QUESTION $5(20$ Marks$)$

As Ridewell $($Pty$)$ Ltd is a wholesaler of bicycles and accessories, it has a conventional inventory cycle, for example, goods

are delivered to a designated receiving depot, subjected to various checks and transferred to the storage areas. The goods

are suitably protected while in storage until they are sold. Goods to fill sales orders are selected using picking slips, placed

in a picking area once picked, checked and transferred to despatch. Internal control at Ridewell $($Pty$)$ Ltd is taken very

seriously and the control over inventory is no exception. The company has in excess of a thousand different inventory items

that range from complete bicycles $($in boxes$)$ to small individual bicycle parts. There are also expensive items such as top

quality cycling helmets, gearing systems and bicycle computers for measuring speed, distance, etc. Most of the inventory

items held by the company can be easily disposed of if stolen, so theft is a major risk that the company has to respond to$.$

The control activities that are described below are supported by a very strong control environment in the company as a

whole.

For example:

All employees working in the cycle are properly trained and have good product knowledge $($commitment to competence$).$

There is a clear reporting structure within the cycle and individual employees are held accountable for their actions

$($organizational structure and assignment of responsibility$).$ Senior management not directly involved in the cycle are

frequently in the warehouse and will, from time to time, observe the various activities that go on in the cycle, such as the

unpacking of a container of imported bicycles $($management philosophy and operating style$)$ that sets a good example and

enhances control awareness.

Theft of inventory results in dismissal that emphasizes the integrity and ethical values expected of all employees.

Segregation of duties

The cycle is $$broken down$$ into the following functions: receiving goods, custody of goods, picking of goods and despatch.

In the overall context of the company, the inventory cycle is separated from the functions of initiating sales orders or

purchase orders.

The overall responsibility for all functions rests with Reg Gaard, the warehouse manager. He is supported by Patrick Adams

$($warehouse foreman$)$ who is responsible for the team of pickers.

As the function of receiving does not warrant the appointment of a full$-$time receiving clerk, the despatch controller fills both

roles. He has a number of assistants who report to him, and he in turn reports directly to Reg Gaard $($warehouse manager$).$

There are a relatively large number of pickers whose duties are to:

Receive goods from the receiving depot

Pack goods into bins, boxes and onto shelves

Pick goods to fill orders

Pack goods into boxes for delivery $($after goods have been checked$),$ and

Keep the storage areas neat and tidy and shelves properly labeled, etc.

Pickers are not allowed to assist with receiving goods from suppliers or despatch to customers, and receiving$/$ despatch

employees are not allowed to pick goods.

Patrick plays a supervisory role over the pickers and is responsible for checking the items picked once they are placed in

the picking area.

Both Reg and Patrick Adams have read access to the inventory masterfile but do hot have write access $($segregation of

custody and record keeping$).$

Reg does not have sole responsibility for authorizing an inventory adjustment$$ final authority must come from the financial

manager, Johan Els.

Approval and authorisation and isolation of responsibility

All movement of inventory must be supported by an authorised document, for example, the picking slip can only be

generated off the $($computer$)$ system from an approved sales order, whereas delivery notes can only be generated from an

approved $($signed$)$ picking slip.

All adjustments to the masterfile arising out of the cycle counts must be approved by the warehouse manager and the

financial manager.

The responsibility for receiving and despatch is isolated to the despatch controller as nobody else has access to the

necessary applications and by the requirement that all relevant documentation be signed by him.

All employees are required to sign the document related to the procedure they have carried out to acknowledge having

done so$,$ thus isolating their responsibility for the procedure.

For example:

Pickers must sign the picking slip for the goods they have picked so any mistakes or problems can be tied back to the

picker, and

The warehouse foreman must also sign the picking slip to acknowledge $($isolate his responsibility$)$ for checking what

has been picked before it is packed and transferred to despatch.

Required:

$5\mathrm{.}1$ Identify the key internal controls in the above scenario that lowers risk for this organization to an

acceptable level.

$(10$ marks$)$

$5\mathrm{.}2$ Suggest a Test of Control for every identified key control. $(10$ marks$)$

Use t