Integrated Measurement Systems Inc. (IMS) is a Canadian public company that manufactures high-end measuring devices used primarily in the oil and natural gas industries. In 20X3, it had sales of $100 million and earnings before income tax of $5 million. The company has a December 31 year-end.
Ted Pollock, IMS’s CEO, is a proponent of strong corporate governance. He has spent the last year strengthening IMS’s internal control environment. He believes that organizations that demonstrate good corporate governance practices will be perceived favourably by the markets. Ted wants to make a presentation to IMS’s audit committee supporting the position that throughout the year the company’s internal controls functioned in accordance with the company’s control objectives.
Depending on the reaction of the audit committee, Ted would like to make the presentation an annual occurrence. IMS has hired your professional services firm to assist Ted in preparing the content of his presentation.
Your firm is currently assessing the purchasing process. Accordingly, IMS has provided you with relevant material and access to the company’s resources (Exhibit 12-20–1). As part of the analysis of this process, IMS has asked you to:
1. Identify the existing key internal controls within the purchasing process.
2. Describe the procedures that IMS could use to test the controls.
3. Identify the internal control weakness within the purchasing process and recommend improvements.
It is now the first week of March 20X4. The partner responsible for the IMS audit engagement provides you with her notes from a meeting with Ted Pollock (Exhibit 12-20–2). You have been asked by the partner to prepare the analysis of IMS’s purchasing process, addressing the three requirements, and to identify any additional issues and make any observations that would be relevant to the engagement.

Prepare an analysis of IMS’s purchasing process, addressing the three requirements requested by the IMS CEO, in a report format suitable for the CEO’s use.
EXHIBIT DC12-20–1 Purchasing Process Documentation Updated November 20X3
The purchasing process has four major components, namely:
1. Vendor prequalification
2. Purchase of goods and/or services
3. Receipt of goods
4. Settlement
Process description
The purchasing process begins when there is a requirement for goods or services. A manually completed purchase request form is sent from the operating department (e.g., Sales Marketing, Manufacturing, etc.) to the purchasing department. The purchasing clerk numbers these documents and reviews each purchase request form to verify that a signature is present.
Purchase request forms must be authorized by the signature of a person with the appropriate level of authority. The amount of the expenditure determines the level of authority required, and the expenditure authorization levels are organized in tiers. Because there are so many possible combinations of departments and authorization levels, the operating departments are responsible for ensuring that their purchase request forms are signed by individuals with the appropriate level of authority. This requirement eliminates the need for the purchasing clerk to check the specifics of their signatures.
The purchasing clerk sends the purchase requests to the purchasing manager for review and approval. The approved purchase request is then sent to the buyer who sources the purchase. If the amount is below $5000, selection of the vendor is left up to the buyer. For purchases in excess of $5000 but less than $25,000, a vendor from the Prequalification Listing is selected, again at the discretion of the buyer. For purchases in excess of $25,000, a formal bidding process is performed. However, at the discretion of the buyer, the bid process can be waived if deemed to be cost inefficient.
Upon selection of the vendor, the buyer inputs the purchase request information into a purchase order form. The purchase order is forwarded to the purchasing manager for review, and a photocopy is made and filed, in numerical order, with the appropriate photocopy of the purchase request. The original purchase order is then sent back to the buyer who delivers it to the vendor.
All goods are received in the warehouse. All employees have access to the warehouse. The goods are checked against the packaging slip and are examined for damage, and so on. If the goods are acceptable, the bill of lading is signed off by the receiver. A copy of the signed bill of lading is then forwarded to the purchasing clerk who matches it to the file copy of the purchase request and purchase order. If there are differences in the details (over/under shipment, wrong product, etc.), the bill of lading is forwarded to the buyer for resolution with the vendor. If no problems are noted, copies of the three documents are sent to the payables group for settlement.
The receiver, John Smith (who was hired six months ago), sends the goods to the user department that made the original purchase request along with a photocopy of the bill of lading. The user department agrees the quantities noted by the receiver and files the bill of lading. User departments have noted that, recently, there have been an increasing number of manual adjustments to the quantities shipped versus received. Any unmatched purchase requests and purchase orders that remain outstanding for over 90 days are returned by the purchasing clerk to the user department that originally ordered the goods on the assumption that the goods have been received. It is then the responsibility of the user department to follow up and forward the paperwork to the payables group for settlement.
If a signed bill of lading is forwarded to the purchasing clerk for which there is no source documentation (i.e., no purchase request or purchase order exists), the purchasing clerk follows up with the buyer to understand the nature of the receipt. At the same time, a copy of the bill of lading is also sent to the payables group.
EXHIBIT DC12-20–2 Meeting Notes Received from Partner
I met today with the CEO of IMS, Ted Pollock, for the purpose of discussing his needs.
He provided the following information:
— IMS’s corporate governance framework
— IMS has adopted an approach to establishing a strong corporate governance framework that includes:
1. Documentation of the existing processes and controls
2. Identification of the key controls in the process
3. Evaluation and testing of the internal controls and implementation of improvements
— Control objectives that relate to the purchasing process
1. Proper approval of all transactions
2. Safeguarding of company assets
3. Prevention and detection of errors and irregularities
4. Accuracy and completeness of books and records
5. Appropriate use of information

  • CreatedJanuary 09, 2015
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