Summary:
Assume that Elena Nydiacova is the owner of Leaf Power, a vegan gourmet supplier located in New York City that only supplies meal deliveries. The delivery is outsourced to web food delivery services (such as GrubHub, Uber Eats, etc.). Leaf Power’s kitchen and packaging facility is located in Queens. Elena has 20 employees. Elena and these 20 employees have been working together for a couple of years and have built a good working relationship. Elena has been thinking about expanding into another state and an opportunity comes up for Elena to open another kitchen in Boston, MA.
Elena has found a good location in Allston, MA. Elena has also asked the executive chef of her restaurant to develop a new menu that best fits the customers in the new market. The Boston kitchen is expected to add sales revenue by $260,000 per month to the current sales revenue of $400,000 per month. More kitchen and procurement staff is needed for the new location. In addition, the location will use local suppliers for the food ingredients and supplies. Elena realizes that she needs an internal control policy to make sure that the new kitchen is able to keep up with her standards and is free from irregularities. Elena is especially concerned about the procurement process because each week tens of thousands of dollars of ingredients are purchased by her kitchen.
The current procurement process in the Queens kitchen is as follows:
The kitchen staff make projections of the ingredients needed based on the recipes of the menu items and the past experience of the customer demand. One of the sous chef then makes the purchase order and send the orders to the suppliers. The ingredients are delivered to the kitchen pantry directly. The delivery receipts are signed by the kitchen staff and the accountant collects the signed receipt and put them in her office twice a week. Every two weeks, the suppliers send an invoice to the kitchen and the accountant will then prepare for the payment. The accountant also prepares and cuts the check. Currently there is no pre-designed forms for the kitchen staff to fill. The orders are made purely based on kitchen staff’s daily estimates. In the first year of operation, there were some big waste of food ingredients because the kitchen staff were not accurate in projecting the demand during certain holidays. The waste of perished ingredients in the first year cost the business tens of thousands of dollars.
Elena has found several kitchen staff to join the Boston operation. She has also found a local employee that will work as the procurement staff in the new location. The new employee for the procurement position has years of experience in the Boston food preparation business and has good relations with many major suppliers in the area. The new procurement staff has given Elena a list of suppliers for her to consider. Elena decides to have her current accountant to cover the accounting and payment process in both locations.
You are a consultant hired by Elena to help her design an internal control system for the procurement process. Because Leaf Power is not a large business so Elena expects you to design the system to be function and easy to follow. Write a report (three to five pages) for her and include the following items:
Control environment:
What are the responsibilities of the procurement staff? (10%)
Who should the procurement staff report to? (5%)
Risk assessment:
What are the risks of the procurement function? (10%)
What kind of fraud may happen in the procurement function? (5%)
Is Leaf Power vulnerable to any risks related to the new procurement staff? (5%)
Control activities:
What is the better process to lower the risks identified in 2. above? (10%)
What type of checks and approvals have to be in place for the procurement process? (5%)
Information and communication
What forms or reports should be used? By who? (5%)
What kind of data should be documented in the forms? (5%)
Who should approve the forms? (5%)
Monitoring activities
Is there a need for an internal policy compliance review (internal audit)? (5%)
Who should perform the review? How often? (5%)
Is there any other process that should be in place to reduce the loss of waste? Explain. (5%)
Relating to the accounting staff:
Is there any room for improvement of the current accounting and payment process? (5%)
If the current accounting staff is to cover the accounting for both locations, what recommendation do you have to ensure that the payment process is free from fraud or error? (5%)
Please write a structured report (3-5 pages in MS Word) with complete sentences that are free from grammatical errors and use the tables or figures with computation process in your discussion (10%)
For your information, following is a website of open-source educational resource regarding internal control:
http://simplestudies.com/introduction-to-internal-controls.html/page/5#Purchase-Cycle
(If the above webpage does not work, please check out other related websites.)
