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. RISK ANALYSIS AND INTERNAL
CONTROL
The following describes the purchases and cash disbursements procedures for a lawn and garden supply
wholesaler that uses a central computer system with
distributed terminals in departments.
The inventory control clerk visually reviews
inventory levels from his computer terminal to identify items that need to be ordered. He then prints and
sends a hard-copy purchase requisition for the needed
items to the purchasing agent. Based on the requisition, the purchasing agent selects a vendor and adds a
digital record to the purchase order file from his terminal in the purchasing department. The clerk then
prints a hard copy of the purchase order and mails it
to the vendor. Finally, the purchasing agent destroys
the purchase requisition, which is no longer needed
since the relevant details are on the PO.
When the materials arrive at the receiving department a receiving clerk prints a copy of the purchase
order from his terminal and reconciles it to the packing slip. The clerk then manually creates a two-part,
hard-copy receiving report. One copy of the receiving report is sent to inventory control and the other
is sent to the purchasing department. The packing
slip is sent with inventory to the warehouse.
When the purchasing agent receives the receiving
report, he closes the digital PO record and adds a record
to the digital receiving report file. He then destroys the
hard-copy receiving report, which is no longer needed.
Upon receipt of receiving report copy, the inventory control clerk updates the inventory subsidiary
ledger to record the receipt. The clerk then destroys
the hard-copy receiving report.
Vendors send hard-copy invoices to the AP clerk
for processing. When the clerk receives an invoice,
she reconciles it with the digital purchase order and
receiving report. She then selects a due date and adds
a record to the vendor invoice file, which serves the
AP subsidiary ledger. The clerk then files the invoice
in the department.
On the due date the computer system automatically
prints a check, mails it to the vendor, closes the vendor
invoice record to discharge the liability, and records
the payment in the cash disbursement file.
Required
a. Create a system flowchart of the system.
b. Describe the uncontrolled risks in the system.
c. Describe the physical controls needed to reduce
the risks identified in (b).
d. Describe the IT controls that are appropriate in
this system.
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