What should the controller of Lexsteel do in order to address the potential problems within the corporation? •The controller became aware of the potential problems with the accounts payable system because of the discussion made with the external auditors. •Each branch manager is given the authority to order materials and issue emergency purchase orders directly to the vendors. •Physical counts of raw materials are not performed since there is a cost-effective computerized perpetual inventory system. •COMPUTER RESOURCES:
The host computer mainframe at corporate headquarters is linked to the computers at each branch locations. Data transmission occurs between leased telephone lines between host computer and branch offices wherein it is maintained in an integrated database. The software also allows flexibility for managing user access and editing data input meaning there is no control over the software for it allows data editing without the proper authorization given. •PURCHASING PROCEDURES: The production orders and appropriate bills of materials needed are generated by the host computer at corporate headquarters.
While the purchase orders for raw materials are generated by the purchasing function and is mailed to the vendors which contain an instruction to the vendor that the materials should be directly delivered to the manufacturing plant. There is a control between the generation of production orders needed and the purchase orders issued to the vendor but it is not an exception in the occurrence of fraud. At receipt, the manufacturing plant examines and verifies the count against the packing slip and transmits the receiving data to the accounts payable at corporate headquarters.
Even though there is a proper segregation between custody and recording, still fraud may occur because of collusion. Also, each branch manager is given the authority to order materials and issue emergency purchase orders directly to the vendors. Fraud may also occur if collusion will be made by the branch manager and the vendor, with that proper control is a must. Since the company employs a cost effective computerized perpetual inventory system, physical counts of raw materials are not performed.
With that, the generation of production orders and purchase orders may be deceived because the count of raw materials that are needed are not matched with the proper physical count on its ending inventory. •ACCOUNTS PAYABLE PROCEDURES: Vendor invoices are mailed directly to the corporate headquarters and entered by the accounts payable personnel when received. This often occurs before the branch offices transmit the receiving data so the recorded vendor invoices are not properly matched with the receiving report. Uncertainties of amount may exist.
The checks and the payment listings are made by the accounts payable function and are transmitted to the treasurer’s office for signature and mailing to the payee. After validation, payment listings are returned to the accounts payable section for filing. In here, there is no proper control in the preparation and validation of checks and payment listings for the verification of it is not done which may result into collusion and creation of dummy payee made by the treasurer’s office and the accounts payable function.
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