CASE STUDY Q: You are the audit manager in charge of the audit of Millipede Ltd a manufacturer of children's furniture. Their products are made of wood and consist mainly of small versions of adult-sized furniture principally children's chairs, small tables, beds, cots and nursery furniture often painted in bright colours, have jolly images attached and are generally designed to be cheerful and enjoyable for children to use. Their customers are mainly large retail chains and the Revenues for the year ended 31 December 2X16 were 11.4m.

To assist you in your audit planning, one of the audit team has provided the following description of the purchasing system. No other controls exist apart from those described.

1. The company has no buying department so employees place orders in their own area of responsibility. These orders can be considered as the company generally buys in bulk wherever possible. These departments are Cutting where wood is cut to shape based on a standard pattern for each product before being passed to Assembly which makes up the product and passes it to Painting which completes it and sends it to Dispatch who wrap the products and hold in finished inventory.

2. A three-part order form is used. The top copy 1 is sent to the supplier, copy 2 is sent to the goods inward department and copy 3 is retained by the originator.

Goods are received and checked against the order by the goods inwards department who are responsible for putting items into stores. Once received the advice note from the supplier and their copy, (Copy 2) of the purchase order for those goods, are sent to the finance department.

3. When the supplier's invoice is received the purchase ledger clerk checks the calculations on it, initials it and staples the advice note and purchase order to it. She then enters the invoice on to the purchase ledger.

4. The invoice is sent to the manager responsible for the employee who ordered the goods. The manager codes the invoice and returns it to the purchase ledger clerk. Purchase invoices are coded, entered on an analysis sheet and posted to the nominal ledger monthly.

5. The cashier pays suppliers monthly on instructions from the purchase ledger clerk.

6. The purchase ledger control account is reconciled monthly by the purchase ledger clerk who also reconciles suppliers' statements.

Required:

(I)Set out the control objectives of a purchasing system.

(Il) Identify four significant weaknesses in the internal controls in the above system and explain their significance in terms of potential loss to the business.