Control and Control Risk

Controls pertaining to recording inventory transactions are important to assessing control risk for the existence and occurrence, completeness, valuation or allocation, and presentation and disclosure assertions for manufacturing transactions and inventories.

1. How does the auditor perform a walk through of production transactions? What documents will the auditor collect? Regarding controls, what will the auditor look for?

Documentation of the authorizations of production is provided by issuing pre-numbered production orders. In addition, a material requirements report should be prepared to show materials and parts needed and on hand
management should have controls in place to ensure that purchased raw materials quantities are appropriate for production levels. Production performance evaluation reports should be prepared to evaluate production quantities, product quality, and delivery schedules.

2. What control could be used to prevent or detect false work orders or fraudulent requisitions?

Management should limit physical access to inventories and fixed assets. In addition, access to information about inventories and fixed assets should be restricted by using access controls and compatibility tests. All internal movements of inventory through the production process should be documented by using (1) materials requisitions to authorize the release of raw materials to production, and (2) move tickets to document the movement of inventory.

In addition, the receiving department should not accept returned goods without an authorization number. Customers should be required to obtain authorization by the company in advance.

3. What control could be used to prevent or identify the taking of company inventory by the spare parts custodian?

If management fails to institute effective controls, this condition could lead to theft, pilferage, embezzlement, and corruption. When employees have knowledge of where the weaknesses are in internal controls, such as approvals of transactions and access controls over automated records, they have the opportunity to commit fraud.

As an example, employees can bill the company for services from a nonexistent company if the accounts payable staff does not review services for completion or materials for receipt.

4. Describe a control that would prevent or identify "shell company" schemes.

Economic motive is a need for money to pay for college tuition, hospital bills, drugs, or alimony and child support. Sometimes honest people can fall into circumstances where there is an unexpected need and there appears to be no other way to solve the problem.

In addition, the inability to obtain a better lifestyle through legitimate means can lead to the motivation to commit financial crimes by persons in trusted positions.

Some companies have "ethics officers" to assist those employees who experience financial and other pressures.

5. What is a control that could prevent or identify fraudulent refunds of merchandise by employees?

The need for controls within the work environment is very critical in the operation success of the organization. One must think of every possible situation to prevent too much authority being placed under one position. Using checks and balances, a company can determine if a new control is needed or if there is a gap within the internal control process.

6. Do you think storage of source documents becomes an important factor when determining controls within an organization?