Question

Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI's products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured.

In October 2022, MSI installed a new cloud-based inventory costing system to replace a system that had been developed in-house. The old system could no longer keep up with the complex and detailed manufacturing costing process that provides information to support competitive bidding. MSI's IT department, together with the consultants from the software company, implemented the new inventory costing system which went live on December 1, 2022. Key operational staff and the internal audit team from MSI were significantly engaged in the selection, testing, training, and implementation stages.

The inventory costing system uses various manufacturing costing and unit of production inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements such as purchases, sales, waste, and damaged inventory losses.

It is now February 2023, and you are beginning the audit planning for the June 30, 2023, annual financial statement audit. You are assigned to assess MSI's IT controls with particular emphasis on the recent implementation of the new inventory costing system.

Explain how the external auditors would evaluate each of the following components with respect to the new inventory costing system.

1. The control environment.

2. Management's risk assessment process.

3. IT general controls.

Answer 1

The five components of internal control framework are control environment, management risk assessment process, IT General controls, monitoring.

New inventory costing system with respect to control environment:

1. Produce and sell goods to meet demand

2. Avoid maintaining excess products and

3. Eliminate cost associated with purchasing, producing and holding excess

With respect to management risk assessment process

1. Prevent theft and damage loss

2. Make certain that inventory costs are accurately captured and report.

With respect to General IT controls

Fence & lock the warehouse

Organise the inventory

Count of inventory

Tag all inventory