Case 5-2: Lexsteel Corporation
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
• 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