You are a business consultant with an extensive knowledge of auditing and business controls. You have been asked by the directors of Festival Ltd. (Festival) to perform a review of their business specifically in relation to their internal controls system. Festival is an engineering company in Hong Kong which has been operating for many years. Festival makes unique products to order for specific projects needed by Festivals clients who are located round the world. Recent examples of Festivals orders have been a large metal door for an unusual old building in England, machinery for factories in Africa making a range of products including components for bicycles and towers for storing water in South America.

Festivals clients usually want products made from a range of metals and Festival typically orders copper, aluminium, steel and bronze depending on the clients needs.

Mark has been head of the factory activities for many years and is responsible for purchasing the metal required for the business. He has an excellent knowledge of how to estimate the quantities of metal needed for each client order, and has long standing contacts in the metal supply business. Because of this, when materials are needed, Mark telephones his suppliers and places orders verbally stating which metal he wants delivered and how much by weight. He uses his regular suppliers, who he has been using for over 20 years, and accepts the price quoted without question. The suppliers and prices are not reviewed by the Directors because they know and trust Mark to make the right decisions and get best value for the companys supplies. Recently there has been a complaint received from the owners of the old building in England. They say the metal door is rusting after only one year of use and now has a crack in the middle.

When the metal arrives the factory takes receipt of it at the main door. The metal is unloaded and the supplier delivery driver usually passes a printout of the order with the weight and detail of the type of metal ordered and the cost. The factory clerk usually takes the sheet and files it in a file in the factory managers office. The sheet is only referred to if someone wants to contact the supplier to ask for more of the same product.

A few weeks after the order is received an invoice is sent by suppliers. This is sent directly to the accounting department where an accounting clerk pays the invoices by bank transfer and files the invoice in a folder on the assistant accountants desk.

During the manufacturing work of the factory scrap metal is usually produced. Because of rising market prices for metal the scrap is often worth a substantial amount of money. Mark usually takes the scrap in a van on his day off to a scrap dealer who pays him in cash which he keeps for himself. The Directors are aware of this and feels it is a fair way of keeping Mark happy.

Prepare a report for Festival that provides details of:

1. The control weaknesses found during your review of internal controls; (for identification of relevant control weaknesses from the scenario)
2. The implications of each weakness found; (for valid and reasonable reasons as to why the weakness is a risk to the business)
3. Recommendations for improvements to the system of internal control. (for a valid recommendation to resolve the control weaknesses identified.)
4. Briefly discuss, giving examples, what is meant by the internal control category referred to as Management Controls (for clear explanation and relevant examples of management controls.)