Lancaster Company makes electrical parts for contractors and home improvement retail stores. After their annual audit, Lancaster’s auditors commented on the following items regarding internal controls over equipment: The operations department that needs the equipment normally initiates a pur- chase requisition for equipment. The operations department supervisor discusses the proposed purchase with the plant manager. If there are sufficient funds in the requesting department’s equipment budget, a purchase requisition is submitted to the purchasing department once the plant manager is satisfied that the request is reasonable. When the purchasing department receives either an inventory or an equipment pur- chase requisition, the purchasing agent selects an appropriate supplier and sends them a purchase order. When equipment arrives, the user department installs it. The property, plant, and equipment control accounts are supported by schedules organized by year of ac- quisition. The schedules are used to record depreciation using standard rates, de- preciation methods, and salvage values for each type of fixed asset. These rates, methods, and salvage values were set 10 years ago during the company’s initial year of operation. When equipment is retired, the plant manager notifies the accounting department so the appropriate accounting entries can be made. There has been no reconciliation since the company began operations between the accounting records and the equipment on hand. REQUIRED Identify the internal control weaknesses in Lancaster’s system, and recommend ways to correct them. (CMA, adapted)
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7.9 Lancaster Company makes electrical parts for contractors and home improvement retail stores. After their annual audit, Lancaster’s auditors commented on the following items regarding internal controls over equipment:
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The operations department that needs the equipment normally initiates a pur-
chase requisition for equipment. The operations department supervisor discusses the proposed purchase with the plant manager. If there are sufficient funds in the requesting department’s equipment budget, a purchase requisition is submitted to the purchasing department once the plant manager is satisfied that the request is reasonable.
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When the purchasing department receives either an inventory or an equipment pur- chase requisition, the purchasing agent selects an appropriate supplier and sends them a purchase order.
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When equipment arrives, the user department installs it. The property, plant, and equipment control accounts are supported by schedules organized by year of ac- quisition. The schedules are used to record
depreciation using standard rates, de- preciation methods, and salvage values for each type of fixed asset. These rates, methods, and salvage values were set 10 years ago during the company’s initial year of operation. -
When equipment is retired, the plant manager notifies the accounting department so the appropriate accounting entries can be made.
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There has been no reconciliation since the company began operations between the accounting records and the equipment on hand.
REQUIRED
Identify the internal control weaknesses in Lancaster’s system, and recommend ways to correct them. (CMA, adapted)
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