Question 2

You are an audit senior of Bima Sakti & Co and are in the process of reviewing the inventory management for your audit client, Digital Mega Bhd (DMB), a medium-sized furniture manufacturing company. The companys warehouse is situated on a large site, and its financial year end is 31 December 2018. At the financial year end, DMB will undertake a full inventory count of its raw materials, work in progress and finished goods. You have been assigned to represent the audit team to carry out the inventory count. In preparing yourself for the task, you have been reviewing the inventory count instructions provided by DMB. All inventories are kept in the centralised warehouse. The personnel in-charge of the warehouse includes a supervisor and three clerks. The supervisor is in-charge of authorising the issuance of the raw materials to the production department. The raw materials can be issued upon submission of a form to the supervisor detailing the type and quantity of the raw materials requested. The clerks, on the other hand, do not have specific division of duties. Generally, all of them are incharge of monitoring and coordinating the movement of the work in progress and the finished goods. The clerks maintain perpetual inventory records for all inventories. At the end of each day, the clerks are responsible to reconcile among themselves the total inventories received and issued from the warehouse. Since the three of them have been working together for quite some time, they know the routine of their work and can coordinate their work well with minimal supervision by the supervisor. They are only required to perform periodic physical inventory count on a quarterly basis under the supervision of the supervisor. During the full inventory count at the end of the financial year, you observe that one of the clerks is still accepting deliveries of raw materials from the suppliers into the warehouse. These newly-delivered raw materials are kept aside at a separate bay. When asked, the clerk informs you that these raw materials will be reconciled later in the perpetual inventory records.

Required:

1. Identify FIVE (5) weaknesses in the companys internal control systems of inventory and warehouse management. For each of the identified weaknesses, provide one (1) recommendation of each weakness on how to improve the weaknesses. Present your answers in the following format:

Internal control weaknesses	Recommendation

(10 Marks)

2. Explain two (2) factors that could affect the complexity of auditing the inventories of a furniture manufacturing company. (4 marks)
3. Outline three (3) responsibilities expected of the auditor during the observation of a full inventory count process. (6 marks)