Campbelltown Chemical Industries is a case study which is designed to provide students with an insight into the practical application of auditing procedures. The case incorporates an evaluation of internal controls relating to the audit of the inventory system of the company.

Required

(i) identify any weaknesses in the internal controls of the inventory system; and
(ii) clearly and explicitly state what could go wrong as a result of these weaknesses. Describe the specific risk of fraud or error.

Your answer should be presented in a two-column format as follows:

Internal Control Weakness Specific risk of fraud or error

Background Information:

Your firm is the auditor of Campbelltown Chemical Industries Pty Ltd. The company manufactures a wide range of products used by the farm fertiliser industries.

You are the audit senior given the task of performing the audit of inventory for the year ended 30th June 2014. The inventory is shown in the Financial Statements at 30th June 2014 at $18 283 267 (at cost). Inventory is stored in a goods store and a purpose built compound. You have obtained the following information regarding the inventory system from responses to an internal control questionnaire.

Description of the Inventory System

Customer Orders for manufactured products

Orders from customers are received at the Sales Order Department by telephone or fax. The Sales Order Department raises a multi-copy sales order, two of which (the invoice copies) are priced and totalled. The order is entered via a computer terminal located in an open access area within the department.

Inventory - raw materials into goods store

The inventory is controlled by the Storeroom Manager (Jim Shine) and two storeroom clerks. All are well trained in the custody and control of chemicals.

The Factory Manager (John Jones) prepares a Purchase Requisition in respect of the raw materials required which specifies 3 items of information about the materials required: the chemical description; the quantity required; and the supplier from whom the purchase should be made. The Factory Manager then sends the requisition to the Purchasing Department where a formal Purchase Order is raised and sent to the supplier. Where a supplier is unable to supply a particular order, the Factory Manager recommends a new supplier.
Raw materials are kept in a large purpose built locked compound which includes underground storage tanks. When deliveries are made to the storage tanks the item is pumped from the tanker directly into the underground storage tanks. The delivery driver hands a Delivery Docket to a storeroom clerk as proof that the goods were delivered to the compound.

When ordered raw materials arrive from suppliers, one of the storeroom clerks counts the item and formally signs the delivery docket as evidence of receipt of the chemicals. He then telephones Accounts Department advising the payments clerk that the goods from a supplier has been received. He follows this up a later date with an email. All signed delivery dockets are filed in the Store Manager's office. The stock quantity is entered into the inventory system via a computer terminal located in the Storeroom Manager's office. The goods are physically stored in either the goods store or the compound.

Inventory - raw materials from goods store to production

Raw materials are removed from the compound or goods store only upon written or oral authorisation by the Production Manager.

Inventory - finished goods from production to goods store

As finished goods leave the production area, they are sorted into product type and entered onto "Finished Goods from Production" tickets. The tickets are then given to a storeroom clerk who enters the data into the inventory system via the computer terminal located in the Storeroom Manager's office. At the end of each day, all tickets are batched and a control total is created on units. On an ad hoc basis, this control total is agreed to the daily printout of finished goods entered into the store.