Acquisitions and Expenditure Cycle

6-13: Fresh Foods Grocery Store

Required:

a. For each error or irregularity, identify one or more types of controls that were
absent.
b. For each error or irregularity, identify the internal control objectives that have not
been met.
c. For each error or irregularity, suggest a control procedure to correct the deficiency.

1. a. 1) Appropriate documents and records.

2) Independent checks on performance.

b. Transactions are correctly valued.

c. 1) Guarantee that the billing clerk receives the current pricelist.

2) There must be an internal verification by someone who has the current

pricelist.

2. a. Appropriate documents and records.

b. Recorded transactions are validated.

c. 1) Permit payments to be made only on original invoices.

2) Permit a receiving report to be attached to the invoice of the vendor before
the payment has been made.
3. a. 1) Appropriate documents and records.
2) Physical control over assets.
3) Independent checks on performance.
b. Recorded transactions are validated.
c. 1) A barrier in the physical facilities and forbid the employees from parking
inside the barriers.
2) Ask the accounting department to manage the perpetual inventory records
and have physical counts of the actual sides of beef periodically.
 4. a. Independent checks on performance.
b. Transactions are correctly valued.
c. Whole counts by a personnel and independent checks on performance.
5. a. Appropriate procedures for authorization.
b. 1) Transactions are correctly valued.
2) Transactions are correctly authorized.
c. 1) Guarantee that the salesman has the current pricelist.
2) Ask for independent approval of all the transactions with the price before the
shipment has been made.
6. a. 1) Appropriate documents and records.
2) Independent checks on performance.
b. Transactions are recorded at the right time.
c. Reconcile properly the physical count of the inventory on the last day of the year
with the sales records to make sure that the counted inventory has not been
billed and the billed inventory has not been counted.

6-14: Love Company

Required:

a. Indicate the function served by each procedure.

b. Identify an error or irregularity that may be prevented or detected by the control
procedure.
c. Indicate a compliance test that may be performed to determine whether the control
procedures above are operating as prescribed.

1. Approved purchase order for each purchase.

Function: Ordering the items requested

Error or Irregularity: Purchases are may be unauthorized items.
Compliance Test: Review the evidence of matching of the purchase orders with the
receiving reports and the vendor’s invoices.

2. Prenumbered receiving report for goods received.

Function: Receiving the items ordered

 Error or Irregularity: Goods received may not be all justified.
Compliance Test: Review the evidence of numerical sequencing of receiving reports.

3. Signed receipt from storeroom on acceptance of goods.

Function: Receiving the items ordered

Error or Irregularity: Goods delivered to a client may not be in compliance with the
goods posted on the receiving report.
Compliance Test: Review the receiving report for the signature of the client.

4. Matching of voucher with vendor’s invoice.

Function: Preparing the voucher

Error or Irregularity: There is a possibility that the vouchers can be prepared for the
goods that were not really ordered.
Compliance Test: Review the evidence of the matching of voucher by a voucher clerk.

5. Approved voucher for each check.

Function: Paying the liability

Error or Irregularity: There is a possibility that the checks are issued without the
appropriate authorization.
Compliance Test: Review the supporting documentation for each check.

6. Cancellation of voucher on payment.

Function: Paying the liability

Error or Irregularity: The official voucher may be paid more than once.
Compliance Test: Review the distortion of the paid vouchers.

7. Review of voucher and supporting documentation by check signers.

Function: Paying the liability

Error or Irregularity: Checks may not agree with the amount on voucher.
Compliance Test: Review the voucher for evidence of performance by the check signers.
8. Internal verification of voucher accuracy.

Function: Preparing the voucher

Error or Irregularity: Vouchers may be wrong with reference to the payee and the
amount.
Compliance Test: Review the evidence of verification.

9. Locked storerooms for inventory.

Function: Protecting the inventory

Error or Irregularity: Inventory may be stolen.
Compliance Test: Monitor the security of the storerooms.

10. Periodic reconciliation of inventory control and perpetual inventory records.

Function: Updating the inventory records

Error or Irregularity: There maybe something that is not recorded to inventory records,
i.e. a purchase or a sale.
Compliance Test: Review the evidence of reconciliation.

11. Accounting for all prenumbered checks in journalizing.

Function: Journalizing and posting all cash disbursements

Error or Irregularity: A check may not be recorded.
Compliance Test: Review the evidence of verification.

12. Periodic independent bank reconciliations.

Function: Managing the correctness of the cash in bank

Error or Irregularity: Mathematical errors can be made in the estimation of the bank
balance.
Compliance Test: Review the evidence of reconciliation.

13. No checks payable to cash or bearer.

Function: Paying the liability

Error or Irregularity: Checks can be forwarded to unauthorized payees.
Compliance Test: Review the checks for the names of payees.
14. Approved purchase requisition for each purchase order.

Function: Ordering
Error or Irregularity: Purchases can be made for unauthorized purposes.
Compliance Test: Review the purchase order for supporting documentation.

15. Review of purchase requisitions for reasonableness.

Function: Requisitioning
Error or Irregularity: Excess quantities of goods may be ordered.
Compliance Test: Review the evidence of the supervisor approval.