Harlan, Inc., is a large, highly diversified organization engaged in feed and flour milling, the manufacture of plastic products, the manufacture of highly specialized machinery, and the operation of poultry hatcheries, farms, and processing nlants. The company's facilities are located throughout the United States.
During the past several years, the company has been expanding the business through acquisitions, mergers, and natural growth of the original operations.
The company finances poultry growing operations of feed customers until the flocks are marketed. Poultry prices have been depressed for the past several years, and, as a result, large bad debt losses have been sustained. Many accounts are secured by collateral other than poultry and are not considered current assets.
Your review of the current internal controls and accounting procedures disclosed the following changes from prior years:
1. The company organized an internal audit staff during the year.
2. The internal audit staff is reconciling all bank accounts.
3. The company has instituted a procedure whereby divisions send the Home Office an "invoice apron" which lists the information required for payment of the invoices and the due date. The other invoices and other supporting data (e.g., receiving reports, purchase orders) remain at the receiving location.
4. Excess funds are now invested in short-term securities. The treasurer has sole authority for purchase and sale of the investments. Securities purchases are credited to a company account at a local brokerage house. The securities are held in the treasurer's name. All correspondence related to the investments is sent directly to the treasurer. He, in turn, forwards brokerage advices to the controller's office for recording in the accounts.
5. A physical inventory of office furniture and fixtures has been taken at the home office.
Discussions with company personnel and compliance testing disclosed the following information:
1. The company plans to discontinue extending credit to certain customers whose poultry raising operations have deteriorated to the point that their ability to repay the company is doubtful. It is anticipated that a large provision for doubtful accounts may be necessary to reduce these accounts to estimated realizable value on a forced realization basis (the company has second mortgages as collateral on many of the farms).
2. The tool crib inventory consists of a conglomeration of miscellaneous items, most of which are small quantities with very minor unit prices. This inventory totals \(\$ 42,395.89\) which is an insignificant portion of the total inventories.
3. The purchased parts stockroom at another plant is segregated from the production areas by a wire fence. While visiting this plant, you noted that the gate was left open all day and access to the stockroom (which contains many valuable and easily concealed items) was a vailable to any employee. The stockroom's perpetual inventory records were formerly checked by an employee who made periodic test counts. This employee has retired and has not been replaced. As a result, such counting has ceased. You expanded your tests in view of these situations and are satisfied that the perpetual records reasonably reflect the quantities on hand.
Required:

a. Identify the environmental factors that impact on the company's internal controls.

b. List identified strengths and weaknesses in Harlan's procedures.

c. From your list of weaknesses identify those you consider material and indicate your suggestions for improvement in your required communication to management.

d. Indicate the areas in which you would likely extend your substantive tests.