Question

Question 3 Your audit firm is the auditor of Speighstown Garden Centre, which operates a large centre that sells plants, garden furniture (e.g. outdoor benches) and garden equipment (e.g. lawn mowers). The inventory system is up-to-date; the records are well maintained and the year end quantities are used to determine the inventory value. The inventory count instructions are shown below: (1) The inventory count will supervised by the Financial Controller and will take place on 31 August 2012. The count will begin at 7am. The centre will be closed on the day of the count, but if any of the large customers like hotels require a rush order, they will be accommodated. One member of the Accounts Department will be assigned to each area along with a member of the garden staff. There will be computer produced sheets showing the quantities of each item from the system. The Financial Controller will distribute and collect back the forms at the end of the count. Where the amount observed is different to the amount on the sheet, it will be crossed out and the new amount written in pencil. (111) The Financial Controller will then carry out test counts on five items in each area that has been counted. Where an error is found, the area will be re-counted. (iv) The quantity for any inventory that looks damaged or unsaleable should be crossed out and allotted a quantity of zero. Once all the sheets have been collected and test counts completed, the Financial Controller will manually update the computerised system to reflect the counted quantities. After the system has been updated, the count sheets are discarded. Required: Identify and explain FIVE deficiencies in the inventory counting system that can be highlighted in the instructions from Speighstown Garden Centre. For each deficiency suggest how it could be overcome.

Answer 1

Following are the 5 deficiencies identified from Speighstown Garden Centre with some recommendations to overcome :

1. Deficiency

The inventory count will be supervised by the Financial Controller. One member of the Accounts Department is also assigned to each area along with a member of the garden staff.

The accounts team and garden staff is familiar with the department, they have responsibility for the inventory and is not independent. They could hide or manipulate data and would not want to present their department to be inefficient

Recommendation

An alternative supervisor who is not involved with the inventory, such as an internal audit manager, should supervise the inventory count. Any team members from accounts department or warehouse staff should not be involved in the supervision.

2. Deficiency

One member of the Accounts Department is assigned to each area along with a member of the garden staff and a computer produced sheets showing the quantities of each item from the system. The Financial Controller will distribute and collect back the forms at the end of the count.

There is no clear division of responsibilities within the team, both members of staff could count together rather than checking each other’s count, and errors in their count may not be identified.

Recommendation

Each team should be informed that both members are required to count their assigned inventory separately. One should count and the second member checks that the inventory has been counted correctly.

3. Deficiency

There will be computer produced sheets showing the quantities of each item from the system and the Financial Controller will distribute and collect back the forms at the end of the count.

There could be possibilities for inventory to be not listed on the sheets,this could lead to areas to be missed out on count and the supervisor will be unable to ensure the completeness of all inventory .

Recommendation

Each team should be given a blank sheet for entering any inventory count which is not on their sheets. This blank sheet should be sequentially numbered, and any unused sheets should be returned at the end of the count, and the supervisor should check the sequence of all sheets at the end of the count.

4. Deficiency

Where the amount observed is different to the amount on the sheet, it will be crossed out and the new amount written in pencil.

The sheets are completed in pencil, however there is no indication that they are signed by the counting team. and in case any issues arise with the counting in the warehouse, it will be difficult to follow up as the identity of the counting team will be unknown.

Recommendation

All inventory sheets should be signed by the relevant team upon completion of count. When the sheets are returned, the supervisor should check that they have been signed.

5. Deficiency

The quantity for any inventory that looks damaged or unsaleable are crossed out and allotted a quantity of zero.

Damaged goods are crossed out and allotted a quantity of zero, instead of storing in a central area. It will be difficult for the team to decide on an appropriate level of write down if they are not able to see the damaged goods. In addition, if these goods are left in the stock, they could be inadvertently sold to customers .

Recommendation

Damaged goods should be clearly flagged by the counting teams and at the end of the count appropriate mechanism should be used to move all damaged goods to a central location. This will avoid the risk of selling these goods. The financial controller should then inspect these goods to assess the level of any write down allowance.