Recommendation The company would benefit greatly by improving on certain aspects of its internal control. There is an overall weakness in checks and balances largely due to the failure of forwarding the proper documents to the respective department for reconciliation purposes. This problem needs to be addressed by ensuring that source documents are directed to the proper departments so that all transactions are accounted for and verified. Segregating AP and disbursement duties and strengthening independent verification will also help in the reconciliation of accounting records. Improvements in authorizing purchasing transactions and supervising the receipt of goods are sought to regulate the inflow of inventory to the company. Case Background Walker Books, Inc. was born when founder Curtis Walker decided to turn his favorite hobby into a profitable venture. Starting out small, he saw his secondhand bookstore grow as book lovers flocked to his shop. However, the opening of larger bookstores and the growth of the Internet threatened the success of the company and he had to find a quick way to keep up. While Walker Books still sells used books, it has also expanded operations to include mass distribution of new books. Problem The key problems currently facing Walker Books, Inc. ar e poor inventory management, troublesome disbursements and lack of legitimate documentation of transactions.
Control Issue Title
Condition
Risk
Recommendation
Transaction authorization
Purchasing agent has complete autonomy over the purchasing decisions of the company
May result in excessive inventory levels
Implement a system of purchase order authorization
Company does not make use of blind purchase orders
Receiving department may not manually inspect and verify the quantity and quality of goods received
Make use of blind copies of purchase orders for the receiving department
Designate a receiving department supervisor to oversee the arrival and inspection of goods
Accounting documentation documentation and records
Supervision
Goods that arrive are not manually inspected and reconciled with the blind copy of the PO
Amount and condition condition of goods received may not be the same as that which was ordered
Independent verification
Receiving department does not send a copy of the receiving report to the Accounts Payable department
Recorded obligations to suppliers might not have a legitimate basis (e.g. no physical receipt of goods)
Segregation of duties
Accounting documentation documentation and records
Accounting documentation documentation and records
Accounts Payable Payable clerk prepares checks for disbursements
Invoices received are discarded after writing the check
Voucher and supporting supporting documents are not given to the Cash Disbursement department for check approval; no official list of qualified vendors/suppliers is maintained
AP clerk may misappropriate company funds and disguise the fraud by adjusting the AP books
Have the receiving department forward a copy of the receiving report to the AP department for reconciliation purposes Separate the functions of the Accounts Payable from Cash Disbursements
Lack of audit trail
Maintain a file of received invoices for recordkeeping purposes
Payment for unauthorized purchases might occur
Provide sufficient supporting documents to evidence that the disbursement to be made is legitimate to a known and existing supplier
