FOLEO FONES CASE STUDY Chapter 9:

Assume you are the management accountant for the Foleo Group & Tracey Chen has asked you to assist her in assessing the organisations internal control environment before her meeting with Peter Singh next week. Specifically, she asks you to look at the Foleo Fones & Foleo Accessories Business Units. Tracey provides you with her detailed observations of their current control environments below, & asks for your input.

Foleo Fones & Accessories:

Allan Raymond & Robyn Smith walked me though the controls currently in place for the warehouse, the production plants & the sales offices of Foleo Fones & Foleo Accessories.

The warehouse: The primary risk for the warehouse operation is theft, so control over Foleos inventory assets (i.e. raw materials, work in progress & finished goods) is critical. Currently there are no restrictions on entry to the warehouse it would seem that any employee (or non-employee) can enter the area without authorisation. This needs to be addressed, as the inventory items themselves are not secured behind physical locks or barriers, rather they are accessible to anyone who enters the warehouse. There are controls over the purchasing & receiving functions of raw materials & other miscellaneous items required by the businesses. These consist of authorised purchase orders, receiving inspections & reports, & the recording of materials received into the computerised inventory system. Whilst in theory these controls seem adequate, however, in practice, they are not as effective as they could be, due to staff overriding them at peak times of activity (e.g. when a number of orders are being delivered at the same time). Allan will address this & report back to me. The warehouse manager expressed some concerns about the involvement of Phil Brown, the senior accountant, in the receiving processes of deliveries received. According to the manager, there are staff allocated in the warehouse specifically for this function, & he found it disruptive & unnecessary to have Phil involved with warehouse operations. This will need further investigation. I discussed the incidence of theft over the past six months with the warehouse manager, who advised that there had been an observable increase he did not have any evidence or numbers to support this observation. Allan will look into this matter & report back to me.

The production plants: The control issues of concern for the plants revolve around the risks associated with not meeting customer demand & escalating costs. These risks have not been sufficiently mitigated, with the plants regularly experiencing issues such as: insufficient raw materials & capacity available for scheduled production runs; unplanned production downtime due to machinery breakdowns & staffing issues; reworking of defective phones & accessories; cost blowouts in direct labour & materials; cost increases associated with expediting late orders; etc. Allan & Robyn have introduced some controls to address these issues, however it does not appear that they are being sufficiently monitored or enforced. Monthly variance reports are generated, but not regularly reviewed by the Business Unit Managers due apparently, to their time constraints. H.O. do not see these reports, nor do we hear about them from the Business Managers. This will need to be addressed. Quality assurance activities are in place for the raw materials, products during the manufacturing process & finished goods. These activities were introduced as a result of Foleos focus on delivering quality to our customer some months ago, however it is evident that controls over the operations of these activities need to be enforced to eliminate the risk of poor quality goods being produced & supplied to our customers.

The sales offices: The risk most evident for the sales function of Foleo Fones & Accessories is that of revenue streaming. There are currently budgets in place, along with performance targets for sales staff, however, in the past these have encouraged the deferral of sales once the targets have been achieved. The Balanced Scorecard will hopefully address this sort of behaviour, however the Business Unit Managers need to monitor the budgets & actual results more carefully to identify potential instances of revenue streaming. Another more sinister risk for the area of sales is that of bogus customers & fraud. Both Foleo Fones & Accessories have in place an authorised customer list on their sales system, so that sales can only be entered against customers already in the system. Allan & Robyn have recently introduced a formalised process for adding new customers onto their authorised lists that involve multiple trade & credit checks. My suggestion would be that an ASIC check should be added to this process & that this authorisation process should be restricted to the Sales Managers.

1. Based on Traceys observations as well as the weeks readings and lecture materials, identify five (5) lapses in the control environments of Foleo Fones and Foleo Accessories, and explain the risks that each presents.

(HINT: Ensure you identify the controls that might be missing and explain the implications for the organisation of EACH missing control.) (1.5 marks)

2. Define preventive and detective controls. Suggest a specific control that Allan Williams and Robyn Smith might introduce to address each of the lapses you identified in part (a) and classify each control suggestion as either preventive or detective in nature. Explain your choice of classifications. (1.2 marks)

3. Select three (3) controls you have suggested in part (b), and describe how each will work towards achieving the overarching objectives of the Foleo organisation. (0.6 mark)

(HINT: You may need to revisit the entire Foleo Case Study and/or the exercises you have completed so far to refresh your memory of the overarching objectives of the organisation.)

(HINT: Ensure you identify and explain the specific objective that each control will relate to.)

4. What are the four levers of control? For the three (3) of the controls you selected in part (c), classify each as one of the levers of control and explain why.

(HINT: Refer to the Simons reading for information on the levers of control.) (0.7 mark)