Expenditure Cycle

Diamond Manufacturing Company

Control Purpose

• Centralized • To avoid purchasing

purchasing function items not needed
• Purchasing only • To avoid purchasing
from approved goods of inferior
suppliers quality
• Budgets • To avoid purchasing
at inflated prices
Diamond Manufacturing Company
Weakness Solution
• No procedures established to ensure • Solicit quotes/bids for large orders.
the best price is obtained.
• Buyer does not check vendor’s past • Prepare a vendor performance report
performance. and use it when selecting vendors.
• Blind counts not made by receiving. • Black out quantities ordered on copy of
Purchase Order sent to receiving.
Provide incentives if discrepancies
between packing slip and actual
delivery are detected.
• Written notice of equipment receipt not • Send written notice of equipment
sent to purchasing. receipt to purchasing.
• Written notice of equipment receipt not • Send written notice of equipment
sent to accounts payable receipt to accounts payable
• Mathematical accuracy of vendor • Verify mathematical accuracy of vendor
invoice is not verified. invoice.
Diamond Manufacturing Company
Weakness Solution
• Invoice quantity not compared • Compare/verify invoiced
to receiving report quantity. quantity with quantity received.
• Notification of acceptability of • Obtain confirmation from
equipment from requesting requisitioner of the
department not obtained prior acceptability of equipment
to recording payable. ordered prior to recording
• Voucher package not sent to payable.
Treasurer. • Send voucher package
(purchase order and receiving
report) to Treasurer along with
• Voucher package not cancelled approved invoice.
when invoice paid. • Treasurer should mark voucher
• No mention of bank package as PAID when check is
reconciliation. signed.
ABC Company
Control Purpose
• Perpetual inventory system • To avoid Stockouts and excess
• Review of purchase orders inventory
• EDI-specific controls • To avoid purchasing at inflated
prices
• To avoid purchasing from
• Requiring existence of unauthorized suppliers
approved purchase order prior • To avoid accepting unordered
to accepting any delivery items
• Regular reconciliation of bank
account with recorded amount • To avoid theft of cash
ABC Company
Weakness Solution
• Purchase requests are not • Purchase requisitions should be
reviewed and approved prior to reviewed and approved by the
submission. This can result in originating department’s
ordering unnecessary items. manager prior to being
• A formal inventory control processed.
system (EOQ, MRP, or JIT) is not • A formal inventory control
used. This is likely to result in system should be used to plan
both shortages and excess purchases to minimize the
inventory. combined costs of stock outs,
excess inventory, and ordering
• There is no mention of periodic costs.
physical counts of inventory. • Regular physical counts of
Thus, the perpetual inventory inventory need to be
records are likely to become conducted.Discrepancies with
ABC Company
Weakness Solution
• Any purchasing agent can add • Restrict the number of
new suppliers to the approved employees who can make
supplier master file without changes to the approved
approval. As a result, the supplier list. Periodically print a
approved supplier master file report of all changes and review
may contain unreliable or non- them to ensure that they have
existent suppliers. all been approved.
• Selection of suppliers is based • Criteria for selecting suppliers
solely on price. As a result, should include information on
inferior quality products could supplier reliability and product
be purchased, resulting in quality. The system should be
increased costs due to warranty configured to track actual
repairs, scrap, or rework. supplier performance against
promised delivery dates.
ABC Company
Weakness Solution
• Receiving department • Reconfigure the system and do
employees have access to the not permit receiving
quantities ordered on purchase department employees’ to
orders. access quantity ordered
information.
• Receiving department • Create a policy requiring
employees sometimes unload receiving department employees
deliveries without verifying the to always verify the existence of
existence of an approved a valid purchase order before
purchase order. accepting delivery.
• Receiving department • Configure the system to
employees inform purchasing of compare quantities received to
discrepancies between quantities ordered.
quantities received and ordered
ABC Company
Weakness Solution
• Accounts payable clerks can • The system should be
create one-time supplier configured to print a list of all
records without review and one-time suppliers.
subsequently approve payments Management should review that
to those suppliers. list regularly.
• There is no indication that • The system should be
supporting documents in the configured to mark supporting
voucher package are marked documents in a voucher
“cancelled” or “paid” after being package as PAID when used to
used to issue a check. generate a check or EFT
• Checks are returned to payment.
accounts payable to be mailed • Checks should be mailed by the
to suppliers. cashier or the cashier’s
• The treasurer, who has the assistant.