You have been recently employed as an accountant for Sharp Apparel Pty Ltd (Sharp Apparel), an Australia manufacturer of women's clothing. The CEO, Ms Barbara Sharp, is looking to expand the business in the coming years and is seeking some advice from you.

Ms Sharp is concerned about some areas of the expenditure process and has asked you to analyses their processes for inventory management, from purchase to when it is used in the manufacturing process.Additionally, as Sharp Apparel are looking to further evolve their business, Ms Sharp is seeking advice on the introduction of Business Intelligence (BI) and digital dashboards. To assist you in your review, Ms Sharp has prepared a summary of key information.

Using the information provided , prepare business report to Ms Barbara Sharp, the CEO, addressing the following:

1. Identification of internal control weaknesses relating to Sharp Apparel inventory management and expenditure process;
2. the impact these weaknesses could have on the organization; and
3. specific internal controls which could be implemented by Ms Sharp in the coming months to mitigate the weakness posed by the internal control weaknesses you have identified. Note that they do not want theoretical controls suggested.You need to include practical controls that they can implement.

All parts of question 1 must be answered as a table in your report. Answer this question using the following headings:

Internal Control Weakness

Impact of the weakness

Control to mitigate the weakness

Below information should be considered to make business report

Overview

Sharp Apparel is a large, listed company, based here in Australia. We manufacture women's clothing and sell to retailers in Australia and around the world. A majority of our inventory is sourced here in Australia although a small number of inventory items need to be imported. I notice that our inventory costs have been slowly increasing which concerns me. May this be due to changes in the exchange rate?

Our headquarters and admin offices are located in Brisbane, Queensland. Our processing plant where all of our production, shipping and receiving is conducted is located in northern New South Wales (NSW).

Purchasing

Our manufacturing plant has five (5) department heads who are responsible for all inventory purchases. When they think required inventory is getting low, they raise a purchase requisition (PR), which the system sends through to the purchasing team in our Brisbane office.

The purchase team consist of two (2) full-time and two (2) part-time purchasing clerks (clerk). When a PR is received, it is logged into a queue and actioned by the next available clerk. Upon receiving a PR, the clerk is expected to review the contents of the PR to check that the request details are reasonable and that it has come from one of the department heads. Once they have reviewed the PR, the clerk selects a supplier based onwho the items were last ordered from and raises the purchase order (PO).

The system emails the PO to three (3) locations:

1.The clerk who raised the PO. The clerk then emails the PO to the supplier.

2.The department head who raised the PR.

3.The receiving team. This lets them know what they should expect to receive and makes their process easier, especially when they are really busy.

At the end of every week, the purchasing team have three (3) oversight functions. They are responsible for:

1.Reviewing any PO's which have been outstanding for more than two (2) weeks to determine why they are still outstanding. I have been informed by the team that this is sometimes due to errors by others in the team.

2.Reviewing any discrepancies highlighted by the system as a result of differences between the inventory received and inventory ordered based on the PO and the receiving report (see receiving department details below).

3.Reviewing any discrepancies between the supplier invoice, the PO and the receiving report (see accounts payable notes below).

Sometimes there is an overlap between processes two (2) and three (3), as a supplier may have sent us an invoice before one of the clerks has had a chance to follow up discrepancies between the PO and the receiving report. This only occurs when we are really busy and has only inconvenienced a couple of suppliers.

Receiving Department

There should be six (6) people in our receiving team, however, we have only had three (3) receiving officers for the last 18 months. This hasn't been too much of an issue, although I have noticed that the team have worked a lot of overtime over this period of time.

The receiving department gets a copy of each PO. When inventory is received, a receiving officer matches the items received to the PO in the system. Once a delivery has been matched, the receiving officer submits the details into the system and a receiving report is generated.

Any differences between the inventory received and those on the PO are automatically flagged in the system and followed up at a later date by the purchasing team, as noted above.

The inventory received is then stored in the warehouse until required in production.

Inventory

The warehouse team are very efficient and effective. They never take leave and have the warehouse running like clockwork. All inventory is stored based on the manufacturing process it belongs to. If there are any discrepancies, they notify the department heads immediately so more inventory can be ordered if necessary.

Accounts Payable

When a tax invoice is received from a vendor, the accounts payable team (AP) match it to the PO and receiving report. Where there is a match the invoice is included in the appropriate payment run and paid via electronic transfer prior to its due date. Where there is a discrepancy, the AP clerk flags this in the system which is later followed up by the purchasing clerks, as noted above.

All payments runs are reviewed and approved by the AP manager before any payments are made. We are really strict regarding this as I have read a lot regarding fraud and how frequently it occurs when businesses make cash payments.

The AP manager reviews the amounts paid in each payment run to the supporting documentation prior to approving the payments run. No payments can be made without the approval of the AP manager. When she is on leave, one the AP clerks steps up into this role so we do not miss a payment run.