Stopwatch PLC’s main customers are the maior television networks within the UK. The company’s creative team present an idea for a television programme to the network and, if successful, the programme is then commissioned. A production budget, including an agreed profit margin for Stopwatch PLC, is agreed with the network before production commences. Stopwatch PLC’s production team is then responsible for making the programme within these agreed budget limits. If the production goes over budget, Stopwatch PLC is responsible for meeting the additional cost of completing the programme concerned. The following significant points have been identified during your audit of the company:

(a) On 6 out of the 22 commissions received by Stopwatch PLC during the year, the company has not adhered to its own internal control procedures which call for the weekly comparison of budget to actual spend. As a result large overruns against budget in time and cost have occurred on these productions.

(b) The company employs a large number of writers, directors and presenters in the making of its programmes. Under Inland Revenue guidelines, depending upon the length of their individual contract and the nature of their role, some must be paid after deduction of income tax and National Insurance whereas others are treated as freelance and can be paid without such deductions being made. Any such sums deducted must be paid over to the Inland Revenue monthly. Due to staff changes within the company’s human resources department during the year, a number of individuals for whom income tax and National Insurance should have been deducted, were found to have been treated as freelance and paid without the appropriate deductions being made.

(c) On four separate occasions during the year, equipment was found to have been ordered for the company by individual production staff without proper authorization and in contravention of company policy which calls for three quotes for all capital expenditure.

Required: 

(a) Set out, in a manner suitable for inclusion in a report to management, the possible consequences arising from the weaknesses identified above, and your recommendations to remedy these weaknesses.

(b) Outline the points to be included in the covering letter accompanying the above report to management and explain why they should be included.