You are performing the audit of the financial statements of Jenna Furniture Ltd., a closely-held company that manufactures and distributes a line of mid-quality furniture. You have obtained the following client-prepared description of the companys procedures and controls over the acquisition and use of production materials:

1. All production materials are kept in a locked storeroom. Storeroom personnel consists of a supervisor and three clerks. Materials are removed from the storeroom based on requisition forms submitted to the storeroom and signed by the production foreman.
2. The storeroom clerks maintain perpetual inventory records of goods received and issued in both quantities and dollar amounts (using FIFO assumption). The record for each inventory item also includes a reorder level and a predetermined economic order quantity (EOQ). If the recorded quantity on hand falls below the reorder level, the supervisor prepares a purchase requisition and sends it to the production foreman for approval. Once approved, the purchase requisition is sent to the purchasing clerk. Upon receipt of the approved requisition, the purchasing clerk issues a prenumbered purchase order (in triplicate) in the amount of the EOQ. He original of the purchase is sent to the normal supplier of that item (based on multi-year supply contracts), one copy is sent to the storeroom clerk, while the other copy is retained in the clerks files.
3. When ordered materials arrive at Jenna, they are received by the storeroom clerks. The clerks inspect and compare the materials delivered to the purchase order, count the goods received, and compare their counts to the shippers bill of lading and suppliers packing slip. The goods received are then entered in the perpetual records. The bill of lading and packing slip are installed, dated, and filed by supplier name in the storeroom.
4. When the accounts payable clerk receives a vendors invoice in the mail, he telephones the storeroom and asks if the goods have been received. If yes, the invoice is matched with the purchase order copy, checked for proper description, pricing, clerical accuracy, and so on, and temporarily filed pending payment. If the goods have not been received, the accounts payable clerk asks the storeroom clerk to telephone as soon as the goods are delivered so the invoice can be processed. In the interim, he keeps the invoice in one of the drawers of the desk.

REQUIRED:

1. List three strengths and three weaknesses in the internal control system outline above. 2 marks
2. For each control weakness identified, recommend an improvement that will address the weaknesses. Arrange your answers for part 2 in the table given below. 2.5 marks
3. 3. Since the existing internal controls with respect to acquisition and use of material are seriously deficient in several areas, suggest at least three substantive testing procedures that will address some of the weaknesses 1.5 marks

Control Weaknesses

Recommended Improvements