B. Inventory System Notes

Procedures for raw materials

Separate systems, staff and warehouses are maintained for both raw materials and finished goods.

Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month's usage. The purchase orders contain the following details:

date;

supplier name and address;

raw material needed.

Three copies of the purchase order are produced and distributed as follows:

Copy 1to warehouse to enable follow up of late orders.

Copy 2filed by accounts clerk in date order.

Copy 3sent to supplier.

When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced:

Copy 1matched to warehouse copy of purchase order by stores staff.

Copy 2filed by accounts clerk.

The scanning process is aborted if the codes do not match those on the master-file.

Procedures for finished goods

Production orders are automatically generated when finished goods fall below 60% of the prior month's sales. The production orders contain the following details: date; sub-contractor's name; raw materials required; finished goods needed.

Two copies of the production order are produced:

Copy 1to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier.

Copy 2filed by production controller in date order.

When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced:

Copy 1matched to production controller's copy of production order.

Copy 2filed by accounts clerk.

The scanning process is aborted if the codes to not match those on the master-file.

General notes

The computer automatically selects the supplier of both raw materials and finished goods based on:

the latest price (as per their most recent invoice).

their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse).

Password access is as follows:

Stores staff

(raw materials)

Purchase order printing for raw materials only.

GRN printing for raw materials.

Stores staff

(finished goods)

GRN printing for finished goods.

Production controller

Production order printing, master-file amendments.

Accounts clerk

Master-file amendments

Master-file amendments

The stock master-file contains details of:

existing stock items including codes and warehouse location;

approved suppliers and sub-contractors.

Orders will only be generated to suppliers and sub-contractors recorded on the master-file.

Master-file changes are made by the production controller for both raw materials and finished goods inventory. A master-file amendment form is completed by the production controller as a record of the changes made.

Ques : Using the Inventory System Notes:

a) Identify three weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified.

b) Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform.

c) Identify two Computer Assisted Audit Techniques (CAATs) that you would request the IT auditors run to assist you in testing the valuation of inventory