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.
Placing this much authority in the hands of the warehouse workers can result in inappropriate inventory levels – either too much which ties or cash reserves or too little resulting in manufacturing delays or lost sales. This can also lead to frauds such as kick-backs from unapproved suppliers or fraudulent transactions as the workers both perform record-keeping and have physical custody of the assets.
Warehouse workers should prepare a purchase requisition and send it to purchasing to prepare the PO.
Inventory should be delivered to the receiving department where a receiving report is prepared using a blind copy of the original PO.
Accounts payable should receive a copy of the purchase requisition, PO, and receiving report and compare them to the supplier invoice. Cash disbursements, not AP, should prepare the check.
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