Inventory Management Auditing and Assurance Services

Question: Discuss about the Inventory Management for Auditing and Assurance Services. Answer: An effective internal control mechanism enhances the functionalities of the business. The process of internal control defines the reliability and effectiveness of the business operations and ensures the legal authenticity. In the given assignment, all the case scenarios are concerned about the Adel Manufacturing Company where sixty workers are associated in the production process and have the specific payroll procedures. In the first case scenario, the internal control weakness can be identified in the area of documentation and authorization. As per the scenario, the company is engaged in the interview process maintaining the exclusivity. They handled all the interview activities alone and the judged the applicants on the basis of the interview. The risk mainly incurred in the area of the documentation procedure followed by the foreman of the factory. Normally they right the hourly rate of pay manually. Furthermore, the foreman identified the newly employed people mentioning the applicants name in the corner of the income tax installment declaration form. This documentation process can be considered as risky because the company does not follow any proper digital form. Filling up all the relevant data about the candidates may be missed out due to an ineffective job responsibilities performed by the foreman of the factory. On the other hand, there may be some different payroll structure for the experie nced or new employees. In other words, the hourly rate of pay may be differed by the types of employees of the organization. Here the new employees are recognized in the improper manner. Therefore, the error can be occurred, if the payroll department mistakenly makes wrong adjustment related to the rate of pay of employees. Furthermore, the authorization of duties is also ineffective because the foreman has made communication with the payroll department verbally. Thus the error can be made due to gap of negotiation among the responsible parties. To control each internal error, the company needs to identify the following aspects: Firstly, the inefficiency of documentation can be improved by the following process of adequate documents and records. In this case, the online procedure can be maintained for the preparation of an income tax installation declaration form. More stresses must be given to record data by the electronic system instead of manual procedure. Secondly, the independent performances must be checked by the continuous internal verification of the control. If the payroll associates of the factory frequently review their individual duties, then the risk of mistake can be reduced or minimized. The record of the blank timesheets has been maintained weekly basis in the case scenario. However the main risk lies in the area of record keeping procedure. The blank timesheet has been filled up in pencil which can be modified at any point of time. The false data such as the records of the daily arrival or departure can be rectified at any point of time. Therefore, such risk can be considered as the potential material misstatement. The evidenced risk can be mitigated by the managing activities properly. The management of the company needs to monitor timesheets by the regular basis. On the other hand, the bio-metrics system can give the accurate information about the employees in and out. In this way, the material cannot be misstated in the near future. In this case scenario, the company has measured the employee performances by monitoring the timesheet. Here each clerk is responsible for the computation of the gross pay, deductions and net pays. Based on such calculation of the employee earnings have been finalized. Therefore, the risk lies in the area of the independent performances. On the other hand, the employee existence may be lost due to the automatic removal system of the company. Therefore, an ineffectiveness of the payroll clerk can become a serious risk for the company. Such identified risk of internal control can be mitigated by improving independent checks and performances. By verifying his own duty, the payroll clerk can enhance their performances. Furthermore, the management should continuously review the calculation which are computed by her before releasing any final payments to the employees of the organization.. In this way, the company can cross check the payment procedure. From the case study, it can be stated that the distribution process of the salary cheques has few flaws. The chief accountant uses to sign the salary cheques, manually and distributes the cheques through the foreman. Such manual signature system includes high risk of forgery. It has been observed in such cases, that the foreman or the labor in-charge, who keeps track of the workers, continues the record of the left workers or create records of the imaginary workers. They may alter the amounts of the cheques or issue new cheques for such ghost workers by forging the signature of the chief accountant. There is flaw in the distribution of the cheques also. The company does not maintain any such procedure, which can ensure whether the workers are getting the cheque in reality or not. The management should introduce digital signature system. Only the chief accountant will have the authorization to use the digital signature. In that case, any other people cannot duplicate his signature to make any forgery. Moreover, the management should maintain a payroll receipt book, where the workers will sign after receiving the cheques. Even the employees, who will be absent on the payment date, should sign it on the next day. Thus, it can minimize the risk of misallocation of slary cheques. Bibliography Boritz, J, L Hayes, J Lim, "A content analysis of auditors' reports on IT internal control weaknesses: The comparative advantages of an automated approach to control weakness identification". inInternational Journal of Accounting Information Systems, 14, 2013, 138-163. Feng, M, C Li, S McVay, H Skaife, "Does Ineffective Internal Control over Financial Reporting affect a Firm's Operations? Evidence from Firms' Inventory Management". inThe Accounting Review, 90, 2015, 529-557. Hoitash, R, U Hoitash, K Johnstone, "Internal Control Material Weaknesses and CFO Compensation*". inContemporary Accounting Research, 29, 2012, 768-803. Skaife, H, D Veenman, D Wangerin, "Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading". inJournal of Accounting and Economics, 55, 2013, 91-110.