You are the audit senior on the MyPet Pty Limited audit. MyPet is a distributor of pet care products including shampoos, lotions and a small range of toys.
MyPet uses an on-line computer system. No goods are manufactured in-house; rather, MyPet maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties. Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system:
Procedures for raw materials
- Separate systems, staff and warehouses are maintained for both raw materials and finished goods.
- Purchase orders are automatically generated by the computer when stocks of any raw materialfall below 70% of the prior month’s usage. The purchase orders contain the following details:
- supplier name and address; raw material needed.
- Three copies of the purchase order are produced and distributed as follows: Copy 1—to warehouse to enable follow up of late orders.
- Copy 2—filed by accounts clerk in date order.
- Copy 3—sent to supplier.
- When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced: Copy 1—matched to warehouse copy of purchase order by stores staff.
- Copy 2—filed by accounts clerk.
- The scanning process is aborted if the codes do not match those on the masterfile.
- Procedures for finished goods
Production orders are automatically generated when finished goods fall below 60% of the priormonth’s sales. The production orders contain the following details:
sub-contractor’s name;raw materials required; finished goods needed.
- Two copies of the production order are produced:
- Copy 1—to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier.
- Copy 2—filed by production controller in date order.
- When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced:
- Copy 1—matched to production controller’s copy of production order.
- Copy 2—filed by accounts clerk.
- The scanning process is aborted if the codes to not match those on the masterfile.
- General notes
- The computer automatically selects the supplier of both raw materials and finished goods based on:
- the latest price (as per their most recent invoice).
- their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse).
- Password access is as follows:
Stores staff (raw materials):
Stores staff (finished goods): Production controller: Accounts clerk:
Purchase order printing for raw materials only. GRN printing for raw materials.
GRN printing for finished goods.
Production order printing, masterfile amendments. Masterfile amendments.
- The stock masterfile contains details of:
- existing stock items including codes and warehouse location; approved suppliers and sub-contractors.
- Orders will only be generated to suppliers and sub-contractors recorded on the masterfile.
- Masterfile changes are made by the production controller for both raw materials and finished
- goods inventory. A masterfile amendment form is completed by the production controller as a record of the changes made.
Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified.
Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform