Auditing Internal Control for the Purchasing & Disbursement Cycle

Class Assignment-Review the narrative write- up resulting from interviews with the company's Purchasing Agent, Director of Accounting Payable and the Controller. Identify weaknesses in internal controls, provide a preliminary assessment of the overall control environment and determine which controls you would recommend for testing. Provide a brief power point presentation (2-3 slides) and be prepared to present to the class. Assignment if due February 21 before class. Post your homework in BB using the assignment icon provided.

Actual Interview between the staff auditor and members of the audit client on 2/14/2024.

Purchasing Agent:

Questions by the staff auditor

1. Question: Please describe the policies and process that the purchasing department follows for the creation, review and recording of company purchasing orders.

Answer: Any purchases for services and items for $10,000 or more require a purchase order and the purchasing agent to obtain three competitive bids. Purchase requestions are sent to the purchasing department by the person requesting the purchase on a formal purchase requestion form prescribed by the company. Purchase orders are then prepared by the purchasing agent responsible for the area of purchase. The purchase order is reviewed and signed off by the Director of Purchasing. One copy of the approved purchasing order is maintained in the purchasing department's files and a copy is set to the accounts payable department and a third copy is sent to the receiving department. These are all digital files.

1. Question by staff auditor- Does the company have a "grant of authority" stipulating requestion authorities i.e., which person's or roles with the company have authority levels for the type and dollar amount of the item or service being requested?

Answer: Yes, we do have a policy to that affect but on occasion we do receive a request from a person that exceeds their stipulated authority. In these rare instances the purchasing agent may overall and approve anyway.

1. Question- are purchase orders pre-numbered?

Answer: Yes

1. Does the purchasing department review open purchase files for old unfulfilled purchases to determine why the purchase is still open?

Answer: Yes, once per quarter and when a item or service is received the receiving department notifies that the purchase if complete and satisfactory.

1. Question: Does the company maintain a list of approved vendors and do you ever receive a request for an item from a vendor not on the approved vendors list?

Answer: Yes, and if a vendor is not on the approved list the Director of Purchasing then must approve the vendor in writing.

1. Question: You obtain three competitive bids for all purchases over $10,000, are there any exceptions?

Answer: On occasion a purchasing agent may waive this requirement and use a sole vendor if such vendor is a trusted qualified vendor.

Director of Accounts Payable

1. Question for Auditor- When you receive your copy of a purchase order from the purchasing department what do you do with it?

Answer: We maintain in an open purchase order file.

1. Question: What happens then?

Answer: We maintain the purchase order in our digital file awaiting notification of receipt and the receipt of an invoice to pay from the vendor. We then perform a "three way match" of purchase order to receiving notification and invoice to ensure we received the items ordered and price reflected on the purchase order agree. We there is a difference we send a request to the purchasing department and the person requesting the item or service to resolve and explain the difference. If the three match agrees we approve the invoice for payment and the accounts payable clerk initials the packet (approves for payment.

1. Question: How does the account payable department know that the item or service to be paid is recorded in the correct account, i.e., the correct account distribution?

Answer: The accounts payable clerk verifies the correct account distribution against our chart of accounts and designates the account to be charged on the face of the invoice.

1. Question: What happens next?

Answer: For all items over $10,000 the director of accounts payable reviews and initials on the face of the invoice that the invoice and packet is approved and then the entire packet is vouchered and then forwarded to the Controller for authorization of payment.

1. How are items under $10,000 handled.

Answer: Same process as above but the packet is not sent to the controller and the invoice is end to the treasury department for payment.

Staff Auditor: Thank-you for your time in answering my questions.

Controller:

1. Question: When you receive the invoice voucher and accompanying documents from accounts payable what do you do?

Answer: I review for completeness, initial my approval on the face of the payment voucher and forward to the treasury department for payment. The treasury department pays and returns the packet to the accounts payable department so they then place it in a paid invoice file.

1. Question: Do you ever receive a packet that is incomplete or has errors in it

Answer: on rare occasions yes but the accounts payable department is quite good at their job. When there is an error I return the packet to the accounts payable director for resolution. Again this is rare.

Staff Auditor: Thank you for your time.