Perfect Plumbing sells bathroom and kitchen plumbing fittings to plumbers across Australia and uses a perpetual inventory system. The business imports their fittings from Italy and Asia and stores the fittings for resale at its business premises at Acacia Ridge. The Johnson Family owns the business and accounting is undertaken using MYOB. Sam Johnson is the CEO, his sister Brittany is the Finance Manager, his brother Alex is the Sales and Marketing Manager and his other sister Natalie is the Purchasing, Warehousing and Distribution Manager.

When the individual plumbing fittings stock is low, Natalie orders more by requesting the Purchasing Officer to place the order with the appropriate supplier. When the goods are received from suppliers, the receiving officer enters them into inventory records upon receipt. No comparison is made to the purchase order, but the receiving officer checks that the items and quantities received to the invoice received from the supplier at the time of delivery. If the items received agree to the invoice, the purchase order is converted to an invoice by the purchasing staff. If not, changes are made to the order to make it agree with the supplier invoice in MYOB ready for payment.

Inventory going in and out of the business premises is not tracked by individual items, as the staff in the distribution area are long-term trusted employees. Natalie as Purchasing Manager considers she knows what items should be in the warehouse each week in terms of inventory and would ask questions if she thought that stock was lower or higher than anticipated.

Sales occur to trades people only; there are no sales to the general public. The sales area receives a customer order from various plumbing businesses. Sales staff process the order, produce an invoice, a packing slip, and dispatch docket. These documents are forwarded to the warehouse staff. These staff distribute the goods to the customers and check the sale has been recorded in the sales system. No reconciliations are made between total customer balances and the general ledger. Alex, the Sales Manager tries to monitor the sales area, but he is also busy sourcing new customers and is often out or on the phone during the day.

Brittany pays wages weekly to all 50 employees, based on employee timesheets. There is no check on the timesheets as all the employees are trusted employees and have been with the business for many years. When an employee does leave the business, Brittany deletes them from the payroll table a few weeks later.

Question 1 (a) Identify a potential threat(s) in Perfect Plumbing for each of the 3 cycles (Expenditure, Revenue, and HR & Payroll) and how you could minimise these threats. Categorise your solutions using the five (5) Control Activities (Authorisation, Segregation of Duties, Documents & Records, Safeguarding Assets, Records & Data; and, Independent Checks).

Expenditure Cycle

Revenue Cycle

Payroll