Question

Clearview Pty Ltd (Clearview) is a manufacturer of glass fencing for swimming pools and balconies. Clearview operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Clearview’s year end is 30 June. Clearview is finalising the arrangements for the year-end inventory count, which is to be undertaken on 30 June 2017.

The finished glass fence panels are stored within 25 aisles in the first warehouse. The second warehouse is for large piles of raw materials, such as sand, used in the manufacture of glass. The following arrangements have been made for the inventory count:

The warehouse manager will supervise the count, as he is most familiar with the inventory. There will be ten teams of counters and each team will contain two members of staff, one from the finance and one from the manufacturing department. None of the warehouse staff, other than the manager, will be involved in the count.

Each team will count an aisle of finished goods by counting up and then down each aisle. As this process is systematic, it is felt that the team will not need to flag areas once counted. Once the team has finished counting an aisle, they will hand in their sheets and be given a set for another aisle of the warehouse. In addition to the above, to assist with the inventory counting, there will be two teams of counters from the internal audit department and they will perform inventory counts.

The count sheets are sequentially numbered, and the product codes and descriptions are printed on them, but no quantities. If the counters identify any inventory which is not on their sheets, then they are to enter the item on a separate sheet, which is not numbered. Once all counting is complete, the sequence of the sheets is checked and any additional sheets are also handed in at this stage. All sheets are completed in ink. Any damaged goods identified by the counters will be too heavy to move to a central location, hence they are to be left where they are located, but the counter is to make a note on the inventory sheets detailing the level of damage.

As Clearview undertakes continuous production, there will continue to be movements of raw materials and finished goods in and out of the warehouse during the count. These will be kept to a minimum where possible.

The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles. In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.

REQUIRED:

(a) List four (4) sources of information that would be of use in gaining an understanding of Clearview, and for each source describe what information you would expect to obtain.

(b) (i) Identify and explain five (5) internal control weaknesses in the inventory count arrangements of Clearview. (ii) Explain the impact of these weaknesses on the audit.

(c) Describe a recommendation to address each internal control weakness identified in requirement (b)(i).

Answer 1