Saif Fine Foods (SFF) is a grocery store chain started by Jameel Saif in Karachi in the early 2000s. The chain now has 5 locations with over 200 employees.

In 2017, the controller of SFF moved abroad due to some family commitments without a reasonable notice period and Saif had a short time to fill the vacated position in their main office.

The position was crucial and required a person who was highly motivated and knowledgeable of operations. After interviewing several candidates, they decided to give Shahbaz Sheikh the position.

Sheikh was nothing like the previous controller, he was quickly labelled a maverick and was completing tasks that had been languishing for months. Many of the employees noticed Sheikh in the office working early in the morning, late at night, on weekends and not taking vacations. On many occasions, Sheikh stayed at the office all night and through the next day. He was eager to fill in for people away from the office due to illness, vacation, or business travel. Jameel Saif was elated at Sheikhs performance as now he had someone who he could rely on and not have to micromanage the business himself.

Since its inception, the business has always had trust (or bharosa) as an informal form of control. Previous controllers and some of the executive-level management had never felt having formal documented control processes as important. Within six months of Sheikhs arrival, based on his dedication and performance Saif expanded his duties and to improve efficiency Sheikh made changes in the Sales, purchases and payroll functions.

About 3 years after Sheikh was hired, Saifs daughter who had was studying to be a Chartered Accountant wanted some practical work experience and asked her father to allow her to start working part time at the office. Saif agreed as even though the company was recording higher revenue the receivables were starting to pile up and the company was having liquidity problems.

A few weeks into in her job she noted the following:

Sales

Most of the company sales are to walk in customers at the stores but approximately 30% of the sales are to smaller grocery store owners who purchase the goods on credit. Sales staff are responsible for assessing new customers creditworthiness and proposing a credit limit which is then authorised by the controller. The controller also has the authority to add new customers.

The sales staff have monthly sales targets and are able to use their discretion in granting sales discounts up to a maximum of 10%. They then record any discount granted in the customer master data file.

Sales orders are completed using a two-part pre-printed order form. One copy is left with the customer and the other copy is retained by the salesperson. The sales order number is based on the salespersons own identification (ID) number.

The company markets itself on being able to dispatch all orders within three working days. Once the order is taken, the salesperson emails the finance department and warehouse dispatch team with the customer ID and the sales order details and from this a pick list (for quantity) is generated. Sequentially numbered goods dispatched notes are completed and filed in the warehouse. Sequentially numbered invoices are generated using the pick lists for quantities and the customer master data file for prices. Standard credit terms for customers are 30 days and on a monthly basis sales invoices which are over 90 days outstanding are notified are reported to the relevant salesperson to chase payment directly with the customer. The controller has the authority to write off receivables past 90 days.

Purchases and payments

When inventory stock needs to be purchased a purchase requisition is sent to the purchasing department. Copies of the purchase requisition are sent to the accounts payable department and stores department (inventory is stocked here).

The purchasing department issues a purchase order and sends it to the supplier, copies of the purchase order are sent to the accounts payable department.

When goods are received, the receiving department logs in the shipment by stamping order received on the receiving record. One copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department.

The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment. The accounts payable department prepares a disbursement voucher and forwards it along with the suppliers invoice, purchase requisition, purchase order and receiving record to the controller.

The controller prepares a cheque for each supplier, signs the cheque and records it in the cash disbursements journal. The cheque is immediately mailed to the supplier by the controller.

The controller receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items.

Payroll

After taking charge of the payroll department, Sheikh designed and implemented a new payroll system, a system that only he fully understood. In fact, Sheikh controlled the system so completely that he verified, authorized and signed the cheques for the weekly payroll for each of the 200 employees.

Sheikh was known not only for his work ethic but also for his loyalty, if he was ever on vacation payroll was not processed and was done when he came back.

The daughter noticed that several employees, were being paid unusually large amounts and some employees did not have an employee file maintained with Human Resources.

Once the daughter reported to Saif the issues she had noted, Saif called Sheikh in for a meeting but by that time Sheikh had left town. The authorities were contacted, but Sheikh got away by befriending every-one, having exemplary performance for the time he was with the company, and gaining everyones trusthe was the perfect employee.

Required:

1. Identify the reasons that lead to the fraudulent activities by the controller go undetected and relate the reasons to the components of the internal control. For e.g., no limit on cheque signing authority is an example of lack of Control Activities (10 marks)

2. Identify seven (7) control deficiencies, explain the impact of the internal control deficiency and recommend a corresponding control in the Sales function. (14 marks)

3. Identify three (3) control deficiencies, explain the impact of the internal control deficiency and recommend a corresponding control in the Purchases function (6 marks)

4. Identify two (2) control deficiencies, explain the impact of the internal control deficiency and recommend a corresponding control in the Payroll function (5 marks)