SEC Ltd, a small electrical accessories company, wants to design a company wide computer purchasing system. To date the company has maintained a semi manual record system for all its purchases.
For the previous three financial years the company has made average annual purchases of £34m (all purchases from UK suppliers) and average annual profits of approximately £10.6m. The company has approximately 350 employees working at six locations throughout the UK: Manchester, which is the company’s head office, Birmingham, Leeds, Swindon, Bristol and Newcastle.
You have recently completed an audit of activities within the purchasing department within SEC Ltd. The department employs 15 buyers, seven supervisors, a manager and clerical personnel. Your audit has disclosed the following conditions:
The company has no formal rules on conflicts of interest. Your analysis produced evidence that one of the 15 buyers in the department owns a substantial interest in a major supplier and that he procures supplies averaging £150,000 a year from that supplier. The prices charged by the supplier are competitive.
· Buyers select proposed sources without submitting lists of bidders for review. Your tests disclosed no evidence that higher costs were incurred as a result of that practice.
· Buyers who originate written requests for quotations from suppliers receive the suppliers’ bids directly from the mail room. In your test of 100 purchases based on competitive bids, you found that in 55 cases the lower bidders were awarded the purchase order.
· Requests to purchase (requisitions) received in the purchasing departments in the company must be signed by persons authorised to do so. Your examination of 200 such requests disclosed that three requisitions, all for small amounts, were not properly signed. The buyer who had issued all three orders honoured the requests because he misunderstood the applicable procedures. The clerical personnel responsible for reviewing such requests had given them to the buyer in error.
Required
(a) For each of the above, explain the risk, if any, that is incurred if each of the conditions described previously is permitted to continue and describe the control(s), if any, you would recommend to prevent continuation of the condition described.
(b) Explain the main function of a purchasing system employed by a company such as SEC Ltd, the risks associated with its failure and the controls that can be installed in order to minimise the impact of such risks.