Weaknesses In The Stocktake Procedures

Questions: (1) Identify the weaknesses in the stocktake procedures above and identify how they could be improved? (2)(a) What control should be implemented to reduce the likelihood of each of the above? (b) What is an audit procedure to detect or prevent each of the above? (3)(a) Identify the key assertion addressed by the test procedure . (b) Provide an explanation as to why the conclusion reached is appropriate or inappropriate. (c) Outline the key control procedure that you believe needs to be performed? Answers: (1)While audit of the balance sheet of the company there are few items those needs to be looked and audited with better applied analytical and substantive procedures of the same. The responsibility of Inventory control lies with the manager of the warehouse of the location. The Manager must ensure that the staff members who are involved in stocktaking must aware of the established procedure which needs to be followed in stock taking. The slow moving inventory in a company. There are many cash dealings which get interrupted due to delay in stock being converted back into cash. The main intension and objective of Stocktaking is as follows: To verify the accuracy of stock The Stock valuation as stated in the financial statement must be supported by the physical verification of stock. To verify the weakness in the control and custody of stock. To disclose the possibility of Stock, theft or loss.(Smith 2013) In the given case auditor has attended the stock taking of Smith Equipment and certain discrepancies has been found by them which is described as follows: SI.No. Weakness Improvement Recommendation 1. Warehouse Staff Counted specific area of the warehouse for physical verification However, it is duty of the Warehouse manager to check all the area has been covered and no area has been left and physical verification of every item has been done properly 2. Issuance of blank sheet to each member of staff doing the count Instead of Issuing blank sheet to the stocktaking staff stock take scanner should be allocated to stock taker which will be used by them in stock taking along with the stock taking instruction. This brings better internal control and chances of error and loosing blank sheet is also low. 3. Staff Were Instructed to Write down the stock description and number counted Instead of giving this type of Instructor stock scanner as stated above should be given to each staff so that there is less chances of error and it will bring more accuracy. However, there is certain more recommendation which helps smith Equipment in better stock undertaking. This is as follows: Before starting Stock date all the possible area and the product must be identified. Meeting must be held with the staff member who will help in stock taking to ensure that they should know exactly what they have to do and how to do. Any Question or confusion of the Staff member must be resolved and any suggestion which helps in better stock taking must be implemented. Before submitting the report to the External Auditor report must be discussed internally with the management so that there will be less changes of error.(Jacob october, 2012) (2)Control over the bank reconciliation ensures that all the cash transaction has been properly recorded in the books of accounts for a given period of time. Bank reconciliation also ensures the accuracy of the Financial Statement. With the help of bank reconciliation any omission of transaction in the books of accounts can b easily detected irrespective of the reason that where omission is due to fraud or error. However to ensure less changes of error in the Bank reconciliation one should implement the following procedure to reduce the chance of Error. This are described as follows: There must be segregation of duties between the bank reconciliation between the two departments i.e. between accounts department and payment department. If same person are engaged in same activity then there is more chances of fraud. Even a small amount of un reconciled items create a doubt in the mind of the auditor regarding the accuracy of accounts and existence of fraud in the company. In the given situation Item of $340 remain un reconciled which are treated by the as immaterial. To reduce the chances of incorrect recording of account receivable, client should ensures that the entire credit voucher must be signed along with the supporting and then entry will be done in accounting system. The Company may adopt the policy not to deposit the associate company money in own account in order to reduce complexity. The omission of certain items from Bank reconciliation is serious issues. This even creates doubt about the correctness of bank reconciliation. In order to reduce such type of situation, the client may increase the frequency of reconciliation in order to ensure correct reconciliation process. Recording of bank transfer as deposit is also an serious issue, this shows that accounting clerk is completely irresponsible and he must be warned that if the same continue, then he may be fired from the company.(Team n.d.) b) Audit procedure to detect and prevent each of the above case is as follows; 1) Auditor should compare the bank cancellation date with bank reconciliation. 2) Bank Confirmation should be taken from each bank with whom the client transit. 3) Balance of client bank reconciliation need to be confirmed with the balance of bank confirmation. 4) Minutes of the Board meeting and loan agreement should be reviewed in order to ensure that all the interest bearing deposit has been properly dealt with in the accounts. (3)Key Assertion Addressed by the Test Procedure is as follows: 1. Authorization of Purchase Manager in the Invoices is not taken seriously by the client. It may lead to fraud Error. As per the Test conducted by the auditor more than 10% of the invoices were not authorized which shows lack of effectiveness and Internal control in the company. 2. Incorrect Discount was also noted. This may be intentional or un- intentional. It might be possible that the billing personnel may give incorrect discount and it has been also noted that the bill in which incorrect discount was given was not sent for authorization. 3. However, the incorrect discount given was not in some pattern. This means that the discount given was not due to system fault or change in discount policy. The company should ask the billing personnel reason for such error, though the amount of discount given is immaterial but it shows lack of control in the organization. 4. The Conclusion reached by the Client is not appropriate as it lacks control in the organization. Better policy is to identify the reasons for such mistake that why such error has been occurred whether the error is un-intentional or due to some fraud.(James n.d.) The Key Control procedure that need to be performed by the company is as follows: i. If the company has manual billing system then that need to be computerized. ii. Discount for each and every item needs to be properly updated in the system and the same should be properly checked. iii. Dual checking of invoice should be done for some time once the invoice is generated from the system and second at the cash counter by the cash personnel. iv. Responsibility should be assigned to each personnel to periodically review the discount percentage which has been updated in the system(General 2015) Biliograpy: General, OOA 2015, Office of Auditor General, https://audit.wa.gov.au/reports-and-publications/reports/across-government-benchmarking-audits/timely-payment-invoices/. Jacob, M october, 2012, 'Stocktake of Rgional Research', p. 30. James, 'Substantive Tests of Transcation and balance', p. 60, https://novellaqalive2.mhhe.com/sites/dl/free/0074711709/90089/sample_ch10.pdf. Smith, H 2013, myob.com.au, https://myob.com.au/blog/7-steps-to-a-successful-stock-take/. Team, O, Opentution.com, https://opentuition.com/wp-content/blogs.dir/1/files/group-documents/15/1289882056-E.AuditEvidence.pdf.