Beds and Spreads Inc. specializes in bed and bath furnishings. Its inventory system is linked through the company's website to key suppliers. The auditor identified the following internal controls in the inventory cycle:

1. The computer initiates an order only when perpetual inventory levels fall below prespecified inventory levels in the inventory master file.

2. The sales and purchasing department managers review inventory reorder points for reasonableness on a monthly basis. Approved changes to reorder points are entered into the master file by the purchasing department manager and an updated printout is generated for final review. Both managers verify that all changes were entered correctly and initial the final printout indicating final approval. These printouts are maintained in the purchasing department.

3. The computer will initiate a purchase order only for inventory product numbers maintained in the inventory master file.

4. The purchasing department manager reviews a computer-generated exception report that highlights weekly purchases that exceed $10 000 per vendor.

5. Salesclerks send damaged merchandise on the store shelves to the back storage room. The sales department manager examines the damaged merchandise each month and prepares a listing showing the estimated salvage value by product number. The accounting department uses the listing to prepare a monthly adjustment to recorded inventory values.

REQUIRED

Consider each of the preceding controls separately.

a. What type of risk or potential error could occur if the control were absent?

b. State whether the control is manual, computer-assisted, or fully automated.

c. Describe how the extent of testing of each control would be affected in subsequent years if general controls, particularly controls over program and master file changes, are effective.

d. For each control,

• Provide an example of an audit procedure to test the control; and

• State the transaction-related audit objective associated with the audit procedure.