An internal auditor discovered that fictitious purchases have been recorded by the purchase clerk. This indicates absence of which control?

 Options:

a) Purchase invoices are independently matched with purchase orders and goods received notes b) Goods received notes requires the signature of individual who authorized the purchase c) Routine checks are performed by internal auditor fortnightly. d) Purchase function and production function are clubbed in one department

The Correct Answer Is:

a) Purchase invoices are independently matched with purchase orders and goods received notes

Correct Answer Explanation:

a) Purchase invoices are independently matched with purchase orders and goods received notes

The internal control that’s absent in this scenario is the segregation of duties and the lack of an independent matching process. In a well-controlled environment, the purchase process involves three key documents: purchase orders, goods received notes, and purchase invoices.

These documents should be reconciled independently to ensure the accuracy of purchases and prevent fraudulent activities.

When these documents are independently matched, it means that different individuals or departments handle each step without collusion. The purchase clerk should not be able to create fictitious purchases without detection because their actions would be cross-checked against other documents.

For instance, if a purchase invoice doesn’t match with a corresponding purchase order and goods received note, it raises red flags indicating potential fraudulent activity.

Explanation of Incorrect Answers:

b) Goods received notes require the signature of the individual who authorized the purchase

Requiring the signature of the individual who authorized the purchase is indeed a control measure for ensuring accountability and authorization. However, while it establishes a link between the purchase authorization and goods received, it doesn’t directly address the issue of preventing fictitious purchases.

For instance, if a purchase clerk is fabricating invoices, they could potentially forge the authorization signature or collude with the authorizer to cover up fictitious purchases.

This control does not provide an independent verification process to validate the authenticity of purchases by cross-referencing with other documents like purchase orders and invoices.

c) Routine checks are performed by the internal auditor fortnightly

Regular checks by an internal auditor are an essential aspect of maintaining internal controls and ensuring compliance. However, the issue with relying solely on routine checks is that they are periodic and may not happen frequently enough to catch ongoing fraudulent activities.

In the case of fictitious purchases, if the checks are only performed fortnightly, it allows a window of opportunity for the purchase clerk to manipulate records in between these checks.

Without a real-time cross-verification mechanism between purchase orders, goods received notes, and invoices, the clerk could continue fabricating transactions without immediate detection.

d) Purchase function and production function are clubbed in one department

Combining the purchase function and production function in one department might pose challenges related to segregation of duties and potential conflicts of interest. However, this setup doesn’t directly address the specific control gap concerning the independent matching of purchase documents to prevent fictitious purchases.

Even with separate departments, if there isn’t an independent verification process between purchase orders, goods received notes, and invoices, there remains a risk of fraudulent activities going undetected.

The issue lies more in the lack of a control mechanism that ensures the accuracy and validity of purchases rather than the organizational structure itself.

In essence, while these alternative controls may enhance certain aspects of the purchasing process or organizational structure, they do not directly address the immediate concern of preventing fictitious purchases through the independent matching of purchase documents.

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