Auditors have a responsibility under ISA 265 (UK and Ireland) Communicating deficiencies in internal control to those charged with governance and management, to communicate deficiencies in internal controls.
In particular SIGNIFICANT deficiencies in internal controls must be communicated in writing to those charged with governance.

Required:

(a) Explain examples of matters the auditor should consider in determining whether a deficiency in internal controls is significant.
Greystone Ltd is a retailer of ladies clothing and accessories. It operates in many countries around the world and has expanded steadily from its base in Europe. Its main market is aimed at 15 to 35 year olds and its prices are mid to low range. The company’s year end is 30 September 2020.
In the past the company has bulk ordered its clothing and accessories twice a year. However, if their goods fail to meet the key fashion trends then this results in significant stock write-downs. As a result of this the company has recently introduced a just-in-time ordering system. The fashion buyers make an assessment nine months in advance as to what the key trends are likely to be, and these goods are sourced from their suppliers, but only limited numbers are initially ordered.
Greystone Ltd has an internal audit department, but at present their only role is to perform regular stock counts at the stores.

Ordering process
Each country has a purchasing manager who decides on the initial stock levels for each store, which is not done in conjunction with store or sales managers.
These quantities are communicated to the central buying department at the head office in Europe.
An ordering clerk amalgamates all country orders by specified regions of countries, such as Central Europe and North America, and passes them to the purchasing director to review and authorize.
As the goods are sold, it is the store manager’s responsibility to reorder the goods through the purchasing manager; they are prompted weekly to review stock levels as although the goods are justin-
time, it can still take up to four weeks for goods to be received in store.
It is not possible to order goods from other branches of stores as all ordering must be undertaken through the purchasing manager. If a customer requests an item of clothing which is unavailable in a particular store, then the customer is provided with other branch telephone numbers or recommended to try the company website.

Goods received and invoicing
To speed up the ordering to receipt of goods cycle, the goods are delivered directly from the suppliers to the individual stores. On receipt of goods the quantities received are checked by a sales assistant against the supplier’s delivery note, and then the assistant produces a goods received note (GRN).
This is done at quiet times of the day so as to maximize sales. The checked GRNs are sent to head office for matching with purchase invoices.
As purchase invoices are received they are manually matched to GRNs from the stores, which can be a very time consuming process as some suppliers may have delivered to over 500 stores. Once the invoice has been agreed then it is sent to the purchasing director for authorization. It is at this stage that the invoice is entered onto the purchase ledger.

Required:

(b) As the external auditors of Greystone Ltd, write a report to management in respect of the purchasing system which:
(i) identifies and explains FOUR deficiencies in that system (ii) explains the possible implication of each deficiency (iii) provides a recommendation to address each deficiency.
A covering letter is required.