Your firm is the external auditor of Bestwood Engineering Ltd., which manufactures components for motor vehicles and

Question:

Your firm is the external auditor of Bestwood Engineering Ltd., which manufactures components for motor vehicles and sells them to motor vehicle manufacturers and wholesalers. It has sales of $25 million and a profit before tax of $1 million. The company has a new financial controller who has asked your advice on controls in the company’s purchasing system.

Bestwood has separate accounting, purchasing, and receiving departments. Most purchases are requisitioned by the production department, but other departments are able to raise requisitions for goods and services. The purchasing department is responsible for obtaining goods and services for the company at the lowest price that is consistent with the required delivery date and quality, and for ensuring their prompt delivery.

The accounting department is responsible for obtaining authorization of purchase invoices before they are input into the computer, which posts them to the accounts payable ledger and the general ledger. The accounting records are kept on a computer and standard off -the-shelf accounting software is used. The accounting software maintains the accounts payable ledger, accounts receivable ledger, general ledger, and payroll. The company does not maintain inventory records because it believes the cost of maintaining these records outweighs the benefits.

The financial controller has explained that services include gas, electricity, telephone, repairs, and the short-term rentals of equipment and vehicles.

Required

a. Describe the procedures that should be incorporated in the purchasing department to control the purchase and receipt of goods.

b. Describe the controls the accounting department should exercise over obtaining authorization of purchase invoices before posting them to the accounts payable ledger.

c. Explain how controls over the purchase of services, from creating the purchase requisition to posting the invoice to the accounts payable sub-ledger, may diff er from the procedures for the purchase of goods, as described in your answers to parts (a) and (b).

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...

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