KHARILA CASE KHARILA is a manufacturer and distributor of printed stationery products that are sold in a wide variety of retail stores around the country. There are two divisions: Manufacturing and Distribution. A very large inventory is held in the distribution warehouse to cope with orders from retailers who expect delivery within 48 hours of placing an ordet. KHARILA's management accountant for the Manufacturing division charges the Distribution division for all goods transferred at the standard cost of manufacture which is agreed by cach division during the annual budget cycle. The Manufacturing division makes a 10% profit on the cost of production but absorbs all production variances. The goods transferred to Distribution are therefore at a known cost and physically checked by both the Manufacturing and the Distribution division staff at the time of transfer. Trigger The customer order process for KHARILA's Distribution division is as follows KHARILA's customer service center receives orders by telephone, pest, fax, email and through a new on-line Internet ordering facility (a similar system to that used by Amazon) The customer service center checks the creditworthiness of customers and bundies up orders several times each day to go to the despatch department 1 Lecturer: Louis David Junior ANNOR, CA All orders received by the despatch department are input to KHARILA's computer system which checks stock availability and produces an invoice for the goods. Internet orders have been credit checked automatically and stock has been reserved as part of the order entry process carried out by the customer. Internet orders automatically result in an invoice being printed without additional input All codes received by the depende department we jepet a KHARIA.com vystom which checks availability and produces an invice for the goods etendens tuve been credit checked automatically and stock has been reserved as part of the order cery process carried out by the customer. Inome dentically read na bene printed without subditional inget * The despatch department uses a copy of the invoice to select goed from the bonne which are the mbled in the kuding deck for delivery sing KHARILA'Nowa Beat of delivery vehicles When KHARILA's drivers deliver the goods to the customer, the customer sig for the recipe and the pred copy of the invoice is tumed to the depth office and there the mccounts department Due to the use of my lick physical stock takes only takes per Distributie staff at the end of the financial year. This has always revealed some socken whitenig dess have been optible Seel, Beth internal and certaines pecent during the stock take and check elected terms of stock with the despacho department statt. Due the range of products Best in the watch the auditors rely on the departe department staff identity many of the produto beld KHARILA'Y eigement account for the Distribution de producerely management porte bied on the cling pelice of the goods to the student come of minufacture. The standard cost ef mamulisctune in deducted from the mentory control total which is increased by the value of atvinte transferred from the maintensiteten Lecturer: Louis David Junior ANNOR. CA The control total for inventory is compared with the monthly mentory lub report at while there are differences, there are mainly the result of write-els of damaged ex okte stock, which we recorded on Jumal entry forms by the despatch department and atto con department Tank (a taluste my weaknenes in the risk management approach taken by KHARILAS Distribution de and bow this might alleet repertod politibility Recommend internal control improvements that would reduce the likelihood of rid KHARILA CASE KHARILA is a manufacturer and distributor of printed stationery products that are sold in a wide variety of retail stores around the country. There are two divisions: Manufacturing and Distribution. A very large inventory is held in the distribution warehouse to cope with orders from retailers who expect delivery within 48 hours of placing an order. KHARILA's management accountant for the Manufacturing division charges the Distribution division for all goods transferred at the standard cost of manufacture which is agreed by each division during the annual budget cycle. The Manufacturing division makes a 10% profit on the cost of production but absorbs all production variances. The goods transferred to Distribution are therefore at a known cost and physically checked by both the Manufacturing and the Distribution division staff at the time of transfer. Trigger The customer order process for KHARILA's Distribution division is as follows: KHARILA's customer service center receives orders by telephone, post, fax, email and through a new on-line Internet ordering facility (a similar system to that used by Amazon). The customer service center checks the creditworthiness of customers and bundles up orders several times each day to go to the despatch department. All orders received by the despatch department are input to KHARILA's computer system which checks stock availability and produces an invoice for the goods. Internet orders have been credit checked automatically and stock has been reserved as part of the order entry process carried out by the customer. Internet orders automatically result in an invoice being printed without additional input. The despatch department uses a copy of the invoice to select goods from the warehouse, which are then assembled in the loading dock for delivery using KHARILA's own fleet of delivery vehicles. When KHARILA's drivers deliver the goods to the customer, the customer signs for the receipt and the signed copy of the invoice is returned to the despatch office and then to the accounts department. Due to the size of inventory held, a physical stock take is only taken once per annum by Distribution staff, at the end of the financial year. This has always revealed some stock losses, although these have been at an acceptable level. Both internal and external auditors are present during the stocktake and check selected items of stock with the despatch department staff. Due to the range of products held in the warehouse, the auditors rely on the despatch department staff to identify many of the products held. KHARILA's management accountant for the Distribution division produces monthly management reports based on the selling price of the goods less the standard cost of manufacture. The standard cost of manufacture is deducted from the inventory control total which is increased by the value of inventory transferred from the manufacturing division. The control total for inventory is compared with the monthly inventory valuation report and while there are differences, these are mainly the result of write-offs of damaged or obsolete stock, which are recorded on journal entry forms by the despatch department and sent to the accounts department. Task (a) Evaluate any weaknesses in the risk management approach taken by KHARILA's Distribution division and how this might affect reported profitability. (b) Recommend internal control improvements that would reduce the likelihood of risk