You are the auditor of Pretty People (Pty) Ltd, a cosmetic company. The company manufactures cosmetics, which include skin-care products, make-up, and toiletries, for both men and women. Pretty People (Pty) Ltd holds significant quantities of raw materials for the manufacturing of its skin-care products, make-up, and toiletries. The raw materials are kept in a secure warehouse under the control of Mr Materials the warehouse manager. The products are manufactured on the same premises and the finished goods are also stored on site. All these products are in very high demand and are manufactured and distributed to department stores on a weekly basis. There are no slow moving or obsolete stock items. Your trainee accountant also noted the following: 1. The marketing department meets on Thursdays to analyse the following week's sales orders. The marketing manager, Mr Sell-sell, and the distribution manager, Mr Deliver, prepares pre-numbered production orders, 2. The production manager, Mr Make-it, reviews these production orders against the company standards and normal weekly production before signing and dating them as evidence of his approval. Unusual orders are discussed with the marketing manager before they are approved. 3. The production foreman, Mr Do-it, reviews the sequential order of the production orders every Friday morning and immediately investigates any discrepancies. He asks an assistant to prepare a bill of materials for each production order. 4. Another assistant uses the bills of materials to prepare pre-numbered material requisitions, in duplicate. The original material requisition is signed by the production foreman and delivered to Mr Materials, the warehouse manager, before noon on Fridays. The production foreman attaches copy material requisitions to the relevant production orders and bills of materials and despatches them to the accounting department. Mr Materials files the material requisitions in sequential order. All exceptions are immediately followed up. 5. The raw materials are issued to the production department every Friday afternoon Mr Materials prepares delivery notes in duplicate on blank forms and sends them with the raw materials to the production department. 6. On receipt of the materials Mr Do-it, the production foreman, quickly initials the delivery notes and sends the originals to the accounting department. The copies are returned to Mr Materials and filed by him. The materials are stored in a locked area until production starts on Mondays. 7. On Monday mornings the clerks in the accounting department compare the details on the delivery notes to those on the materials requisitions and immediately process the information. 8. Clock cards and a clock card summary, signed and approved by the production foreman, are processed by the accounting department on a weekly basis. Daily activity reports, detailing direct labour incurred, are submitted to the accounting department by Mr Make-it, the production manager, daily. These daily activity reports are reconciled with the clock card summaries by the accounting clerk before processing. All exceptions are investigated, and the assistant accounting manager signs the clock card summaries as evidence of his review and approval of the reconciliations. 9. Finished goods are transferred to the warehouse daily. A pre-numbered completed production report, giving a description and the quantity of completed goods, is prepared in duplicate by Mr Make-it for each batch. The copy-completed production report accompanies the finished goods from the production department to the quality control department, while the original is sent to the accounting department. 10. Mr Check-it out, the quality controller, inspects all finished goods before signing and dating the completed production reports as evidence of his approval. He completes an internal goods received note, giving a description of the quantity of approved finished goods, in duplicate, and attaches these to the quality approved batch of goods. Finished goods that do not pass inspection are indicated as such on the completed production reports and set aside. 11. As soon as Mr Keep-it, the store manager, receives the finished goods, he agrees the quantities and descriptions of the physical stock to the details per the internal goods - received notes. All discrepancies between internal goods received notes and physical stock are immediately investigated and corrected on the relevant internal goods received notes. He signs and dates the internal goods-received notes on acceptance of goods. 12. The original internal goods-received note is sent to the accounting department and its copy, together with the copy of the completed production report are filed in sequential order by Mr Keep-it. The finished goods are stored in a locked warehouse until collection by the distribution department. 13. The accounting department matches the internal goods-received notes to the completed production reports daily. All exceptions are investigated and cleared immediately, whereafter the internal goods-received notes are processed. 14. A reconciliation between the perpetual stock records and physical stock is performed on a revolving sample of stock items monthly by Mr Materials, Mr Make-it, Mr Keepit and the accounting department personnel. The reconciliations are reviewed by Mr Money, the financial manager. All exceptions are investigated and explained before he signs the relevant reconciliation as evidence of his review. REQUIRED : Note: 1. Do not discuss any stocktaking procedures. 2. Your answer should only deal with the information provided in the question. No assumptions are necessary. a) List your internal control audit objectives in respect of the audit of the manufacturing process described above. (note: it has been done for you below) For each of your internal control audit objectives state the key control on which you intend to place reliance and state the test of control you would perform with regard to each key control identified. Please set your answer out as follows: Audit objective Internal (key) Control Tests of control 1.Valid transactions are accurately recorded in the corrected period 1.1 1.2 1.3 1.4 1.1.1 1.1.2 1.2.1 1.2.2 1.3.1 1.3.2 1.4.1 1.4.2 2. All transactions are accounted for (completeness) 2.1 2.2 2.1.1 2.2.1 3. Transactions are properly authorised (authorisation) 3.1 3.2 3.3 3.4 3.1.1 3.2.1 3.3.1 3.4.1 4. Restricted access to assets (existence) 4.1 4.1.1 (5) (10) (15) (b) Write a letter to management in which you report weaknesses, the potential consequences of each weakness and your recommendation(s) to solve each weakness with regard to the system of internal control over the manufacturing process, as described above. (20