Number of Words : 1548
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This report is based on the following case study -
Check and Tick, Chartered Accountants, have just been appointed as the auditor for ABC Plc, a company listed on the London Stock Exchange.
You are the senior manager in Check and Tick in charge of this audit. You have been provided with the following brief about ABC Plc-
ABC Plc (ABC) is a London-based manufacturer of table fans. It secures most of the components from Asia and a small part from the UK. Its only manufacturing plant (Plant) is in the outskirts of London which employs about 100 employees. The manufacturing manager (MM), his three supervisors as well as all the production operators are housed in the Plant. The only store, handling components and completed fans, is also located in the Plant.
ABC's city office (Office) is located in the heart of London. The purchasing manager (PM) and the sales manager (SM) together with their team members operate from the Office. All other support functional heads like human resources, finance, logistics and legal are also located in the Office. The managing director operates mostly from the Office though he spends about 20% of his time in the Plant.
The purchasing department has a list of approved vendors who supply almost all the components required for production. These vendors have been doing business with ABC since its inception 10 years ago. There was no major issue with any of them. Over the years, they have established their credibility for price, quality and delivery to the complete satisfaction of ABC. Any addition/deletion of vendors require PM's approval.
The components required for the production process are fairly standard. The stores supervisor (SS) keeps a record of component movements, both receipts and issues, in a spreadsheet. He generates a purchase requisition (PR) whenever the stock level seems low by visual inspection. The PR requires MM's approval before it is sent to the purchasing department. The official purchase order (PO) is then initiated/sent to the approved vendors by e-mail with a copy to the SS. The details of all PO's which are in sequential order are kept in a spreadsheet.
The PO extracts the unit price from a file (spreadsheet) maintained in the purchasing department. This file contains a list of all vendors approved for specific components together with approved price. This file gets updated when vendors get added/deleted which must be approved by the PM. This is however not very frequent. As regards price, it is only updated when a vendor requests for an increase which is negotiated/approved by the PM. This spreadsheet is the main source of information required by the people in purchasing department.
ABC conducts an annual stock-taking of all components and any discrepancy in quantity is adjusted in the financial records. SS has full responsibility of planning and conducting this stock-take which is also attended to by representatives from the finance department. Significant discrepancies require further investigation. Again, SS has the sole responsibility for this investigation. Over the years, there has not been many such cases though.
All sales of completed fans are made through approved distributors (currently 10). Initially ABC had only one distributor but as business grew, both in volume and market, more distributors were added. Any addition/deletion of distributors requires SM's approval who also performs credit check before establishing credit limit for each distributor. ABC does not have a full-fledged credit manager mainly due to cost constraint.
Credit limits are only reviewed when distributors request for an upward revision due to increase in business volume. Once a month, the SM reviews the ageing analysis (prepared by accounts department) of all receivables and sends routine reminders for amounts which are overdue. The bad debt written off over last few years has been low (below 2%) which he considers reasonable in such a business.
All distributors receive standard credit of 30 days. The selling price as well as discounts are all pretty standard. Once approved by the SM, these are maintained in a spread sheet widely used by the personnel in the sales department.
When new orders are received, sales staff would first check the credit status of the customer from the last available monthly ageing analysis report. If the order exceeds the credit limit and/or the customer has overdue receivable, the SM has to review the situation. He has the sole responsibility of making any exception and allow shipment or reject the order.
If the credit is clean, an invoice-cum-delivery order would be generated by the sales personnel. The original of this document goes to the distributor with a copy to SS for shipping arrangements. All invoice-cum-delivery orders are sequentially numbered and details are recorded in a spreadsheet. This spreadsheet is the source document for the accounts department to record sales in the books of accounts at the end of each month.
SS is responsible for making arrangements for delivery of items based on the invoice-cum-delivery order received from the sales department. Goods received by the distributors are acknowledged on a separate document which is maintained in the stores. However, this document is not sequentially numbered nor is it matched with the invoice-cum-delivery order. This document is retained in the stores for "sometime" and then destroyed under instructions from the SS.
This report answers the following questions - <br />Required:<br />1. Identify five weaknesses in the purchasing and five in sales activities of ABC Plc. <br />2. For each weakness identified in 1. above, explain the potential risk of material misstatement it can cause in the financial statement. <br />3. Recommend adequate and appropriate internal control mechanism to minimise the potential risk explained in 2. above. <br />
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AKey : A-19403