(b) Strength and weaknesses of purchase and payment system
- Set policies and procedures
The company is following a fixed structure for purchase and payment system. There are set rules and procedures that are followed by each and every individual involved in this purchase and payment system. Set policies and procedure for any activity in business is very helpful for an organization as new employees can also effectively conduct any of such activity.
- Stock level order
Another advantage of purchasing system of stock is that warehouse management has effective stock level. If the stock goes under this level then warehouse management will make an advance order of stock for 3 months. With the help of this policy, the company will never face a situation of stock out and supply of their products will never go under their demand. In addition to that constant supply in the market will also help in making a reputation of the company in the market (Young & Coleman, 2010).
- Segregation of duties
Segregation of duties for important activities performed by the company is very important as all individual involved in such activity will be accountable to each other and task will be completed in time. On a walkthrough of ELC, it was observed that there was segregation of duties among various individual involved in purchase and payment for the acquisition of stock. The individuals involved in this process were warehouse manager, warehouse assistants, head office, financial comptroller and managing directors. The chances of error become very low in cases where segregation of duties is.
- Involvement of managing directors
It is essential that top-level management also takes part in important decisions or conduct an overview of important decisions. It is the policy of the company that any payment made to suppliers in excess to $20000 will have to be approved by managing director (Popov, Lyon & Hollcroft, 2016).
- No proper documentation
First weakness of purchase procedure with respect to inventory is that the warehouse manager does not make any written document in respect of the order placed to the supplier through the telephone. He just makes a tick against the inventory ledger with the date of next reorder. This is not a systematic form to conduct such an important part of inventory management.
- No quantity check by warehouse assistants
There is no proper quantity check in respect of the quantity that has arrived at the warehouse after making an order from the supplier. Warehouse assistants only check the weather all types of inventory that were ordered have arrived or not (Patil, Grantham & Steele, 2012). Even the order placed by the warehouse manager is not verified with the delivery note produced by the supplier as there is no documentation on part of warehouse manager.
- The signing of cheques with the help of computer
Preparing of the cheque is very important activity as it involved a lot of financial interest of the company; hence it is essential that these cheques should be prepared by an individual rather than computer. A single error on printing can result in a chain or errors that will be hard to detect by management.
(c) Tests to be performed to test the controls on strengths of payment and purchasing procedure
- Set policies and procedures- the auditor can check whether these policies and procedures are followed on a constant basis or not. This can be done with the help of documentation prepared in the process of purchasing and payment such as tick on leger, delivery note, request of approval from managing director if the amount goes above $20000 etc. (Knechel & Salterio, 2016) In addition to that the instances where these procedures were not followed will also be evaluated with the reasons for such action.
- Stock level order- In this case stock register of last 12 months will be evaluated to make sure that this policy to order 3-month stock in advance if stock level decreases to the stock of one-month consumption is followed or not. This will help in evaluating whether this procedure is actually followed by the company or it is just a written policy.
- Segregation of duties- These are certain documents that are usually transferred from one individual to another individual in form of approval where there is segregation of duties. For evaluating the controls on segregation of duties, these documents will be checked to ascertain that proper chain of command is followed by management of ECL (Hardy, 2014).
- Involvement of managing directors- for this all the payment with respect to purchase of inventory with an amount higher than $20000 would be checked. All documents in relation to these payments should contain a signature or another form of approval from the managing director.
(d) Likely impact of the weakness on the audit risk and tests
- No proper documentation- The lack of proper documentation disturbs the audit trail of the auditor. Documentation in any form can act as the best form of audit evidence but in absence of documentation, the auditor has to gather audit evidence in some other form which might or might not be conclusive.
- No quantity check by warehouse assistants- if the quantity of stock is not checked by the warehouse assistants then there is a possibility the stock recorded in the warehouse and actual stock received in the warehouse are not same. In such scenario, the auditor cannot give 100% surety on the valuation of stock (Elefterie, 2012).
- The signing of cheques with the help of a computer- in such case the sigh can be done by any person with the help of ID and Password of the authorized person. The process of printing of check does not conclude that the cheques are approved by the authorized person in the company.
Elefterie, L., 2012. Risk Assessment Audit versus Work Accidents Prevention. Contemporary Readings in Law and Social Justice, 4(2), pp.552–561.
Hardy, K., 2014. Enterprise Risk Management A Guide for Government Professionals, Hoboken: Wiley.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Patil, R., Grantham, K. & Steele, D., 2012. Business Risk in Early Design: A Business Risk Assessment Approach. Engineering Management Journal, 24(1), pp.35–46.
Popov, G., Lyon, B. K., & Hollcroft, B. (2016). Risk Assessment: A Practical Guide to Assessing Operational Risks. John Wiley & Sons.
Young, B., & Coleman, R. (2010). Operational Risk Assessment. John Wiley & Sons