Question

You are the auditor of Safe Storage Pty Ltd, which is involved in the manufacture of steel storage drums. One of the directors of Safe Storage has requested that you perform a review of the internal controls within the purchases and payments cycle of the company’s operations. From your discussions with management and staff you ascertain that the company is a small operation, operates from one location in Perth, and only has the following staff:

• five directors (one of whom, the CEO, is responsible for the day-to-day operations of the company)
• a warehouse manager
• an assistant to the warehouse manager
• a secretary/receptionist
• an accounts receivable clerk
• a banking clerk
• an accounts payable clerk
• three machinery operators who are involved in the manufacturing process.

The warehouse manager is able to order from any supplier and will usually telephone a number of suppliers to obtain quotes. The warehouse manager will then order from one of these suppliers by telephone and confirm the order by facsimile. The only documentation kept is the facsimile confirmation of order, which is kept by the warehouse manager.

Once an order has been confirmed, the warehouse manager will complete a purchase order (PO). The warehouse manager keeps one copy of the PO and the other is forwarded to the accounts payable clerk, who files it in date order.

When goods are received at the warehouse, the warehouse manager checks the goods received to the delivery note attached to the goods and signs the delivery note as evidence of this check. The delivery note comprises two copies, one of which is retained by the person delivering the goods and the other by the warehouse manager.

The warehouse manager forwards a copy of the signed delivery note to the accounts payable clerk, who posts a journal entry to the creditors ledger for the amount shown on the delivery note. The clerk then stamps the delivery note ‘entered’ and files the delivery notes by supplier.

REQUIRED

1. Describe the strengths and weaknesses in Safe Storage’s internal control for the purchasing area.
2. How will your assessment of internal controls affect your audit approach for Safe Storage?

Answer 1

Sr No	Strength	Weakness
1	The Account Manager Clerk, Arrange the purchase orders in a date order, this helps to maintain proper filling System.	Lack of Video cameras in the warehouse makes it vulnerable of inventory thief and unauthorized transfer of goods.
2	The warehouse manager conducts real time inventory counts after the order arrives. The Purchase order is raised by authorized person.	In other to maintain proper control there should be segregation of duties. In this case the, warehouse manager handles various activities from placing order, inventory counting, and accepting orders and sending the copy to accounts payable department all the above activities should be handled by different persons.

)

2) Well it is the responsibility of management to Maintain effective and operative internal control

if the management have weak internal control then the audit firm may not accept the audit because of risk of material misstatement.

However, if the auditor had already accepted the audit then it’s the responsibility of the auditor to communicate with the management and point out the weakness in the internal control.

Well auditor have to however extent its audit procedure and increase it audit sample to ensure that the financial statements are free from material misstatement.