Identify an internal control procedure that would reduce the following risks in a manual system:

a. The purchasing department may not be notified when goods need to be purchased.
Require that an inventory control department monitor inventory records and request
purchases (purchase requisition) when goods need to be reordered.

b. Accounts payable may not be updated for items received. Require that the receiving
department complete a receiving report for all goods received, and that a copy of the
report is forwarded to accounts payable.

c. Purchase orders may be prepared based on unauthorized requisitions. Require that

d. Receiving clerks may steal purchased goods. Require good physical security such as
security cameras and good supervision of receiving employees. Using a "blind" PO at
receiving may also help since constant shortages when goods are stolen is more likely
to be noticed.

e. Payments may be made for items not received. Require a three-way match of the
purchase order, receiving report, and invoice before a payment can be approved.

f. Amounts paid may be applied to the wrong vendor account. Assuming that the
payment was to the correct vendor, but posted to the wrong account, it is very difficult to
uncover this error. A reconciliation of subsidiary ledge to the accounts payable account
may not uncover this because the total balance would be the same. It may be uncovered
if someone notices that the records show payments to a vendor are in excess of that
owed. There is no method to completely eliminate errors in posting.

g. Payments may be made for items previously returned. Require a debit memorandum
be completed for any goods returned, and that a copy of this be forwarded to accounts
payable so that the balance owed can be changed.

h. Receiving clerks may accept delivery of goods in excess of quantities ordered. First,
there must be a clear policy on overshipments that receiving personnel can apply. For
example, a policy may be written that overshipments under 5% can be accepted, but all
others should be rejected and returned. Second, there must be a policy that all received
goods are compared against a purchase order. Also, the use a "blind" PO to force
receiving personnel to count goods and they might therefore more easily detect
overshipments.

i. Duplicate payments may be issued for a single purchase transaction. Require that
payment documentation be "cancelled' when payment is made. This stamp on the
documents should help prevent duplicate payments.
Describe what is likely to occur if company personnel erroneously recorded a purchase transaction for
the
wrong vendor?  What if a cash disbursement was posted to the wrong vendor?  Identify internal controls
that would detect or prevent this from occurring. 

- If a company erroneously recorded a purchase transaction to the wrong vendor, it is likely to make a
payment to the wrong party.  When the correct vendor does not collect its payment, it will notify the
company and demand payment. This will likely result in the company making a duplicate payment
for the same transaction.
If a cash disbursement was posted to the wrong vendor account, this would also likely result in
the company making a duplicate payment for the same transaction.  Since the first payment did not
get recorded correctly, the company would not have proper record of the payment.  When it
reviewed its vendor accounts, it would note that it still needed to make a payment.
It would be difficult to discover an erroneous posting of a purchase transaction or cash
disbursement to the wrong vendor account.  (An incorrect posting of a cash disbursement is more
likely to be discovered in the document matching and subsequent posting process.)  The following
internal controls could detect these types of problems:  Solution manual
·         When invoices arrive from the vendor companies, there should be an attempt to match the invoice
to the purchase order and receiving report before the transaction is posted to the vendor account
within the accounts payable subsidiary ledger.  During this posting, the employee who posts should
verify that the transaction is recorded in the proper vendor account. 
·         A reconciliation should be performed upon receipt of the vendor statement. This should reveal any
differences in terms of purchase or payment information.
·         A review of the vendor file should be performed periodically. The vendor to which the purchase
should have been recorded or the vendor to which a payment was erroneously applied may show a
negative balance (paid more than recorded purchases). 
The error may also be discovered when there is a reconciliation of the accounts payable
subsidiary ledger to the general ledger, although this is not as likely.  The reconciliation would still
balance even if an amount is recorded in the wrong vendor account.  It is also possible that this error
would not be discovered particularly if there are always outstanding balances in vendor accounts.
The best internal control to prevent these errors would be to use an automated, rather than manual
system.  An automated system would automatically post to the correct vendor as the purchase order
is created.

Why should a receiving clerk be denied access to information on a purchase order? 

- This practice is called a “blind PO” and the advantage is that it forces a physical count of goods
received.  A clerk cannot complete the “quantity received” field of a receiving report until the goods
have been counted.  If the PO contained quantities ordered, the clerk could assume that the quantity
received is equal to quantity purchased and therefore, skip the physical count.  However, conducting
the physical count is a much better practice and the blind PO serves as a control to force such a
count.