Oliver Bauer, owner of Bauer's Retail Store, has been very careful to establish good internal control over inventory purchases for his shop. The shop has several employees, and since Ollie cannot devote as much time as he would like to running the shop, he has entrusted a long-term employee with the task of purchasing inventory. This employee has worked for Ollie for 15 years and knows all of the shop's suppliers. Whenever inventory must be purchased, the employee prepares a purchase order and posts it to the supplier. When a rush order is needed, the employee occasionally calls in the order and does not prepare a purchase order. This procedure is acceptable to the suppliers because they know the employee. When the merchandise is received from the supplier, this employee carefully checks in each item to verify the correct quantity and quality. This job is usually done at night after the shop is closed, thus allowing the employee to help with sales to customers during normal working hours. After checking in the items, the employee initials the copy of the supplier invoice received with the merchandise, staples the copy to the purchase order (if there is one), records the purchase in the business' accounts and prepares a cheque for payment. Oliver Bauer examines the source documents (purchase order and initialled invoice) at this point and signs the cheque, and the employee records the payment. Ollie has become concerned about the shop's gross profit, which has been steadily decreasing even though he has heard customers complaining that the shop's selling prices are too high. He has a discussion with the employee, who says, 'I'm doing my best to hold down costs. I will continue to do my purchasing job as efficiently as possible - even though I am overworked. However, I think you should hire another salesperson and spend more on advertising. This will increase your sales and, in turn, your gross profit.'

Required

Why do you think the gross profit of the shop has gone down? Prepare for Oliver Bauer a report that summarises any internal control weaknesses existing in the inventory purchasing procedure and explain what the result might be. Make suggestions for improving any weaknesses you uncover.