Last year the Uptown Manufacturing Company purchased over $10 million worth of office equipment under its “special ordering” system, with individual orders
ranging from $5,000 to $30,000. Special orders are for low-volume items that have been included in a department manager’s budget. The budget, which limits the
types and dollar amounts of office equipment a department head can requisition, is approved at the beginning of the year by the board of directors. The
special ordering system functions as follows:
Purchasing A purchase requisition form is prepared and sent to the purchasing department. Upon receiving a purchase requisition, one of the five purchasing
agents (buyers) verifies that the requester is indeed a department head. The buyer next selects the appropriate supplier by searching the various catalogs on
file. The buyer then phones the supplier, requests a price quote, and places a verbal order. A prenumbered purchase order is processed, with the original sent
to the supplier and copies to the department head, receiving, and accounts payable. One copy is also filed in the open-requisition file. When the receiving
department verbally informs the buyer that the item has been received, the purchase order is transferred from the open to the filled file. Once a month, the
buyer reviews the unfilled file to follow up on open orders.
Receiving The receiving department gets a copy of each purchase order. When equipment is received, that copy of the purchase order is stamped with the date
and, if applicable, any differences between the quantity ordered and the quantity received are noted in red ink. The receiving clerk then forwards the stamped
purchase order and equipment to the requisitioning department head and verbally notifies the purchasing department that the goods were received.
Accounts Payable Upon receipt of a purchase order, the accounts payable clerk files it in the open purchase order file. When a vendor invoice is received, it
is matched with the applicable purchase order, and a payable is created by debiting the requisitioning department’s equipment account. Unpaid invoices are
filed by due date. On the due date, a check is prepared and forwarded to the treasurer for signature. The invoice and purchase order are then filed by
purchase order number in the paid invoice file.
Treasurer Checks received daily from the accounts payable department are sorted into two groups: those over and those under $10,000. Checks for less than
$10,000 are machine signed. The cashier maintains the check signature machine’s key and signature plate and monitors its use. Both the cashier and the
treasurer sign all checks over $10,000.
Questions to Answer:
List the various processes within Uptown’s special order process.
What are the inherent risks to these processes?
What internal controls mitigate the identified risks?
Identify at least three(3) weaknesses in Uptown’s special order procedures, explain the associated problem and propose a solution.