It had been two years since the last audit of the Hanning branch of Wendell Furniture Company, Inc. Wendell manufactures a budget-priced line of household furnishings and retails its line through a regional chain of furniture stores. The stores also sell Jeremy G.

Manchester furniture as its better line. During the last audit, the Hanning branch had come under severe criticism for its inventory management. Inventory records were incomplete, and an inordinate amount of damage occurred to furniture in the branch’s storage warehouse. When the auditors recently began a new audit of the branch, they were surprised to discover evidence indicating that nothing had been done to correct the previous problems.

Inadequate inventory accounting and careless handling of goods apparently had continued since the last audit. The lead auditor became disturbed by what he and the junior staff auditor had found. The lead auditor asked his audit manager, ‘'Why perform an audit at all if nothing is going to be done to correct the problems we find?”

Required:

What aspect (s) of the previous year’s audit process seems to have been neglected in the above example? Explain.

Previous problems

The following report was issued to management at the conclusion of a recent audit of a petty cash fund:
AUDIT OF PETTY CASH Completed 5/30/87 Recommendations:
After having examined the petty cash fund at the three different locations within the headquarters building, we recommend that all of the managers receive in-depth training in the management of petty cash. We further recommend that strict controls be established to ensure that each request for replenishment to the fund be signed by a departmental manager, because the petty cash custodians demonstrate a severe lack of judgment in their expenditures and requests for funds. A third recommendation is to institute a voucher system so that each expenditure is approved by the immediate supervisor of the custodians.
Findings:

Control over petty cash is dangerously inadequate, due primarily to the incompetence of the custodians over those funds. Funds often were expended for trivial items or for items that should have been purchased from other funds in other departments. Because a voucher system has not been established, approval is seldom obtained for any expenditure, and replenishments are made solely upon the authority of the custodians.

Required:

a. What topics were covered in the report?

b. What additional topics might have been addressed?

c. What is the tone (or climate) of the report?

d. How would you respond if you were one of the petty cash custodians?

e. Based upon your knowledge of petty cash (imprest) funds, evaluate the findings and recommendations. (A review of these funds in an introductory financial accounting textbook may be helpful.)