Sử Nguyễn Minh Thư - 31231025524
REVIEW QUESTIONS
Question 1:
MediPharma Ltd. is a mid-sized pharmaceutical company specializing in the production
and distribution of prescription medications. The company sources raw materials and
active pharmaceutical ingredients (APIs) from multiple suppliers. Recently, MediPharma
has encountered issues related to excessive procurement costs, delayed deliveries, and
potential compliance risks.
The purchasing process at MediPharma Ltd. follows these steps:
● The department in need of raw materials submits a purchase requisition (PR) to the
procurement department.
● The procurement team evaluates the request, selects suppliers, and requests
quotations.
● Upon receiving quotations, the procurement team selects a supplier and issues a
purchase order (PO).
● The supplier delivers the materials, and the receiving department inspects and
acknowledges receipt.
● The accounting department processes the supplier’s invoice for payment.
Required:
1. Identify internal control weaknesses that led to issues at the company
2. Propose relevant controls to mitigate the above weaknesses and solve the issue
identified.
Control weaknesses Recommendation
1. The procurement team selects suppliers - The company should set a detailed scoring
and requests quotations, but there is no system or criteria based on price, delivery
mention of clear evaluation criteria (price, time, quality of goods or their past
credit policy, shipping time, quality,..) for performance to evaluate the suppliers
the team in order to choose the most carefully before purchasing raw materials
suitable suppliers which can optimize the from them.
cost and ensure the quality of the - The company can also periodically review
medications. Without criteria, the company supplier contracts (annually or quarterly) to
may be overpaying for ingredients or encourage competitive pricing and quality
working with unreliable suppliers. improvements.
2. Inadequate supplier qualification and risk - MediPharma should implement a Supplier
assessment before procurement decisions. Qualification and Risk Assessment
As a pharmaceutical company, MediPharma Framework that includes a mandatory
operates in a highly regulated industry pre-qualification process for all suppliers.
where raw materials and active This process should evaluate each supplier’s
pharmaceutical ingredients (APIs) must compliance with GMP, track record in the
meet stringent quality and safety standards. industry, financial stability, and delivery
However, if suppliers are selected primarily performance history. Additionally, the
based on cost or convenience, the company company should conduct periodic audits,
may end up working with unreliable requiring suppliers to provide certificates of
vendors who fail to deliver materials on analysis (COA) and adhere to strict quality
time or do not comply with Good control measures.
Manufacturing Practices (GMP) and other
regulatory requirements.
The impact of this weakness is serious.
First, delayed deliveries can disrupt the
production schedule, leading to shortages of
essential medications, affecting not only the
company’s revenue but also patient health.
Second, sourcing materials from
non-compliant suppliers increases the risk
of using substandard or contaminated raw
materials, which can lead to regulatory
violations, product recalls, and damage to
the company’s reputation. In extreme cases,
regulatory bodies like the Ministry of
Health could impose sanctions or revoke
manufacturing licenses if compliance
breaches are detected.
3. Lack of segregation of duties: The same - MediPharma should strengthen its internal
procurement team handles supplier controls by enforcing a clear segregation of
selection, purchase orders (POs), and price duties, ensuring that supplier selection,
negotiations, which can lead to the problem purchase order approval, and payment
that the procurement team colluded with the processing are handled by separate
suppliers in exchange for an amount of departments:
money despite poor performance. Moreover,
● Procurement team: Requests
the team can also inflate the quantity of the
quotations and issues purchase
goods the company needs to buy through
orders
Purchase Orders and report a higher price
for materials for their own advantage. ● Material Planning Department:
Evaluates and select suppliers
● Warehouse keeper: Evaluate the
Purchase Requisition and check the
purchase orders
● CEO: Approves the POs, PR and the
Suppliers Selection Report.
4. Insufficient oversight in Purchase Order - In order to prevent unauthorized purchases
(PO), Purchase Requisition (PR) or other or excessive procurement costs,
important documents approval: Important MediPharma should apply multi-level
documents like POs, PRs are issued without approval or authorization before purchasing
adequate approval controls from the CEO or ingredients. Moreover, the company can set
the Financial Accounting Department or the approval limits based on purchase amount
Material Planning Department, which can or the value of raw materials:
lead to unnecessary or duplicate purchases
● High-value materials: need to have
and overspending beyond budget.
signature from the CEO,
Warehousekeeper, Material Planning
Department,..
● Low-value materials: Warehouse
Keeper, Head of Material Planning
Department.
Or the company should use procurement
management software to automate
approvals and track PO history.
5. The lack of a robust invoice matching - MediPharma should implement a
system before payment processing. Three-Way Matching Process as a standard
Currently, supplier invoices are approved by control measure before any supplier
the accounting department without payment is authorized. Under this system,
cross-verifying them against the the accounting department must verify that
corresponding purchase orders (POs) and the details on the purchase order, goods
goods receipt notes (GRNs). This will cause receipt note, and supplier invoice match in
the company to have financial risks, terms of quantity, unit price, and total value.
including duplicate payments, overbilling, Any discrepancies must be identified and
and undetected discrepancies between reported to the CEO for further resolution
invoiced amounts and actual deliveries. before payment is released.
Without proper verification, MediPharma
may end up paying for goods that were
never received, overpaying suppliers due to
pricing errors, or failing to detect fraudulent
invoices, leading to financial losses and
inefficiencies in cash flow management.
Question 2:
XYZ Motors is a car dealership that sells vehicles to individual customers. The company
offers two main payment options:
● Full payment (one-time payment).
● Installment payment (hire purchase), where the customer pays a down payment and
the remaining amount is paid in monthly installments over a set period.
To process a sale, a salesperson prepares the sales contract, collects customer information,
and forwards the contract to the CFO for approval. Once approved, the customer makes
the initial payment, and the vehicle is delivered. For installment sales, XYZ Motors
partners with a financial institution, which conducts a credit assessment before approving
financing. However, the company offers installment plans directly to some customers
without thorough credit checks. Salespersons also have the authority to offer customers
discounts of up to 15%. The sales team is incentivized to close deals quickly to earn a high
commission.
There is no automated system for tracking overdue payments. Payment reminders are sent
manually, and follow-ups on overdue accounts are inconsistent.
Required:
1. Identify weaknesses in XYZ Motors' internal controls over the sales cycle.
2. Propose relevant controls to mitigate the above weaknesses.
Control weaknesses Recommendation
1. The lack of proper credit checks for - The company needs a clear installment
customers purchasing vehicles through the sales policy with strict approval criteria. A
company’s own installment plans. While structured credit assessment should be
financial institutions conduct credit mandatory for all installment purchases.
assessments for their financing options, - The company should form a credit
XYZ Motors does not have a structured approval committee responsible for
process for evaluating a customer’s ability evaluating high-risk customers before
to pay. This increases the risk of granting approving installment sales.
installment plans to customers who might
default on their payment or fail to make - The company should also establish a debt
their payments on time, leading to higher collection team to handle late payments and
bad debt and cash flow problems. In the reduce bad debt.
long run, failing to implement effective
credit measures could lead to an increase in
uncollectible receivables, requiring the
company to write off substantial amounts in
losses.
2. The company’s outdated and inconsistent XYZ Motors should implement an
method of tracking overdue payments: automated system that generates regular
Currently, payment reminders are sent accounts receivable aging reports,
manually, and follow-ups are not always categorizing overdue payments by customer
done on time. Without an automated system, type, location, or size. This would help the
overdue accounts may be unnoticed, company quickly identify problem accounts
increasing the risk of unpaid debts. Manual and take necessary actions. Automated
tracking also leads to inefficiencies and payment reminders and a structured
human errors, making collections less follow-up process would also ensure better
effective. collection rates and reduce the risk of lost
revenue.
3. The company’s sales incentive structure XYZ Motors should regularly monitor
presents another significant weakness. accounts receivable and return rates by
Currently, sales staff are highly motivated to salesperson or sales location, especially
close deals quickly in order to maximize around the end of the fiscal year when
their commissions. While this can drive sales-pushing tactics are most likely to
short-term revenue growth, it also occur. Any unusual spikes in sales followed
encourages aggressive sales tactics that may by high returns should be investigated to
not align with the company’s long-term prevent unethical practices.
interests. Sales personnel might push
customers into purchasing vehicles they
cannot afford, leading to an increase in
defaults and product returns. Furthermore,
when sales targets are set too high,
employees may loosen sales standards, or
allow product returns just to meet their
quotas. This could distort the company’s
actual sales performance, as many of these
pressured customers might return their
vehicles at the beginning of the next
financial period. The resulting fluctuations
in sales and returns create operational
inefficiencies in purchasing, inventory
management, and financial reporting.
4. A lack of clear segregation of duties in - XYZ Motors should separate duties
the receivables process poses a risk of between sales staff and the finance team,
oversight failures and potential fraud. When require dual verification for contract
the same employees handle multiple steps in approvals, and implement an electronic
the process without accountability, errors contract management system to prevent
may go unnoticed, and intentional unauthorized modifications.
misstatements can occur.
5. Sales staff currently have the authority to - To control discounting, managerial
offer discounts of up to 15% without approval should be required for discounts
requiring additional approval. While this exceeding 5%, and an automated system
flexibility may help close deals faster, it also should be implemented to prevent
increases the risk of unauthorized price unauthorized reductions.
reductions and potential collusion between
employees and customers. A salesperson
could offer excessive discounts in exchange
for personal incentives or to meet sales
targets, ultimately reducing the company’s
profit margins. Additionally, without
oversight, discounting practices could
become inconsistent, leading to pricing
discrepancies and customer dissatisfaction.
Question 3:
ABC Manufacturing is a mid-sized company specializing in producing automotive parts.
The company has over 500 employees, including factory workers, administrative staff, and
management personnel. The payroll process is managed by the Human Resources (HR)
and Accounting departments. The HR department is responsible for hiring, maintaining
employee records, and processing payroll, while the Accounting department oversees
salary disbursements.
During an internal audit, the Accounting department noticed an unexplained increase in
payroll expenses despite no corresponding increase in production or workforce expansion.
Further investigation revealed that several employees listed in the payroll system did not
exist. These "ghost employees" had been receiving salaries, which were being deposited
into bank accounts controlled by an HR employee and the payroll officer.
Current internal controls over HR and payroll cycle at ABC Manufacturing:
- The HR department is responsible for adding new employees to the payroll system and
processing payroll.
- Payroll calculations are reviewed by the HR manager and then sent to the payroll officer
for payment processing.
- Employees provide their bank account details directly to the payroll officer for salary
disbursement.
- The company has a fingerprint scanning system for door access. However, employees are
not required to scan their fingerprints daily for attendance tracking.
Required:
1. List internal control weaknesses that allowed the fraud to occur.
2. Recommend relevant controls that could prevent or detect similar fraud in the future.
Control weaknesses Recommendation
1. There is a lack of segregation of duties, - ABC Manufacturing must implement
where the HR department was responsible stronger segregation of duties within the HR
for both adding employees to the payroll and payroll functions. The HR department
system and processing payroll, while the should be responsible only for hiring and
payroll officer had access to employee maintaining employee records, while the
records and salary disbursements. This Accounting department should oversee
allowed fraudulent payments to be made to payroll disbursements. Payroll processing
non-existent "ghost employees." by the HR should require dual authorization from both
department. Without an independent review HR and Accounting to ensure that any new
process in place to verify the legitimacy of additions to the payroll system are
newly added employees, the fraud went independently reviewed and approved.
unnoticed until the unexpected increase in
payroll expenses raised suspicion.
2. Inadequate payroll review and - The company should establish payroll
verification procedures: Payroll calculations verification and reconciliation processes by
were only reviewed by the HR manager regularly cross-checking payroll records
before being sent to the payroll officer for with attendance logs, department head
payment processing. However, there was no confirmations, and independent internal
independent reconciliation of payroll audits. Payroll reports should be reviewed
records against actual employee attendance, by both CEO and an internal audit team to
work schedules, or departmental detect inconsistencies in salary
confirmations. This lack of cross-checking disbursements. Implementing an automated
allowed fictitious employees to remain payroll reconciliation system that flags
undetected in the payroll system. discrepancies, such as duplicate employee
records or unusually high salary payments,
will improve detection and accountability.
3. Currently, employees submit their bank - Employees should first provide their bank
account details directly to the payroll officer account details to the HR department for
for salary disbursement, which creates a risk verification. Once approved, the HR team
of fraud. Without proper oversight, can forward the information to the payroll
employees could potentially collude with officer for processing. Additionally, the
the payroll officer to add fake bank accounts finance director should be kept informed of
to get more money from the company. all new hires and conduct regular payroll
reviews to ensure that all listed employees
are legitimate and actively working for the
company.
4. Although the company has a fingerprint - Employees should be required to check in
scanning system for door access, employees and out by scanning their fingerprints daily,
are not required to use it for daily ensuring that only those who are physically
attendance tracking. This lack of monitoring present and working receive payment.
creates a risk where employees could get Furthermore, additional security measures,
paid for hours they didn’t actually work, such as surveillance cameras or a security
leading to financial losses. Additionally, supervisor, should be put in place to monitor
without proper tracking, employees might attendance more accurately. These controls
cover for one another by falsely marking would help prevent time fraud and ensure
attendance, reducing overall accountability the system functions properly, even in cases
and efficiency. of technical issues.
