Q) Your firm has recently been appointed as auditor to Danish, a private company that runs a chain of small supermarkets selling fresh and frozen food, and canned and dry food. Danish has very few controls over inventory because the company trusts local managers to make good decisions regarding the purchase, sale and control of inventory, all of which is done locally. Pricing is generally performed on a cost-plus basis.

Each supermarket has a stand-alone computer system on which monthly accounts are prepared. These accounts are mailed to head office every quarter. There is no integrated inventory control, sale or purchasing system and no regular system for inventory counting. Management accounts are produced twice a year.

Trade at the supermarkets has increased in recent years and the number of supermarkets has increased. However, the quality of staff that has been recruited has fallen. Senior management at Danish are now prepared to invest in more up-to-date systems.

Required:

(a) Describe the problems that you might expect to find at Danish resulting from poor internal controls.

(b) Make FOUR recommendations to the senior management of Danish for the improvement of internal controls, and explain the advantages and disadvantages of each recommendation.