Question

You are the audit senior on the Pet Care Pty Limited (Pet Care) audit. Pet Care is a distributor of pet care products including shampoos, lotions and a small range of toys. Pet Care uses an on-line computer system. No goods are manufactured in-house; rather, Pet Care maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties. Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system: Procedures for raw materials • Separate systems, staff and warehouses are maintained for both raw materials and finished goods. • Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month’s usage. The purchase orders contain the following details: date; supplier name and address; raw material needed. • Three copies of the purchase order are produced and distributed as follows: Copy 1—to warehouse to enable follow up of late orders. Copy 2—filed by accounts clerk in date order. Copy 3—sent to supplier. • When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced: Copy 1—matched to warehouse copy of purchase order by stores staff. Copy 2—filed by accounts clerk. The scanning process is aborted if the codes do not match those on the masterfile. Procedures for finished goods • Production orders are automatically generated when finished goods fall below 60% of the prior month’s sales. The production orders contain the following details: date; sub-contractor’s name; raw materials required; finished goods needed. Asia Pacific College of Business & Law Semester 1 2020 Page 7 of 11 • Two copies of the production order are produced: Copy 1—to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier. Copy 2—filed by production controller in date order. • When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced: Copy 1—matched to production controller’s copy of production order. Copy 2—filed by accounts clerk. The scanning process is aborted if the codes to not match those on the masterfile. General notes • The computer automatically selects the supplier of both raw materials and finished goods based on: the latest price (as per their most recent invoice). their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse). • Password access is as follows: Stores staff (raw materials): Purchase order printing for raw materials only. GRN printing for raw materials. Stores staff (finished goods): GRN printing for finished goods. Production controller: Production order printing, masterfile amendments. Accounts clerk: Masterfile amendments. Masterfile amendments • The stock masterfile contains details of: existing stock items including codes and warehouse location; approved suppliers and sub-contractors. • Orders will only be generated to suppliers and sub-contractors recorded on the masterfile. • Masterfile changes are made by the production controller for both raw materials and finished goods inventory. A masterfile amendment form is completed by the production controller as a record of the changes made. Asia Pacific College of Business & Law Semester 1 2020 Page 8 of 11 REQUIRED: (a) Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified. (b) Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform.

Answer 1

Facts of the case: Deals in Pet care products on automatic computerised system basis. Both FG and Raw material division are operating separately. Automatic Selection by computer itself for raw material Purchase orders and for Finished goods production order

Weakness	Implications
Raw Material and FG division is operating separately ( No Connection over Production or Raw Material required to be purchased)	No control over how much goods is required to be produced and how much raw material is required for such production. Simply relying on automatic computer system will lead to blockage of funds as well and run the company into bankruptcy. Liklihood of fraud is also emerged.
2. Automatic Selelctionof Raw MAterial supplier. ( Addition / Deleltion by Prod Controller only and Amendemnt note is maintained by Production controller only, "Not System generated" )	Here chnages is made by the production controller by him only whether against any documentataion basis yes or no, " Such information is not communicated tp ptther division as well as records is updated by him only and same is not sysytem generated.
3. Password Control: Only in single hand at each process, " Password need to be reviwed or checked after particular frequency, chnages of sharing is high)	Password is known to single handed person, although chnaces to share the same is very high. If there is no change in passsword over a period of time is being done.
4. At Production department when finished goods received from FG supplier, IF GRN codes dont match with the production controller slip against " production slip" Scanning process is aborted, and no alternative process is in record, secondly if anly alternative process is in record, then store keeper of FG division as well as Production controller presence is required for confirming delivery of FG.	if GRN scanning is not working , Such process is abandoned instead of keeping any alternative option in same.
5. Raw Material Purchase Order, date of Gap is based on difference between No. of days in PO requested by Raw Material division and receipt by the warehouse of Raw material division, ( LAck of Communication with FG the time upto which same is required)	No. of Days in which Raw material is required is determined by the computer only, Leads to delay in order and there is no provisionof any bulk or speedy order to be accomplished in this computerised system.
6. Requisition is made only for the stock item which falls below 70% in Raw Material division and 60% in FG division based on the prior period records, If any changes is made over quotation , qunatity , quality , even supplier same is not taken by the system, Change is not autheticated as information for such changes is not communicated in the system properly. Secondly for making such chnages for proper flow chain in the sysytem.	Requisition is only made if stock falls below 70% or 60% , it means LIFO method is followed, first in raw material is not used hence chances of obsolence is also high.

IT testing to be performed:

- ERP configuration over the 70% and 60% basis is correct or not, System is automatically set.

- Password: Policy in respect of password is updated regularly and password is only known to one person and whole IT system controller.

- Monthly changes in Raw material and FG divison Supplier list and sub controllers list is reviewed against the documentation records ( Basis for making such changes)