Deficiencies in the Internal Control System Relating to Inventory - Case Study Example

Auditing Place Audit Committee Address: Sub: Deficiencies’ in the Internal Control System relating to Inventory The stock take for Farhan Muscat SAOG Company is made for the purpose of counting and calculating its all items in stock and recording the outcomes. Such audit activity will ensure the accuracy of the stock records; the value of stock will be verified and shown in the balance sheet through physical confirmation. The analysis of stock value will detect wastage at the early stage and will promote reducing and eliminating of goods. It will also help to reveal any weakness within an organizational system for control of stock. The number of deficiencies discovered by taking will provide a good measure for the efficiency of control and procedures’ adherence in general. Deficiency over the preparation of the financial statements as a result of an inadequate design of internal control The audit activity at Farhan Muscat SAOG Company revealed that due to the inappropriate keeping of financial records for the current financial year in Salalah stores (water seepage during heavy rains), it became impossible to make an audit, which a senior auditor was going to conduct. As a consequence, there appeared an inability to get an access to these records and the inability to conduct the inspection. The absence of an internal process to report deficiencies in internal control to  management on a timely basis The audit revealed an organization was conducted the stock take one time a year, in particular at the end , while the interim checking was not conducted. As a rationale, the rare stock take required more time and financial resources involved for the check. Besides, they were not allocated within certain stores department. Deficiency in the inventory control over the certain financial period The company did not conduct any stock take of its inventory within the year and only after the inspection, it has agreed the program of inventory checking on the given date and venue. The consequence was the inventory which was appointed as the area for stock take. Inappropriate documentation of the internal control components The audit did not receive the requested documentation that related to low items of the company and the basic records that concerned the sales and purchases were not also provided Though the required documents did not influence the general audit process, however, their absence caused inability of audit group to make an appropriate checking. Inadequate differentiation of duties within a company process While the company staff was informed about the stick take for the certain period to be conducted in the most convenient time, their other duties, such as movement of goods production receiving and dispatch operations continued. Purchases and sales were not stopped and other daily operations were continuing. Due to the critical period of close at the end of the financial year, the scheduled stock take procedure was postponed. Inappropriate actions of the management in assessing the stock price During the audit, there was revealed that the some stock items of the company were not sold throughout 2014. The storekeeper reported these goods were included in the regular stock and were also valued as regular stock. The adudit inspection observed manager was carrying out all-inclusive check of the low priced stock, however, the premium stock was not counted. Despite the little quantity of the regular stock and the sample check to be enough in this category, the audit group indicated on the inability of management to conduct such poor activities. Failure to obtain timely and accurate consolidating information from remote locations needed to prepare the financial statements The results from the audit revealed the paucity of time of company’s management led to the inability to gather the necessary information about the stock and make the stock sheets at other locations across the country. The consequences of such failure are observed in the absence of any information of financial outcomes from the remote locations necessary to the audit group. Failure to control company’s assets from loss, damage and misappropriation According to the audit group results, damaged, obsolete, slow-moving stock and non moving stock was valued at purchase price by the company. The manager was informed about such stock to make a little part of the entire stock and is valued at purchase price. As a rationale, since physical inventory cannot be protected from loss, the company could prevent a material misstatement of its financial statements. The material deficiency relates to misstatement of the financial statements, and the failure of such preventive control will not lead a significant deficiency. However, it prevents a misstatement of the financial statements. This circumstance had to be carefully considered before it was evaluated. Failure to obtain timely and accurate consolidating information The detailed stock take was not conducted out the location of United Arab Emirates. Along with the value of stock to be formed by the stores system, it was not possible to conduct the beneficial audit. Failure in operations that would eliminate the final stock valuation The stores system created value of stock and in other cases the cost of the audit was outweighed. In addition, some stock audit was held on behalf of third parties, which were not seaprated and were also not included in the company’s stock. As a consequence, despite such audit measure was an insignificant, the company did not eliminate it before the final stock valuation. Failure to an effective entity risk assessment process and mess in the documentation The audit revealed there was no conducted any anti-risk measures for reducing the negative consequences of the goods which were not purchased. Instead, they were received and stored in the port of Egypt and London. The consequence of such deficiency is the mess in the documentation and the fact that they should be excluded from the inventory count due to its physical absence in the stock. The evidence showed that the company followed a standard stock take program unchanged for years. Failure in operations to reduce the final stock valuation The audit revealed the cumulative financial losses were estimated in 3 million Rials within the last years. The consequence of such data is that part of company’s total capital of Rials estimated in 7 million was spoiled. Schedule of weaknesses 1. The audit group recommends reducing deficiencies by preparing adequate design of internal control. 2. To ensure the internal process in internal control to  management to report deficiencies on a timely basis 3. To ensure inventory control over the certain financial period and make documentation of the internal control components be appropriate 4. To make a differentiation of duties within a company process 5. Management to assess the stock price and track and manage the accurate consolidating information from remote locations 6. To evaluate and manage company’s assets from loss, damage and misappropriation 7. To consider and evaluate potential risk for company’s processes and make changes into the documentation circulation Practice related to inventory management and stock take Inventory of Farhan Muscat SAOG is the stock of raw materials. However, not only inventory represents an important asset on the balance sheet of the company. It is also the value of closing stock that influences the net profits. The practice related to the inventory management includes the auditor’s visit of the stock take program at certain day and appointed date and time. The staff will be observed for the stock take conducting and a few tests will be confirmed and evaluated. Farhan Muscat SAOG should keep an adequate level of stock to enable processing of smooth business operations and to achieve the objectives for stock relating costs minimization. The procedure related to inventory management and stock take will also include the review of the previous year’s arrangements, assessment of the key factors relating to the stock and the arrangement obtained from third parties. Closure An accurate stock take is an importance part of business process to the management, since it enables the company to outline the procedures and conduct the stock take in a faster way. The procedure enables the company to see where the deficiencies are and search for the ways to solve the issues. Signature Auditor’s name Independent audit report To: Address: An auditor’s report represented communicates financial statements about the company with accordance to the generally accepted accounting principles. Information within the report is also addressed the risks of material misstatements and for the purpose of company’s performance improvement. While inventories are the significant components of the total assets, particularly among the manufacturing and trading companies, audit of inventories assumes its special role for the company’s effective performance (Jha, 2015). It is clear that information about inventory might be useful, all information provided by the company will be necessary to conduct an adequate audit and make appropriate conclusions. Management responsibility for the financial statements For the sake of fair presentation and preparation of financial statements in accordance to the International trading and manufacturing corporations listed on the Muscat Securities Market, the management provides the auditor the written statement that describes the details of the location of inventories, methods and procedures of their physical handling and valuation of inventories (Puncel, 2007). The letter, hence, serves as the formal acknowledgements of the responsibilities of the company to the inventories. Auditor responsibilities Auditor’s responsibilities include the procedures, which are aimed to receive appropriate audit evidence. This evidence will enable the auditor to form the basis for the opinion about the financial information. The auditor maintains to work on papers regarding the inventories. It includes the summary of each onventory and the details regarding the verification of inventory. The auditor receives the management letter about the inventories. The auditor is also responsible for the maintenance of proper records for production and for maintaining stocks. One is expected to exercise the skills in order to take every possible data for the audit report completion (Johnstone, Gramling & Rottenberg, 2014). In the audit conducted by the Ansari and Alawi Associates LLC., the audit group has made a stock take for Farhan Muscat SAOG Company for the financial year 2014, which was comprised of the statements of financial position as of the same period and the related inventory statements. It put an emphasis on the main deficiencies of the company and made recommendations as to their improvement of company’s performance. Audit results We have found that the company operates its stores at many locations and is headed by a Warehouse Manager for the last few years. We have also found that Farhan Muscat SAOG has suffered financial losses for the last four years due to the company’s operation within the Gulf region, which was affected by the global slowdown. The major sales have led the reduction in sales of the company and poor performance on domestic and international markets. According to our examination, the company has lost some of its financial records for the last financial year due to the water seepage during heavy rains. As a result, the audit group was not able to assess those records. We have also revealed that the company has carried out the stock take at the end of its financial year, while the huge amount of information was not assessed and no financial resources were allocated to the stores department to conduct the audit activity. We have also noticed that due to activities critical to the close to the end of the financial year, such as movement of goods and sales and manufacture, there was no possibility to assess rationale for the stock take. The company has also provided limited assurance in its daily inventory counts and failed with the information that created certain deficiencies in timeliness, accuracy and failure to obtain consolidating information in time. We have also observed that the stock was valued at Simple Average method and caused damaged and slow-moving stock and non-moving stock to be valued at purchase price. We have noticed the company fails in safeguard asset from loss and damage Hence such condition should be evaluated. In terms of risk management, the company has also showed certain deficiency as its products were purchased but were not delivered and could not be confirmed in the stock take. Basis of qualified opinion In our opinion, despite the financial data was provided not in the full extent and there were present breaks in terms of time, the financial statements were properly prepared and the explanations were provided. During our review we have found the accuracy of the inventory count. However, additional steps should be taken to improve the performance of the company in terms of its inventory. In our opinion, except for the effects of absence of certain data, financial statements were presented fairly. However, we should recommend policies to be undated and monitoring of the remote locations was made by the management of the company. Risk management procedures should also be included into the company’s activities. We highly recommend that all documentation in terms of inventory to be ensured for further inspections and appropriate storages were provided for the important papers. We find the financial reporting process to be held twice a year instead of one as it enables the company to keep abreast on the changes of its financial data and then improve its economic measures at the end of financial year. Auditor’s signature: Auditor’s name and address: Date: References Inventory management report, 2013. Internal Audit Function Internal Audit and Evaluation Directorate, [pdf] Available at: https://www.bac-lac.gc.ca/eng/about-us/audits-evaluations/Documents/Inventory%20Management%20Audit%20Report.pdf [Accessed on May 11, 2015]. Jha, S. 2015. Inventory audit ascertainment of the liquidity position, Global Academic Research Journal, Vol.3, Issue 1, [pdf] Available at: http://researchjournals.in/GARJ/2015/3.1/3105.pdf [Accessed on May 11, 2015]. Johnstone, K., Gramling, A. and Rottenberg, L. 2014. A risk-based approach to conducting a quality audit, 9th ed., South-Western/Cengage Learning Lew, H. 2010. Review of Controls over Storeroom Operations, Final audit report with recommendations Puncel, L. 2008. Audit Procedures, CCH Read More