1. The production manager, Nick Wang, is responsible for initiating orders for inventory. The system sends Nick an email alerting him of the stock falling below 65% of the previous month's usage. He then generates a pre-numbered purchase order (PO). He can also adjust the quantities on the purchase order when he anticipates increases or decreases in sales. The purchase order is then sent to the purchase clerk Ray Kim via email.
2. For inventory orders, Ray normally sends the purchase orders directly to their approved suppliers. The suppliers will then send Ray a confirmation of items and quantities and an estimated date for the parts to be delivered. When the confirmation is received, Ray will log on his computer, finds the relevant PO initiated by Nick and select the supplier's name on the PO and then click on the box "sent to suppliers".
3. If a PO cannot be filled by any of the approved suppliers, Ray may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to his manager, Barry Sadler for approval. Once approved, Barry will add the new supplier into the approved supplier list.
4. Jasmine Lee Ltd requires their suppliers to attach a Delivery Note (DN) with inventory they ordered. DN should have a reference to the relevant PO number and shows the quantities and items being delivered. When a delivery arrives at the warehouse, the warehouse assistant Gordon Scully will reject the delivery if there is no PO on it or the PO number is invalid. Gordon reconciles the DN to the relevant PO on the computer to match items and quantities. Once it is confirmed, Gordon initials and dates one copy of the DN and then passes it to Gary Chen the warehouse manager.
5. When Gary receives the DN, he logs on to a computer and updates the PO to be "received" and the computer is requested to print a pre-numbered Goods Receiving Report (GRR). The computer retrieves a list of the items ordered from Purchase Order Master file and supplier details in the Supplier Master file to check for accuracy and then prints the GRR. Gary then counts the actual items against the GRR. Once all items are counted and checked, Gary updates the inventory record to reflect the actual items and quantities that have been received. When updating inventory, the computer asks for the relevant PO, if the computer accepts the PO number, it automatically displays the ordered items and quantities and ask Gary to confirm. After Gary updates inventory, the system will generate a journal (Note: the journal posted by the system is to Dr Raw materials inventory; Cr Creditor.). Gary then writes the journal number on the GRR and signs it. The signed GRR together with a copy of DN are left in a tray on the desk of Ray.
6. If discrepancies are found between the DN and the results from the actual counting, a copy of the GRR and DN will be passed to Ray to contact the suppliers. Inventory will not be updated until the discrepancies are sort out.
7. Ray receives all supplier invoices. Suppliers include the relevant PO number on their invoices. On receipt of an invoice, Ray agrees the details on supplier's invoice against the relevant PO. If they agree, he sequentially numbers the invoice based on its due date to ensure that it will be paid within discount period. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forwards the payment requisition, with the invoice attached, to Barry Sadler for authorisation.
8. Barry signs the payment requisitions to confirm authorisation and forwards the documentation to the banking clerk, Toni Burton who keys the payments into the payment journal (the journal posted by the system is Dr Creditor; Cr Bank). The system generates a journal number which Toni writes on the payment requisition to make sure the account payable balance is updated. Toni files the payment requisitions with the supporting documents.
9. Toni then loads the payments on the online banking facility with reference to the payment requisition number. Barry must approve and release the payments. The banking system automatically sends electronic transfer records to Barry who subsequently forwards them to Ray. Ray checks it against supplier invoices and then sends a remittance advice to individual suppliers.
Required:
a) Identity SIX control strengths of the purchases and payments system.
b) For each control strength, explain what the purpose of the control (i.e what does the control prevent or detect).
You may use the following format to present your answer.
Internal control strengths
Identify a control strength (a)
The purpose of the control (b)
c) Identity FIVE control weaknesses of the purchases and payments system.
d) For each control weakness, explain its potential consequence/implication and provide a suggestion for improvement.
You may use the following format to present your answer.
Internal control weaknesses
Identify a control weakness (c)
Consequence/Implication and suggestion for improvement (d)
1. The production manager, Nick Wang, is responsible for initiating orders for inventory. The system sends Nick an email alerting him of the stock falling below 65% of the previous month's usage. He then generates a pre-numbered purchase order (PO). He can also adjust the quantities on the purchase order when he anticipates increases or decreases in sales. The purchase order is then sent to the purchase clerk Ray Kim via email.
2. For inventory orders, Ray normally sends the purchase orders directly to their approved suppliers. The suppliers will then send Ray a confirmation of items and quantities and an estimated date for the parts to be delivered. When the confirmation is received, Ray will log on his computer, finds the relevant PO initiated by Nick and select the supplier's name on the PO and then click on the box "sent to suppliers".
3. If a PO cannot be filled by any of the approved suppliers, Ray may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to his manager, Barry Sadler for approval. Once approved, Barry will add the new supplier into the approved supplier list.
4. Jasmine Lee Ltd requires their suppliers to attach a Delivery Note (DN) with inventory they ordered. DN should have a reference to the relevant PO number and shows the quantities and items being delivered. When a delivery arrives at the warehouse, the warehouse assistant Gordon Scully will reject the delivery if there is no PO on it or the PO number is invalid. Gordon reconciles the DN to the relevant PO on the computer to match items and quantities. Once it is confirmed, Gordon initials and dates one copy of the DN and then passes it to Gary Chen the warehouse manager.
5. When Gary receives the DN, he logs on to a computer and updates the PO to be "received" and the computer is requested to print a pre-numbered Goods Receiving Report (GRR). The computer retrieves a list of the items ordered from Purchase Order Master file and supplier details in the Supplier Master file to check for accuracy and then prints the GRR. Gary then counts the actual items against the GRR. Once all items are counted and checked, Gary updates the inventory record to reflect the actual items and quantities that have been received. When updating inventory, the computer asks for the relevant PO, if the computer accepts the PO number, it automatically displays the ordered items and quantities and ask Gary to confirm. After Gary updates inventory, the system will generate a journal (Note: the journal posted by the system is to Dr Raw materials inventory; Cr Creditor.). Gary then writes the journal number on the GRR and signs it. The signed GRR together with a copy of DN are left in a tray on the desk of Ray.
6. If discrepancies are found between the DN and the results from the actual counting, a copy of the GRR and DN will be passed to Ray to contact the suppliers. Inventory will not be updated until the discrepancies are sort out.
7. Ray receives all supplier invoices. Suppliers include the relevant PO number on their invoices. On receipt of an invoice, Ray agrees the details on supplier's invoice against the relevant PO. If they agree, he sequentially numbers the invoice based on its due date to ensure that it will be paid within discount period. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forwards the payment requisition, with the invoice attached, to Barry Sadler for authorisation.
8. Barry signs the payment requisitions to confirm authorisation and forwards the documentation to the banking clerk, Toni Burton who keys the payments into the payment journal (the journal posted by the system is Dr Creditor; Cr Bank). The system generates a journal number which Toni writes on the payment requisition to make sure the account payable balance is updated. Toni files the payment requisitions with the supporting documents.
9. Toni then loads the payments on the online banking facility with reference to the payment requisition number. Barry must approve and release the payments. The banking system automatically sends electronic transfer records to Barry who subsequently forwards them to Ray. Ray checks it against supplier invoices and then sends a remittance advice to individual suppliers.
Required:
a) Identity SIX control strengths of the purchases and payments system.
b) For each control strength, explain what the purpose of the control (i.e what does the control prevent or detect).
You may use the following format to present your answer.
Internal control strengths
Identify a control strength (a)
The purpose of the control (b)
c) Identity FIVE control weaknesses of the purchases and payments system.
d) For each control weakness, explain its potential consequence/implication and provide a suggestion for improvement.
You may use the following format to present your answer.
Internal control weaknesses
Identify a control weakness (c)
Consequence/Implication and suggestion for improvement (d)
Related questions
QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK AND INVENTORY MANAGEMENT SYSTEM OF RUSSELL LTD.
Russell Ltd carries four types raw-chemicals under both product Line A and product Line B as shown in the table below. The company uses perpetual inventory system and adopts FIFO (first in and first out) method to estimate the inventory cost. Inventory level is managed and monitored by APEX, an inventory management system.
There are two central warehouses. One is located in Auckland, New Zealand and the other is in Adelaide, Australia. The warehouses dispatch clothes to all retailing stores within the country. In addition, the Australia warehouse dispatches stock to stores in Indonesia. On the balance date, the two central warehouses hold 20% of total inventory and all retailing stores hold 80% of total inventory.
| Location | Number of stores |
| Auckland | 5 |
| Wellington | 4 |
| Christchurch, | 3 |
| Perth | 6 |
| Adelaide | 6 |
| Total | 24 |
INVENTORY AT YEAR END RETAIL STORES
| Nature of the range | Label | Value $000 |
| Product Line A | Chemicals-P2P | 173000 |
| Chemical-T2P | 100000 | |
| Product Line B | Chemicals-Paints | 89000 |
| Chemicals-cosmetics | 100000 | |
| Total Closing balance of inventory | 462000 | |
APEX - INVENTORY MANAGEMENT SYSTEM
APEX, the companyâs inventory management system has a central server. It records information on inventory item code, item description, cost price per item, selling price per item, and the available quantities. It also tracks the available quantities of inventory in each warehouse and store. Reorder point was not set up in APEX. Instead, the order quantities are based on anticipated sales level.
Since some raw materials sell quicker than others, Russell has a policy of providing 30% discounts for inventories (raw materials) that have been on the shop floor for more than 4 weeks and 50% discount after 7 weeks. New inventory normally arrives in the store every 4 weeks. The discounts are automatically applied to the inventories based on their arrival dates in the stores, by using a Sales Register System â SALENET.
SALENET â THE SALES REGISTER SYSTEM
SALENET links to APEX (the companyâs inventory management system); and the terminals for the sales system are located in each store. SALENET records cash and credit card sales, calculate discounts, sales tax and produces Daily Sales Report (DSR) for each store. The DSR records all raw types of raw materials under both product lines and quantities sold on that day, and the sales and cost prices of those raw materials. The SALENET system automatically updates inventory levels in APEX at midnight daily, after which it also exports information on the DSR to the general accounting system (a separate software) for the recording of sales.
SUPPLIERS
In Russell Ltd, inventory (raw materials) code, description, and quantities ordered are assigned with a pre-numbered Purchase Order (PO). The Malaysian suppliers source the different inputs-raw materials used for producing chemicals from their local markets. The payment arrangement agreed between Russell and the Malaysian suppliers is as follows: (1) 40% of total costs as a deposit at the time when the completed negotiation and the PO are sent to the suppliers. (2) Once the raw materials are ready and shipped, Russell has 30 days to pay the remaining balance 60%. The suppliers provide a Bill of Lading as proof that the garments are shipped, its ownership transfers to Russell at the time of shipment. When the inventory are shipped (Russell receives a copy of the Bill of Lading via email), the accounting department records a journal entry to recognise both inventory-in-transit and account payable, but the actual inventory level in APEX is not updated until the inventory arrived at the warehouse.
RECEIVING INVENTORY
The shipment of raw-inputs arrives at the central warehouses. The barcodes and the quantities of inventory items shipped are printed on the outside of the cartons. A Packing Slip is attached to each shipment. Each barcode printed on the carton contains information on the inventory item code and raw materials description.
For each shipment that arrives, the warehouse assistant prints off the relevant pre-numbered PO. The warehouse assistant using a scanning device reads each barcode printed on the outside the cartons and compares it with the information on the PO. When the information agrees, the warehouse assistant ticks and signs the PO. He then logs into the APEX system to click on the âreceivedâ box on the PO filed in the system, after which the APEX system updates the inventory levels and also prints out a Receiving Report (RR). At this point, APEX also sends a copy of Receiving Report to the accounting department regarding the arrival of the inventory. The accounting department then initiates a journal entry to reverse inventory-in-transit and to increase inventory. The warehouse assistant is authorised to alter the quantities received in APEX to reflect the actual received quantities when there is a discrepancy in the information between the PO and the barcodes printed on the cartons. The Receiving Report and supplierâs Packing Slip are filed in the warehouse. The signed PO and a copy of Receiving Report are handed to the inventory manager for inventory distribution.
DISTRIBUTING INVENTORY TO RETAIL STORES
The inventory (chemicals) manager is responsible for distributing inventory to the retail stores. The inventory distribution is usually based on the size and turnover of the retail store. When the new inventories arrive, the inventory manager uses APEX to allocate inventory to each retail store. APEX generates and prints a pre-numbered Distribution Report which displays the inventory item code, item description and quantities and the location of the store. Two copies of the Distribution Report go to the warehouse for packing and then shipping via an external carrier. The warehouse files one copy of the Distribution Report and the other copy goes with the inventory to a retail store. When the inventories arrive at the retail store, the shop manager logs into the APEX system. She identifies the relevant shipment by checking its reference number on the Distribution Report and then confirms receipt of the inventories by clicking the âarrived in storeâ box, after which the shop manager and/or assistants unpack the inventory.
Russell carried out an annual inventory count on the 30 June 2016 at 6pm local time. During the inventory counts, the stores were shut. Each store manager has access to APEX. They can read and print out inventory reports, but they cannot edit the inventory levels in APEX. For the inventory counts, the store manager prints out a list of inventories held in the store, which shows the item code, description and quantities. Two staff members and the manager count the stock and write down the numbers counted next to each inventory item on the list. They take note of any differences. At end of the inventory count, the store manager prepares an Inventory level Report which notes the differences using SALENET. SALENET adjusts the inventory level in APEX at midnight to reflect the results from the inventory count. A copy of the Inventory Count Report from each individual store are sent to the accounting department, at where all reports are aggregated based on item codes. The accounting department then adjust the inventory level accordingly in the accounting system.
QUESTION 2: UNDERSTANDING THE INTERNAL CONTROL PROCESS, ASSESSING CONTROL RISK, AUDIT PROCEDURE FOR INVENTORIES
Identify three control strengths in the inventory system of Russell Ltd and explain why each control is a strength. For each control strength, identify audit procedures to test the effectiveness of control. Use the format to present your answers.
You are required to present your answers according to this format:
| Identify a control strength | Why it is a strength | Audit Procedures to test the control |
