ESSAY

1. Differentiate between a purchase requisition and a purchase order.

2. The Soap Manufacturing Company has three employees who work in the warehouse. All of the
warehouse workers are authorized to order inventory when it falls below the reorder level. The
workers complete a purchase order and mail it to the supplier of their choice. The inventory is
delivered directly to the warehouse. The workers send a memo to accounts payable reporting the
receipt of inventory.

Accounts payable compares the warehouse memo to the supplier’s invoice. Accounts payable prepares
a check which the treasurer signs.

Discuss potential internal control risks inherent in this system.

3. Explain how a voucher payable system works. How is the balance of AP determined?

4. Discuss the steps taken in the purchasing department in a basic technology expenditure cycle.

5. What are steps taken in the receiving department under a basic technology expenditure cycle?

6. What are the key authorization issues in purchasing and cash disbursements?

7. Identify six classes of physical controls employed in the expenditure cycle and give one example of
each.

8. Describe two areas where segregation of duties is important in the expenditure cycle.

9. Describe how the IT controls of automated purchase approval and automated postings to subsidiary
and general ledger accounts help reduce risk. What is necessary to ensure these controls function
properly?

10. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people
who have specialized manufacturing skills, and he informs payroll when an employee is hired. The
employees use a time clock to record the hours they work. The employees are also required to keep a
record of the time they spend working on each order. The supervisor approves all time cards.

The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares
the payroll register and paychecks. The supervisor distributes the paychecks to the employees. Payroll
informs cash disbursement of the funds required to cover the entire payroll amount. The cash
disbursements clerk ensures that there are adequate funds in the company's regular checking account to
cover the payroll.

Describe at least three internal control weaknesses; for each weakness suggest an improvement to
internal control.

11. Explain the integration of payroll with the human resource management (HRM) system that often
happens in moderate and large sized organizations.
 12. The Baccus Corp. manufactures medical equipment. This is a capital intensive industry and
investments in fixed assets exceed $5 million a year. The minimum cost for production equipment is
$75,000. When supervisors want new production machinery, they contact the plant manager. The plant
manager approves or denies the request based on discussions with the production supervisor, the repair
and maintenance supervisor, and the quality control supervisor.

A purchase order is prepared by the purchasing department and sent to one of the three major suppliers
of production machinery for medical equipment. The equipment is delivered immediately to the
production floor and put into service. At the end of the month, the production supervisor informs the
general ledger clerk about the receipt of the machinery. The general ledger clerk establishes an asset
record for the machine. At the end of the year, the general ledger clerk computes straight-line
depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded
as a direct reduction of the asset cost.

The repair department performs routine maintenance on all of the production equipment. Occasionally
the repair department rebuilds a machine to extend its useful life. All of the costs associated with the
repair department are charged to manufacturing overhead. When a machine becomes obsolete,
production employees move it to a corner of the factory floor and break it down so that parts can be
used in other machines. Production employees routinely remove parts for personal use. Some smaller
machines have disappeared completely from the factory floor.

The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed
assets can be located and identified. Other assets have serial numbers that are inaccessible, so the item
cannot be matched to a fixed asset record. Some fixed asset records cannot be traced to an actual item.
Several machines that have been scrapped and are being used for spare parts were matched to fixed
asset records. At the last inventory, the general ledger clerk did not make any adjustments to the fixed
asset records explaining that 75 percent accuracy in the fixed asset physical inventory was excellent.

Describe five internal control weaknesses and explain how to correct them.

13. Discuss outsourcing the payroll function. What are the advantages and risks?

The End!
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