Karim Traders: purchases system deficiencies and controls

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• There are no written purchase orders, so orders are not authorised, and goods may be ordered that are not needed, at unfavourable prices or by unauthorised staff, including for personal use.
• The storekeeper prepares the GRN and has access to the inventory records, so there is no segregation of duties, and goods could be stolen and the records changed to hide it.
• The invoices are not matched to a purchase order and GRN, because the manager relies on memory, so the entity may pay for goods not received, incorrect prices or quantities or duplicate invoices.
• The purchasing manager approves invoices and is also in charge of the ordering, which creates a risk of fraud, such as collusion with a supplier or fictitious suppliers.
• The accounts clerk can change supplier bank details with no independent check, which creates a risk of payments being diverted to a fraudulent account.
• Pre-signed blank cheques are a serious weakness, as they can be completed and used by anyone with access.
• No reconciliation of supplier statements, so errors, unrecorded liabilities, duplicate payments and disputes may not be found, and payables may be misstated.
• Payments are made without evidence that the invoice is approved and agreed to the GRN, so payments could be made for goods not received.
• Management attitude: the lack of time for controls shows a weak control environment, and staff may take their lead from this.
• Each deficiency is linked to a clear consequence for the financial statements or for the entity (for example overstatement of expenses or understated liabilities).

Marks counted: 0 of 10

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Require a pre-numbered purchase order, authorised by a manager within an approved limit, before an order is placed.
• The GRN should be prepared by someone who does not have access to the inventory records or the purchase ledger, and checked against the order.
• Match the supplier invoice to the purchase order and GRN before approval, and record the match.
• Separate the roles of ordering, receiving, approving invoices, posting and payment authorisation.
• Changes to supplier master file data should be requested in writing, verified independently with the supplier (for example by a call to a known number), and approved by a senior person, with a regular review of the amendments report.
• Ban pre-signed cheques, and nominate an alternative authorised signatory, or use electronic payments with dual authorisation.
• Reconcile supplier statements to the purchase ledger monthly for the main suppliers and investigate the differences.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Select a sample of purchase invoices from the period (for example from the purchase ledger).
• Inspect each for evidence of matching, such as a signature or stamp, and agree it to the purchase order and GRN.
• Re-perform the match, checking price, quantity and description.
• Make inquiries of the staff who do the matching and observe the process.
• Investigate any exceptions and consider the effect on the extent of substantive work.
• Where there is no evidence of a purchase order, as at Karim Traders, note that the control does not exist and plan substantive procedures instead.

Marks counted: 0 of 4