Spring 2018 Test #1 Short Essay: (20 points) MK, Inc. has hired you to review it

Question

Spring 2018 Test #1 Short Essay: (20 points) MK, Inc. has hired you to review its internal controls for the purchase, receipt, storage, and issuance of raw materials. You observed the following: . Raw materials, which consist mainly of high-cost electronic components, are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are well trained competent, and adequately bonded. Raw materials are removed from the storeroom only upon written or oral authorization by a production supervisor. No perpetual inventory records are kept: hence, the storeroom clerks do not keep records for goods received or issued. To compensate, the storeroom clerks perform a physical inventory count each month. . After the physical count, the storeroom supervisor matches the quantities on hand against a predetermined reorder level. If the count is below the reorder level, the supervisor enters the part number on a materials requisition list that is sent to the accounts payable clerk. The accounts payable clerk prepares a purchase order for each item on the list and mails it to the supplier from whom the part was last purchased. . The storeroom clerks receive the ordered materials upon their arrival. The clerks count all items and verify that the counts agree with the quantities on the bill of lading. The bill of lading is then initialed, dated, and filed in the storeroom to serve as a receiving report. a. Describe three (3) weaknesses that exist in MK's expenditure cycle b. Suggest control procedures to overcome the weaknesses noted in part a.

Explanation / Answer

a) Following are the weaknesses which exist in MK's Raw material expenditure cycle:-

(1) Raw Materials are taken out from the storeroom only after written or oral authorisation by a production supervisor. Oral authoristion is not proper in inventory control. There may be chances of over or under production of specific items if proper authorisation is not made. Other disadvantages of using oral authorisation are:-

* Spread rumours

* Misunderstanding

* Secrecy can not be maintained , etc.

(2) Records are not kept in perpetual inventory records, hence the storeroom clerk do not keep records for goods received or issued. Without receiving record document for every delivery, they would not know the details of goods received, who was receiving the goods and quality of goods received. There may be mistakes made in counting items received.

(3) The third weakness is that the storeroom supervisor matches the quantities on hand against a predetermined record level. The supervisor enter the part number on a material requisition list that is sent to the account payable clerk. Material requisition authorizes the removal of necessary quantity of raw materials from the store room to the factory location where they will be used. Purchase requisition is to identify the requisitioned, specifies the delivery location and date needed, identifies the item number, descriptions, quantities and price of each item requested may suggest a supplier. The person approving the purchase indicates the department number and account number to which the purchases should be charged. Hence, the material requisition is not a proper dochment for recorder materials.

(4) Accounts payable clerk prepares a purchase order for each item or the list and mails it to the supplier from whom the part was last purchased. This is not a proper method of chosing supplier.

(5) The clerks count all item and verify that the counts agree with the quantities of Bill of lading only. Bill of Lading in verifying the counting is not a proper document to be reference.

b.) Control Procedures to overcome the above weaknesse:-

(1) The authosirsation need for documents of material requisition contains the production order numhers date of issue and the bill of materials, the part number of quantities of all necessary raw materials, any subsequent tranfer of Raw Material throughout the factory are documented on Move Tickets. Bar-coding and Radio Frequency Identification Tags(RFID) can also be used for movement and usage of Raw Materials.

(2) Storeroom need for correctly counting the quantity received and maintaining accurate perpetual inventory records. This is to ensure company pays only for goods actually received. There can be manual, card-oriented and computer-oriented perpetual inventory system.

(3) A proper evaluating supplier need to be done periodically to meet the preferable Price, quantities of material and also to ensure the dependability in making deliveries. These are some criteria to be considered in choosing supplier:-

- lead times from receipt of your order to delivery

- Minimum and Maximum order quantities

- Storage and handling facilities

- Specific method of delivery

- Quality assurance processes

- Payment Terms & Conditions

- Return Policy

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