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Audit Of Alex Blenheim Pty Limited

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Question:

Discuss about the Audit of Alex Blenheim Pty Limited.
 
 

Answer:

Internal Control System – Meaning

The methods which are applied by an entity and which give promise to accomplish the aims and objectives set by an entity from its business processes are called as internal control system of an entity. It helps in attaining the goals of efficient and effective reporting by management and auditor about the affairs of the company, proper and timely compliance of rules and regulations lay down by government.

Internal Control Weakness

The internal control weakness is defined as a deficiency in the systems designed and employed by an entity to ensure effectiveness in the working of an entity in relation to aim and objectives set by an entity.

In the given case of Alex Blenheim Pty Limited, to assess the weakness in internal control system firstly the assessment of internal control environment and its effect on company policies and procedures is require to be done.

Evaluation of Client’s Internal Control Environment

 The control environment of an entity is base for efficient and effective reporting of the financial and non financial matters to the stakeholders of entity both internal and external for achievement of aim and goals set by strategic objectivities if an entity and it is the foundation of effective control system in an entity.

The Alex Blenheim may objective is to reduce the cost of goods to company including the overheads costs or by achieving the high volume of sales as the company is low margin company. The company is planning to reduce the levels of inventory, early receipts from debtors and early payments to creditor to increase the working capital margins of the company.

The company is maintaining very goods internal control policies in relation to Inventory of Raw Material, Work in Process and for finished goods. The company is maintaining the computerized system of internal control of inventory. It contains all the five elements which are required for good internal control system. The elements of good internal control systems are Control environment, Entity’s risk evaluation process, information system, control activities and review of internal controls to reduce the weakness of controls are presents in company internal control policy of inventory.(Scaldeo,2013)

 

Weakness in Internal Controls of Company in respect of Inventories

A good internal control in relation to inventory involves the controls which enables an entity to:

  • Prevent inventory from loss of wastage and theft
  • Make certain that an entity is complying with policies lay down by management of the company and compliance with applicable laws
  • All the employees are working with the aim to make control system effective and assessment of their work
  • Guarantee about the reasonable results with accurate financial information and financial reports.

If any of the above is followed in making controls of inventories, there is weakness in controls relating to Inventory.

The following are weakness in the internal control of inventory in Alex Blenheim Company:

  1. No Substitution in case Computerized System failure – The Alex Company is majorly depending on its computer system for controls in relation to inventory. In case of electricity failure the computerized systems will not work resulting in temporary failure and company is not able to ascertain any of the information.
  1. Codes in Master File – The process get terminated when the codes are not matched with master file result in failure of scanning process by store staff. Also if production controller fails to judge and update any of the details relation to stock code, supplier codes or sub contractor codes then the inventory cannot be processed in the system maintained by company making it most important weakness of internal control of company.
  • Non review of Duties of Segregated staff- There is no review policy adopted by the company so the accuracy of the data entry by different personnel of the company cannot be checked and may result in frauds and errors.
  1. Training cost – In the given system of the control of inventory the training cost of different staff relating to stores for raw materials and finished in addition to the staff for production and accounting. To ensure that the job done by each personnel is perfect a proper training is require for each employee which increases the costs to the company and defeating the main object of reducing the cost of company

Impact Of Weaknesses In Internal Control

The weakness could impact the working of an entity and hampers the ultimate objective of the company which the company is required to achieve by implementing the controls systems. The weakness can damage the effectiveness and efficiency of business control environment which are root causes for business risks in any business.

The major impacts of weakness are:

  1. Frauds and error – The non existence of any particular code for an inventory results in failure of process and the employees can collide and create the burglary of inventory at different levels at store level of raw material and finished goods. Also if the employee punched the wrong code then also there are chances of errors in valuation of inventory.
  2. Corruption of Data – In lacking of reviewing the work of employee, there may be high chances of inaccurate reports and financial data generated from inventory systems.
  • Less assurance from Government authorities- By having weakness in control systems of a company, the government authorities is not able to create reliance on the compliance system of an entity.
  1. Non efficient employees- Since the efficiency level is not measured by company by any tools then there are chances of having non efficient employees in an entity and they will not work in accordance with aim of reducing the cost of carrying an inventory. (Strand ,2014)

Steps Taken To Reduce The Imapct Of Risk In Internal Control System

The following are the steps taken by an entity to reduce the impact of risks in internal controls:

  • Review of the work of the staff in the company after particular interval by the managers of the company to whom the subordinates report. Checking of work of production controller and account clerk in relation to master file amendment particular period by another higher manager of the company.
  • External Audit by qualified professional of the internal control policies of the company on periodic basis in addition to review on financial statements. The unbiased outside third party helps in identification of errors and inconsistency present in the control systems which can help the management to know the accuracy of the financial data.
  • Proper Documentation trail is required to maintain for each every time like proper records to maintain for recording of the stocks which are not mentioned in master file. (Feng,2014)
 

References

Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), 529-557.

Salcedo, C. A. G., Hernandez, A. I., Vilanova, R., & Cuartas, J. H. (2013). Inventory control of supply chains: Mitigating the bullwhip effect by centralized and decentralized Internal Model Control approaches. European Journal of Operational Research, 224(2), 261-272.

Strand L, (2014) , “10 Common Internal Control Deficiencies Found in Small Business” available at https://www.lbahs.com/blog/bid/397513/10-common-internal-control-deficiencies-found-in-small-businesses accessed on 06/05/2017

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