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Case Study for Internal Control :

You are in charge of the audit of Borkie Manufacturing.

The purchasing system has been described to you, with no controls that exist apart from those described. These details are given below.

With no purchase department, orders are placed by employees in their own area of responsibility. The order form consists of three parts:

1. Copy 1 - Retained by the originator,
2. Copy 2 - Sent to the goods inward department and
3. Copy 3 - Sent to the supplier.

The goods inwards clerk receives the goods but does not check them. Once received, the suppliers GDN (delivery note) and the PO (purchase order) for those goods are sent to the purchase ledger clerk.

When the invoice is received from the supplier, the purchase ledger clerk verifies the calculations, signs and staples the GDN and PO to it. The invoice is then entered onto the purchase ledger.

The invoice is sent to the manager responsible of the employee who ordered the goods. The invoice is coded by the manager and returned to the purchase ledger clerk. These are entered onto an analysis sheet and monthly posted to the nominal ledger.

On monthly instructions from the purchase ledger clerk, the cashier pays the suppliers. The purchase ledger clerk performs a monthly reconciliation of the purchase ledger control account as well as suppliers statements.

Required:

Identify the deficiencies in the internal control of the purchasing system. What are the types of errors that could result from it? Briefly explain the audit significance.

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