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Internal control weaknesses

Pontex Co. produces a variety of chemical products for use by synthetics manufacturers.The plant operates on two shifts, five days per week, with routine maintenance work performed on the third shift and on Sundays, as required.

Pontex's new internal audit department has recently completed a series of audits and the comments about Pontex's inventory controls have not been favorable. The audit report focuses on raw materials and maintenance materials.

Raw materials are received at the back of the plant, signed for the by any available employee, and stored in a room near the start of the production line. This is convenient because it gives plant workers quick access to the raw materials whenever they are ready to start a new batch of product. Receiving reports are deposited on the desk of the plant supervisor's secretary, and twice a week the secretary gathers the reports together, logs them, and forwards them to the inventory control department. The inventory control department calculates raw material usage based on weekly production reports and standard formulas. Physical inventory counts are done quarterly. The inventory control department also prepares purchase requisitions, and rush orders-ones that require immediate delivery-are not uncommon. The company is charged a high premium for this special service. Yet, in spite of the number of rush orders, the plant supervisor often receives memos from the controller indicating that there must be excessive inventory, since the dollar value of the raw materials inventory seems high.

Maintenance parts and supplies are received at the back of the plant, signed for by any available employee, and stored in a designated storeroom. There is a storeroom clerk on duty on each shift. Storeroom requisitions are supposed to be completed for anything taken from the storeroom; however, this practice is not always followed. Storeroom requisitions must be approved by the maintenance supervisor on shift. The storeroom is not locked when the storeroom clerk is out on breaks, in case maintenance staff require a part or supplies quickly, as is often the case. The storeroom is also opened during the third shift so that maintenance crews can obtain the parts and supplies that they require. Purchase requisitions for maintenance parts and supplies are prepared by storeroom clerks, who also conduct the semi-annual inventory counts. As part of the inventory count, storeroom clerks are required to reconcile count results to inventory records.

a) Identify the weaknesses in Pontex's internal control procedures used for the raw materials inventory and maintenance parts and supplies inventories. Describe what could happen as a result of these weaknesses.
b) Provide practical recommendations for improvements for each weakness that you identified in part (a).

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Hello. I provide the following to assist you.

a) The weaknesses in Pontex's internal control procedures for the raw materials inventory, maintenance parts, and supplies inventories are:

1. It seems that raw materials and maintenance parts and supplies are all received at the back of the plant. This is major internal control weakness. Having all of these different parts, which are essential to the company, delivered to the same holding area, where anyone can sign for them can cause confusion, misappropriation of placement of products, and can create a loss for the company due to the time and effort it may take for an employee to distinguish one part versus another when they are all in the same location.

2. "Any available employee" is not a preferred method of receiving products. This can cause mishandling of products to the correct department.

3. The receiving reports are placed on the plant supervisor's secretary's desk. Apparently the reports are only gathered twice a week and forwarded to the appropriate department. This can cause a delay in ordering of new supplies.

4. Physical inventory counts are done ...

Solution Summary

This solution discusses internal control weaknesses.