JY Miko Sdn. Bhd. ('JYM') is a limited liability company and wholesale supplier of stationery products. It commenced trading in 2018 and now has 50 employees. The following policies and procedures form part of the control activities exercised by JYM.

JYM has two directors, i.e., James and Tony. Both of them jointly responsible and overseeing the whole operations of the company and largely responsible for the company's growth since its formation and for the implementation of control activities exercised over the company. JYM consist of two departments, namely Sales and Marketing department and Administration Department. The organization structure summarized as follows:

Sales & Marketing Department: 

Mr. Ting, sales manager, assisted by 8 sales executives and 6 sales clerks.

Jason, warehouse manager assisted by 2 warehouse supervisors, 19 warehouse assistants.

5 lorry drivers.

Administration Department:

Ms .Tong, Chartered accountant, assisted by 2 accounts clerks (Siti and Ros).

Ellen, purchasing executive.

2 credit control assistants (Ms Chan & Ms Tan).

The inventory is mainly supplied by four local manufacturers. All the purchases in charge by the purchasing executive, Ellen. She will negotiate the price with the suppliers and create purchase order manually to the suppliers. Supplier will send the purchase invoice directly to Ellen and she will check and approve the purchase invoice for payment. She will pass the purchase invoice to the account clerks, Ros for recording into the accounting system, "AutoCount" and payment will be made when due. Cheque will be prepared by Ros and signed by either James, Tony or Ms. Tong.

Sales executives will negotiate and confirm the selling price and credit term with the customers directly. Once the sales have been confirmed in writing or by telephone, the respective sales executive will direct it to the sales clerk who is available at the point of sales for the creation of two sets of sales order and sales invoice simultaneously. A copy of sales order and sales invoice will be forwarded to administration department for recording purposes. Another set of sales documents will be forwarded to warehouse supervisor for dispatch of goods. Once the goods have been packed, the warehouse assistant will instruct the driver to deliver the goods, together with the invoice to the respective customer.

Credit control assistants, Ms. Chan and Ms. Tan in charge of the collection of debts from the customers. They will chase for payments as and when required by James or Tony. Money received from the customers can be cash, cheque or direct debit. Money received in cash or cheque will be banked in by the credit control assistants and a copy of bank-in slip will be forwarded to Ros for recording into the "AutoCount".

Maintenance of personnel records and preparation of the payroll of JYM in charge by Siti. All the employees are paid through the company's wages system by bank transfer. Salaries for all the employees, except for warehouse assistants and drivers are fixed. Warehouse assistants and drivers are paid an hourly rate on the basis of time worked. In this regard the company operates a swipe card time recording system, operated by employees with individually uniquely coded swipe card. Siti will compute the wages for warehouse assistants and drivers based on the hours recorded in the swipe card system. Furthermore, the only independent review of any nature on the payroll is that the chartered accountant, Ms Tong who confirms that the amount of the wage cheque presented to her for signatures agrees with the total of the net wage column in the payroll. In view of the confidentiality issue, Ms Tong is not allowed to view the information related to the monies being due to individual employees.

Physical inventory count will be conducted annually by the warehouse supervisor, Ros and assisted by all of the warehouse assistants. A copy of the inventory count report will be forwarded to Ms Tong directly. Ms Tong will prepare the adjusting entries when encounter any discrepancies between the book inventory quantities and physical inventory quantities.

Key financial data of JYM extracted from ledgers for the year ended 31 December are as follows:

Sales = Y2020: 5,500 / Y2019: 1,500 / Y2018: 1,000

Purchases = Y2020: 1,352 / Y2019: 942 / Y2018: 603

Salaries & Wages = Y2020: 180 / Y2019: 100 / Y2018: 85

Other Operating expenses = Y2020: 450 / Y2019: 433 / Y2018: 430

Closing inventory = Y2020: 1,500 / Y2019: 125 / Y2018: 163

Other key non-financial data of JYM extracted as at 31 December 2020 are as follows:

James, executive director: 51 years old

Tony, executive director: 50 years old

Ms. Tong, Chartered accountant: 72 years old

No. of trade receivables: 450 customers

Types of stationery supplies: 352 different types of stationery supplies are available

Required:

Discuss ANY THREE deficiencies and the implications that the above observations have for the purchasing and the payment system of JY Miko Sdn. Bhd. and recommend improvements to address the deficiencies in the existing internal control system.   

Answer rating: 100% (QA)

Deficiency 1 Lack of Segregation of Duties in the Purchasing and Payment System The first deficiency in the internal control system of JY Miko Sdn Bhd is the lack of segregation of duties in the purch... View the full answer