QUESTION $1[30$ MARKS$]$

You have recently been appointed as the internal auditor of North Shore $($Pty$)$ Ltd$,$ a large shipping company in Port Elizabeth. Your first assignment was to evaluate the company$$s accounting systems and related internal controls. The company is divided into five sections, each of which has its own section accountant who is responsible for producing monthly accounts and ensuring that sectional financial matters run smoothly. While reviewing the financial records of the warehousing section you were surprised to see considerable capital expenditure had been incurred just before the financial year$-$end $(30$ June$).$ You found that the same occurred in the other four sections of the company and visiting the various sections $($in July$),$ you noticed a fair amount of equipment still in boxes and not in use. Deciding to follow this up$,$ you approached Andy Bell the most senior sectional accountant, for an explanation of how the system for capital expenditure operated. He responded as follows:

$1.$ Each sectional accountant is responsible for capital expenditure for his section.

$2.$ A budget is prepared in the office of the financial director. Budgeting figures are calculated by increasing the prior year$$s budget by the average consumer price index for the year. Sectional accountants are notified as to what their section can spend on the purchase of capital items.

$3.$ However, if sections do not spend their capital budget in any financial year, that section$$s budget is reduced for the following year. As you can see, we all try to avoid a cut in our budget by making sure we spend our budget before the end of the financial year.

$4.$ If a staff member in the section requires equipment, for example in my warehouse section the foreman may decide he needs a new fork lift, he will email my assistant with the precise details of what is required as well as the name of a supplier. Most of the equipment used by North Shore $($Pty$)$ Ltd is particularly complicated, so this method works fine.

$5.$ My assistant will then complete a pre$-$printed, numerically sequenced, multi$-$copied order form $($which I as sectional accountant will sign$)$ and send the top copy to the supplier. The second copy of the order is sent with the supplier delivery note, to the central creditors department for payment. The third copy is left in the order book and used by the assistant to write up the new equipment in the assets register.

$6.$ The supplier delivers the equipment to the section and my assistant signs the supplier delivery note after agreeing the items to the supplier delivery note. He retains a signed copy of the supplier delivery note which is sent to the creditors department as described in point $5$ above.

Required

Identify and describe the weakness in the system of investing in capital equipment at North Shore $($Pty$)$ Ltd$,$ based on the information given above and to recommend improvements to address the weaknesses you have identified. Use the following format to present your answer:

WEAKNESSES

RECOMMENDATIONS

Do not concern yourself with payments to creditors