An important part of the audit of a company is the consideration of the company's internal control structure, in which the auditor identifies risks of potential misstatements that could affect the audit. Assume that you are the auditor of X Ltd., which has annual sales of $5 million. One of the members of your audit staff has provided the following list of internal control descriptions and has noted the related deficiencies.

For each point considered by the audit staff member to be a deficiency:

1. Explain very briefly the significance of the deficiency, in terms of the materiality of errors that could result from it.

2. Describe the effect, if any, of the deficiency on your substantive procedures.

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Staff member's internal control descriptions "Because the company has no purchas- ing department, many employees make purchases. In general, employees make purchases applicable to their area of the company's operations, but it is not uncom- mon for employees also to make purchases of personal items through the company. A three-part purchase order form is sup- posed to be used whenever merchandise is ordered: one copy to be sent to the suppli- er, one to be sent to the shipping/receiving clerk, and one to be kept by the individual doing the ordering. When the merchandise arrives, the shipping/receiving clerk checks the merchandise and sends the packing slips and purchase order copies to the accounts payable clerk. If he has no pur- chase order for the merchandise, the ship- ping/receiving clerk ascertains by telephone who ordered the merchandise and attaches a copy of a mimeographed form with this information on it to the packing slips. Staff member's notes as to believed deficiencies 1. No control over company's commitment to purchase goods. 2. No control over employees' personal pur- chasing. 3. Mimeographed forms are not prenumbered.