Detailed Report on Internal Control Weaknesses: Retro Pty Ltd's System

This report identifies and analyzes several internal control weaknesses within Retro Pty Ltd's purchasing and payment system. The weaknesses include the lack of a request for quotation process, failure to verify the quality and quantity of received goods, inadequate segregation of duties in the accounts department, immediate mailing of cheques, a junior accountant checking a senior accountant's work, the financial accountant performing bank reconciliations, and the use of the purchase order as a receiving document. These weaknesses create opportunities for fraud, errors, and inefficiencies, potentially leading to financial losses and operational risks. The report highlights the importance of implementing robust internal controls to safeguard assets, ensure accurate financial reporting, and promote operational effectiveness. Recommendations for improvements include establishing a quotation process, verifying goods received, segregating duties, implementing cheque verification, and ensuring independent reviews of financial records. This report provides a comprehensive overview of the vulnerabilities in the system and offers insights into how to strengthen the company's financial controls.

Internal Control Weaknesses 1
INTERNAL CONTROL WEAKNESSES
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Internal Control Weaknesses 2
Internal Control Weaknesses
There are a number of internal control weaknesses that are present in Retro Pty’s purchasing and
payment system. The first weakness is that the purchase and payment system does not have
provision for considering quotes from different suppliers in order to be able to get the best prices.
The effect of not having a step involving preparation of a request for quotation is that the
company may not get the best value for its money.
The second internal control weakness is that goods received are not checked to verify that the
quality and quantity delivered match what was ordered. The receiving department simply records
the shipment as having been received by stamping the purchase orders in its possession. There is
a risk that the goods receiving department might stamp goods as received yet the goods received
do not match the goods ordered.
The third internal control weakness is that there is no segregation of duties in the accounts
department relating to processing of payments. The financial accountant is involved in preparing,
signing and recording cheque payments. This predisposes the company to loss of assts through
fraud as the accountant can misappropriate cash by writing a cheque to an unintended beneficiary
and covering up the transaction as there is no review of his work and there is no segregation of
duties.
A further internal control weakness is that cheques are mailed to suppliers immediately after they
are written, signed and recorded by the financial accountant. This leaves no room for verification
to establish whether the amounts written in the cheques are correct and whether the cheques have
be written to the correct suppliers. The cheques should be verified by a different person from the

Internal Control Weaknesses 3
one who wrote it. Dispatching the cheques immediately after they are written does not give room
for such verification.
The fifth internal control weakness is that the assistant accountant performs the task of checking
the sequence of all accountable forms. Whereas checking the sequence of these forms is a good
internal control measure, the fact that a junior accountant checks the work of a senior accountant
places that junior accountant in an awkward position of reviewing work done by his or her
senior. The junior accountant may be intimidated to give the records a clean bill of health. The
ideal situation would be to have a more senior and more experienced accountant to review or
check the work of a junior accountant.
A further internal control weakness is that monthly bank reconciliations are done by the financial
accountant who prepared and signed cheques and recorded cheque payments. Reviewing or
checking for errors in one’s own work is not as effective as having a review done by another
person. The bank reconciliation provides the accountant with a further opportunity to conceal
fraud.
The seventh internal control weakness is that the purchase order is used as a receiving document.
This makes it difficult to account for any changes in the quantity of goods delivered.