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Risk Management

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed. Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling. Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels. Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors. In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment. Required: In respect of the internal control of Pear International Co: (i) Identify and explain FIVE deficiencies; (ii) Recommend a control to address each of these deficiencies

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198 views8 pages

Risk Management

Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website. Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed. Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling. Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels. Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors. In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has been purchased, however, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment. Required: In respect of the internal control of Pear International Co: (i) Identify and explain FIVE deficiencies; (ii) Recommend a control to address each of these deficiencies

Uploaded by

SyedAshirBukhari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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B.

Com (6) RISK MANAGEMENT

Operational Risk Management


1) Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and its
customer base includes retailers as well as individuals, to whom direct sales are made through their website.
Pears website allows individuals to order goods directly, and full payment is taken in advance. Currently the
website is not integrated into the inventory system and inventory levels are not checked at the time when orders
are placed.
Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the
customer has received the goods. Over the past 12 months there have been customer complaints about the delay
between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order
had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.
Pears retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales
ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount
levels.
Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff
changes in the purchase ledger department, supplier statement reconciliations are no longer performed.
Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger
clerks as well as supervisors.
In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has
been purchased, however, there are considerable levels of plant and equipment which are now surplus to
requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and
little has been done to reduce the surplus of old equipment.
Required:
In respect of the internal control of Pear International Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 1

B. Com (6) RISK MANAGEMENT

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 2

B. Com (6) RISK MANAGEMENT

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 3

B. Com (6) RISK MANAGEMENT

2) Introduction
Fox Industries Co (Fox) manufactures engineering parts. It has one operating site and a customer base
spread across Europe. Below is a description of the purchasing and payments system.
Purchasing system
Whenever production materials are required, the relevant department sends a requisition form to the
ordering department. An order clerk raises a purchase order and contacts a number of suppliers to see
which can dispatch the goods first. This supplier is then chosen. The order clerk sends out the purchase
order. This is not sequentially numbered and only orders above $5,000 require authorisation.
Purchase invoices are input daily by the purchase ledger clerk, who has been in the role for many years
and, as an experienced team member, he does not apply any application controls over the input process.
Every week the purchase day book automatically updates the purchase ledger, the purchase ledger is
then posted manually to the general ledger by the purchase ledger clerk.
Payments system
Fox maintains a current account and a number of saving (deposit) accounts. The current account is
reconciled weekly but the saving (deposit) accounts are only reconciled every two months.
In order to maximise their cash and bank balance, Fox has a policy of delaying payments to all suppliers
for as long as possible. Suppliers are paid by a bank transfer. The finance director is given the total
amount of the payments list, which he authorises and then processes the bank payments.
Required:
Write a report to management in respect of the purchasing and payments system described above
which:
(i) Identifies and explains FOUR deficiencies in the system; and
(ii) Explains the possible implication of each deficiency; and
(iii) Provides a recommendation to address each deficiency.

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 4

B. Com (6) RISK MANAGEMENT

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 5

B. Com (6) RISK MANAGEMENT

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

Page 6

B. Com (6) RISK MANAGEMENT


3) You are a member of the recently formed internal audit department of Oregano Co (Oregano). The

company manufactures tinned fruit and vegetables which are supplied to large and small food retailers.
Management and those charged with governance of Oregano have concerns about the effectiveness of
their sales and despatch system and have asked internal audit to document and review the system.
Sales and despatch system
Sales orders are mainly placed through Oreganos website but some are made via telephone. Online
orders are automatically checked against inventory records for availability; telephone orders, however,
are checked manually by order clerks after the call. A follow-up call is usually made to customers if there
is insufficient inventory. When taking telephone orders, clerks note down the details on plain paper and
afterwards they complete a three part pre-printed order form. These order forms are not sequentially
numbered and are sent manually to both despatch and the accounts department.
As the company is expanding, customers are able to place online orders which will exceed their agreed
credit limit by 10%. Online orders are automatically forwarded to the despatch and accounts department.
A daily pick list is printed by the despatch department and this is used by the warehouse team to
despatch goods. The goods are accompanied by a despatch note and all customers are required to sign a
copy of this. On return, the signed despatch notes are given to the warehouse team to file.
The sales quantities are entered from the despatch notes and the authorised sales prices are generated by
the invoicing system. If a discount has been given, this has to be manually entered by the sales clerk onto
the invoice.
Due to the expansion of the company, and as there is a large number of sale invoices, extra accounts staff
have been asked to help out temporarily with producing the sales invoices. Normally it is only two sales
clerks who produce the sales invoices.
Required:
Identify and explain SIX deficiencies in Oregano Cos sales and despatch system and provide a
recommendation to address each of these deficiencies.

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

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B. Com (6) RISK MANAGEMENT

Saad Hassan - B.Sc. Honors (Applied Accounting), M.Com, ACCA

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