center
Finished
Good Inv
Work Order
Initiate
WIP
recording
WIP
Material
Inventory
Records
Material
Inv. Journal
Voucher
Material
Requisition
Calculates
variance
Finish Good
Journal
Voucher
Journal
voucher
B
B
Compare
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