Question

Assume you are considering the internal controls related to inventory for a potential new audit client....

Assume you are considering the internal controls related to inventory for a potential new audit client. In the course of your study, you discover the manager of the firm’s merchandise inventory warehouse has the ability to approve customer orders for creditworthiness. He is also responsible for loading all merchandise from the warehouse onto trucks for shipment to customers. Explain how these activities of the warehouse manager would affect your initial view of control risk related to inventory. Be specific.

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Answer #1

Before starting an audit, the auditor will have a thorough check on the internal controls of the company. The type of transactions their approval requirements and division of work will be the main among them.

In the given scenario, the manager of inventory itself approving customer's orders and their are no authorisation requirements, and also loading of merchandise for delivery is also looked after by the same manager, which means there is no division of work.

Though there are no fraudulent activities there is a high risk of internal controls where auditor should entertain substantive proceedures in such a way to detect the material activities and also auditor should suggest for changes in the company policies and internal control methods being adopted now.

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