Question

Budd's Retail is a small family owned retail business. Budd's sells its products to clients through via online internet sales and through a call centre. Most of the employees are casual staff employed during the busy seasons.

The company’s managers feel that on-the-job training is adequate for their needs and that the labour savings from using temporary staff are reflected in the profits Budd's has earned for the family each year.

When a customer order is received, either by phone or through the internet, the customer service representative (CSR) takes the order and checks that Budd's has the goods in stock and the correct price by checking an on-line database of inventory on hand. If the goods are available, the representative then personally phones the customer back to verify the order, including both quantity and price for each item and the extension for the entire order. The representative then prepares a sales invoice and faxes a copy to the customer.

The company has a shipping staff of 7 people and the shipping department will not ship any goods without a sales invoice initialled by the CSR. The shipping department is determined to reduce the number of shipping errors. This year, 12 shipments have occurred in which there was no sales invoice initialed and attached to the shipping bill. One of these turned out to be an urgent shipment to a long-time customer, sent on the manager’s verbal instructions.

Required:

Discuss five different types of deficiencies/problems in Budd's internal controls. Provide an example for each type of problem.

Control deficiencies may be evident from the lack of general controls, control objectives and/or from the limitation of internal controls that are discussed in CAS 315.

Answer 1

Sr no of problem	Deficiencies / Problems in Budd’s Internal Control
1 – Casual Staff	It is evident that Budd’s Retail is using the Temporary Staff, even in the busy season . In fact , they want to save some money cost difference between a Permanent staff and Temporary staff. However, Budd’s has to maintain a mix of Permanent staff and Temporary staff. He must have atleast 20-25% Permanent staff who could train the new Temporary staff before they get into real business. It would help Budd in maintaining smooth operations. Company’s managers also have felt about the on the job training to temporary staff . Example – Suppose the new temporary staff has done an error in packing or in counting of material loaded, it would create the problem and will result in discrepancy between the Sales Invoice and the Shipped quantity.
2- Verbal Communication	It has been observed that the Company is having a tendency to communicate with customers , verbally ,over telephone about the orders. It increases the probability of errors to happen more as there is no verification , once the discussion is over. There must be a mail or written system through which an order from customer must be accepted and then confirmed in writing only so that the goods are delivered with respect to correct quantity ,rate , description and details as desired by the Customer. Example- In case , in verbal communication there is mismatch of the price or the quantity , while something else has been charged . It would lead to misleading information and the Company could loose some valuable customer.
3- Improper allocation of staff	It has been seen that the Company has as many as 7 persons in Shipping department ,while only one person is there for raising Sales Invoices . Sales Invoice is such a document ,which should be done on the very same day the goods have been dispatched, in fact, the Sales Invoice has to accompany the goods and the Company is not raising Sales Invoices on time , resulting into loss of sales. Example – Given the case, Seven persons in Shipping and only one in Invoicing . It may be possible that the most of the seven persons in Shipping department are sitting idol and wasting the company’s time and energy while there is overload in Invoicing , resulting into errors in preparation of Invoice or sometimes missing some Invoice.
4- Poor Internal Control by Despatch department	The Finished Goods warehouse from where the material outward happens , must have a document viz Sales Invoice / Challan for the quantity dispatched and this document should be recorded into their records for showing any material movement entry. To reduce the Shipping errors , all shipping instructions should be in written form and duly explained and understood by Production / Logistics / Warehouse department properly . If any confusion , it should be cleared in time. It would help sending right material to right customer at right time with right details. Example – When there is no document for Warhouse deparment for movement of goods, they will have to believe the verbal communication and there can be mismatch in Customer name , location , quantity , packing style and it might result into sales return , resulting into cost and bad impression among the customers.
5- Inproper Security checking	Whenever there is an inward or outward movement from the Factory gate, the Security team , stationed at the Main Gate of the Factory that first of all there is a proper document for any inward or outward activity. They should have objected when the goods were dispatched but without any Sales Invoice. Any material going out should be either Sales Invoice only and by no other means. If it is not such goods cannot leave the factory. The Company is having the practice of sending Fax of the Sales Invoice to the Customer. In case, the Customer has not seen the Fax or the Fax machine is out of order , it will never be acknowledged. Moreover, sending the Invoice , alongwith the goods is a requirement also which can be acknowledged at the time of receipt of the material by the customer. Example – Suppose the Fax is sent to the Customer and Customer has not attended it . He might keep followup for the material , while material is already on the way. It will result into waste of time for customer as well as seller.
CAS 315 reference	CAS 315 is about understanding of the Internal Controls by the Auditors It is an Implementation tool for Auditors and this how this Implementation tool is Organized. Pitfall 1 – Auditors do not identify relevant controls within the entity’s – Control environment – risk assessment process – information system and communication- monitoring of controls. Pitfall 2 — Auditors do not evaluate the design of relevant controls within the entity’s control environment, risk assessment process, communication, and monitoring of controls, and/or do not determine whether or not they have been implemented. Pitfall 3 — Auditors do not understand the information system relevant to financial reporting, and how the entity has responded to the risks arising from IT. Pitfall 4 — Auditors do not identify control activities relevant to the audit. Pitfall 5 — Auditors incorrectly conclude that control activities relevant to the audit are appropriately designed to prevent (or detect and correct) material misstatements. Pitfall 6 – Auditors do not determine when substantive procedures alone are not sufficient to provide appropriate audit evidence.