UNIVERSITY OF JOHANNESBURG

DEPARTMENT OF ACCOUNTANCY

Governance and Control 3AB0

Production and inventory cycle

Question bank
QUESTION 1 (20 MARKS)

Posh Shoe Ltd (hereafter Posh Shoe) is a listed company that is situated in Sandton
City, and specialises in the manufacturing of elite footwear for men, women and children.

Posh Shoe purchases all of the raw materials needed for the production of the shoes
from Chic Shoes (Pty) Ltd (hereafter Chic Shoes) in Europe. A variety of materials are
used for the making of the shoes, such as leather fabrics, plastic, rubber, fabrics, wood,
jute fabrics, and metal. With the development of modern machines, a pair of shoes can
be easily manufactured in less time than it would take to manufacture it manually, as
each step in its manufacturing is performed by a separate footwear making machine.

The process for issuing raw materials and producing the shoes is as follows:

• The production clerk issues an order to the processing department that contains
the details of the raw materials that is needed for the production of the shoes.
The order is based on re-ordering levels and market trends.
• Raw materials are then issued to the production processing department through
a single copy of a raw materials issue slip.
• The raw materials are then sent to the production department to start with the
production process.
• Daily production reports are generated for all orders and copies are sent to the
production planning department. Management briefly looks at a few of the
reports to ensure that all charges in terms of raw materials, labor and overheads
are accurate.
• Time spent on each stage of production is captured into a personal journal that is
kept by each of the workers involved in the production of the shoes.
• The foreman inspects that each stage of the production process is properly
completed before the shoes are sent to the next stage.
• All of the raw materials and labour and machine hours and overheads appear on
the job card. The job card is then inspected by the production manager to ensure
that it is correct.
• The goods are sent to the finished goods department once they are complete.

You are required to:

1. Identify and describe the weaknesses in the internal control system of Posh Shoe
Ltd’s production and inventory cycle and; (9)
2. Recommend the internal controls that should be implemented to address these
weaknesses. (9)
(You are required to present you answer and tabular format)
PRESENTATION MARKS (2)
QUESTION 1
1. Weakness
The order is placed by the
production clerk. (award mark if
student says order wasn’t
authorised by production
planning department)
A Customer Job Card (CJC) is
not generated by the production
department to ensure that they
capture all of the costs involved
in the production of the shoes.
No documentation is signed
(authorisation) as proof that the
raw materials have moved to the
next stage of work in progress.
(Award 1 mark even if student
mentions this for each stage, i.e.
mentions four times = 1mark)
Management only briefly looks at
the daily production reports to
ensure that all charges in terms
of raw materials, labor and
overheads are accurate.
The RMI slips are not pre-
numbered
The raw materials requested on
the RMI is sent to WIP, but is not
captured on the CJC
The RMI slip is issued in only a
single copy.
As a result of the above a copy of
the RMI slip is not sent to the
Raw materials store to compare
with the Raw materials masterfile.
Time spent on the production of
the shoes is captured into a
personal journal by each of the
workers.
No reconciliation is done at the
end of the day to ensure that the
total amount of hours is correct
according to what the staff have
captured in their journals.
No quality control inspections are
done before goods are sent to
finished goods.
As there is no job card that is
SUGGESTED SOLUTION
Marks 2. Control Marks
1 An inventory production order 1
(IPO) should be issued by the
production planning department
to the production processing
department.
1 A Customer Job Card (CJC) 1
should be generated by the
production department to ensure
that they capture all of the costs
involved in the production of the
shoes.
1 As goods move to the next stage 1
in the production, the person
responsible for that specific part
of the production process signs a
document stating that the shoes
have moved to the next stage.
1 All daily production reports 1
should be reviewed in detail to
ensure that all of the raw
materials are captured and
accurate.
Any unusual allocations of costs 1
should be identified and rectified.
1 The RMI should be pre- 1
numbered.
1 All of the raw materials 1
requested on the RMI should be
allocated to the particular work in
progress (WIP) CJC.
1 There should be two copies so 1
that one of the copies can be
sent to the Raw materials store
1 to compare with the Raw
materials masterfile.
1 Time spent on each stage of 1
production should be captured
onto the CJC.
1 At the end of the day the total 1
time recorded is reconciled with
the total hours worked by the
production staff.
1 Quality control inspections are 1
also done to detect any of the
apparent defects before the
shoes are sent to finished goods.
1 All of the raw materials, labor 1
made out, none of the hours, raw
materials and overheads appear
on a job card.
The shoes are sent to the
finished goods department once
they are complete without the
production manager signing off
the transfer.
and machine hours and
overheads appear on the job
card and is inspected by the
production manager to ensure
that it is correct.
1 Once the production manager is 1
satisfied that the shoes are 100%
correct and ready to be sent to
finished goods, he signs for the
goods to be transferred.

The finished goods department 1 The finished goods department 1

does not acknowledge the receipt acknowledges that they received
of the finished goods. the finished goods by signing the
completed production report.

Available marks 14 Available marks 17

Maximum marks 9 Maximum marks 9
Table format 1
Layout and Logic 1
QUESTION 2 (15 MARKS)

You are the financial manager at Jungle Gyms (Pty) Ltd (hereafter JG), a company that
manufactures jungle gyms parts. JG manufactures all of the plastic poles needed for the
assembly of the jungle gyms, as well as the safety nets used to place around the jungle
gyms. The production process of these jungle gyms takes place as follows:

ISSUE OF RAW MATERIALS AND PRODUCTION

Issue notes are made out for the issuing of raw materials to production. All of the issuing
notes are alphabetically accounted for according to the material name. The issue notes
are signed by the senior manager and as soon as the goods are transferred to
production, the storeman signs as proof of receipt. All such issues to production must be
accounted for per the allocation on the daily production report. In case of any changes
on the issuing notes, the foreman should sign the issuing note to authorise the change.

All raw materials issued to production should be listed on the customer job card and a
copy is sent to the production planning department staff for comparison with the raw
material inventory master file records for that day.

Each employee captures the time spent on each stage of production on a piece of paper.
If more hours are recorded than what were actually spent by the employee at work during
that day, or week, the discrepancy is sorted out at month end.

The raw materials manager is assigned the responsibility of inspecting that each stage of
the production process has been properly completed before the goods pass to the next
stage.

TRANSFER OF MANUFACTURED GOODS TO FINISHED GOODS INVENTORY

No quality control inspection takes place once the goods are transferred to inventory as
JG is very confident that they have proper controls in place to ensure that their products
will not have any defects.

The raw materials and overhead allocations on the completed job card are inspected by
the storeman to ensure all production charges are correctly recorded.

The foreman authorises, by signature, the transfer of the manufactured goods to inventory.

Once the goods are transferred to finished goods inventory, the manager inspects the
goods and accepts the goods into finished goods.

YOU ARE REQUIRED TO:

1. Identify and describe the weaknesses in the above production process. (7)
2. For each weakness identified in (1) above, provide internal controls that should be
implemented to ensure that there are proper controls in the production process. (7)

(Present your answer in tabular format).

Presentation (1)
QUESTION 3
1) & 2)
Weakness
Issue of raw materials and production:
All of the issuing notes are
alphabetically accounted for
according to the material name.
The issue notes are signed by the
senior manager and as soon as
the goods are transferred to
production, the storeman signs as
proof of receipt.
All such issues to production must
be accounted for as allocated to
the particular work in progress on
the daily production report.
In case of any changes on the
issuing notes, the foreman should
sign the issuing note to authorise
the change.
All raw materials issued to
production should be listed on the
customer job card and a copy
sent to the production planning
department staff to compare with
the raw material inventory master
file records for that day.
Time spent on each stage of
production is written on a piece of
paper, and it is the employee’s
responsibility to clock in the time
spent on each stage in production.
If more hours are recorded on job
cards than were actually spent by
the employee at work that day, or
week, the discrepancy is sorted
out at month end.
The raw materials manager is
assigned the responsibility of
inspecting that each stage of the
production process has been
properly completed, before the
goods pass to the next stage.
(SUGGESTED SOLUTION)
Mark Internal Control Mark
1 The raw material issue slips 1
should be pre-numbered, and all
missing numbers should be 1
regularly followed up.
1 The issue notes should be signed 1
by the store man; and
The production foreman should
1 sign the issue note as proof of 1
receipt of goods.
1 All such issues to production must
be accounted for as allocated to
the particular work in progress 1
Customer Job Card (CJC) or 1
Inventory Job Card (IJC).
1 No changes are allowed on the 1
issuing notes.
All raw materials issued to
production should be listed on the 1
1 daily production report and a
copy sent to the raw materials
1 stores staff to compare with the 1
raw material inventory master file
records for that day.
Time spent on each stage of
1 production, by production
employees or in machine time, 1
should be captured onto the
relevant job card (CJC or IJC)
by simply writing the time on the
card, or by the employee using 1
the card to ‘clock in and out’.
If more hours are recorded on job
cards than were actually spent by
the employee at work that day, or
week, the discrepancy should 1
1 be queried and corrected by the
production manager.
1 The shift foreman or Production 1
manager should be assigned the
responsibility of inspecting that
each stage of the production
process has been properly
completed, before the goods pass 1
to the next stage. This
authorization should be done

Transfer of manufactured goods to finished goods inventory:
No quality control inspection
takes place once the goods are
transferred to inventory as JG is
very confident that they have
proper controls in place to ensure
that their products will not have any
defects.
The raw materials and overhead
allocations on the completed job
card should be inspected by the
storeman to ensure all production
charges are correctly recorded.
The foreman should authorize, by
signature, the transfer of the
manufactured goods to inventory.
Available marks
Maximum marks
Presentation (1)
via a signature on the relevant
on the job card.
1 Once the production process is
complete, a quality control 1
inspection should be
performed to detect any
apparent defects before the
produced goods are transferred to
the finished goods store.
The raw materials, labour and
machine hours worked, as well as
overhead allocations on the
1 completed job card should be
inspected by the production 1
manager to ensure all production
charges are correctly recorded.
1 The factory or production 1
manager should authorize, by
signature, the transfer of the
manufactured goods to inventory.
13 Available marks 17
7 Maximum marks 7
QUESTION 3 (10 MARKS)

You are the internal auditor of Cake-Tique (Pty) Ltd (hereafter CT) a well-known upper-
class bakery in Sandton. The owners of CT have decided to open a new branch at the
V&A Waterfront in Cape Town. They would like to open their doors to the public on the
1st of July 2012 (in two weeks’ time), but before doing so they will have to buy all the
necessary assets for the baking business. The owners have taken out personal loans
from BASA Bank to the value of R1 000 000 each and will use these funds to finance the
new assets.

THE BAKING (PRODUCTION) PROCESS

Once all of the assets had been bought, the bakery was ready to start with the baking of
the cakes and pastries. For the production of these items, the following controls were
implemented to ensure that proper transfer of items would take place during the
production phase:

• Issue notes are made out for consumables such as flour, eggs, water, milk and
other ingredients used in the production process:
o Issuing of issue note occurs only after receipt of a requisition
authorised by the production foreman/manager;
o Issue notes are numerically numbered and missing numbers are
followed up by the manager;
o Issue notes are signed by the store man upon issue of the goods;
o Issue notes are signed by production foreman as proof of receipt of the
goods.
• No changes are allowed to be made on the issuing notes.
• In respect of sales to clients, no cakes or pastries may leave the storeroom without
a delivery note.
• Continuous inventory records are:
o Maintained by personnel independent from the safeguarding function
of inventory;
o Written up from the GRN and matching delivery notes/or issue notes to
production (frequently integrates with purchases and sales in a
computerised system).
• Regular inventory counts are performed and comparisons are made with the
inventory records:
o Differences are followed up by an appropriate staff member;
o Inventory records are adjusted after proper management authorisation
(inventory adjustments).
• Obsolete/slow-moving cakes and pastries are identified timeously and
systematically written off according to company policy.

YOU ARE REQUIRED TO:

1. For each of the controls implemented in the production process, provide the test of
control that can be carried out by the auditor to test whether the control is working as
designed. (10)
QUESTION 3 (SUGGESTED SOLUTION)

Internal Control Test of control Mark

Issue notes are made out Enquire of the store man, 1
for issuing raw material to production manager and sales
production: personnel about issuing
• Issuing of issue note procedures.
occurs only after receipt Inspect issue notes for:
of a requisition NO MARKS. • numerical sequence;
authorised by the (Only for • signatures as proof of 1
production completeness functions performed
foreman/manager; purposes) (Signature of the
• Issue notes are storeman and the 1
numerically accounted production foreman)
for and missing numbers Enquire about the procedures 1
are followed up; followed to follow up any
• Issue notes are signed missing numbers of issue
by the store man; notes. 1
• Issue notes are signed Inspect issue notes and confirm
by production foreman whether they have been issued
as proof of receipt of after receipt of a requisition. 1
goods.

No changes are allowed on Inspect issue notes for any 1

the issuing notes. changes therein For those that
do have changes, enquire of
management reasons for
changes. 1
In respect of sales to clients, Enquire of management the 1
no cakes or pastries may policy on goods leaving the
leave the storeroom without storeroom.
a delivery note. Observe the procedures 1
followed i.r.o. the issue of
inventory and gate control.
Select cakes or pastries sold to
clients and confirm whether
they have a valid delivery note. 1
Continuous inventory Enquire of personnel who is 1
records are: responsible for maintenance of
• Maintained by inventory records
personnel independent Observe the procedures
from the safeguarding performed i.r.o. the maintaining 1
function of inventory; of the inventory records.
• Written up from the Select a sample of GRN and
matching GRN and delivery notes and follow them
delivery notes/or issue through to the inventory
notes to production records. Agree the following: 1
(frequently integrates • details; 1
with purchases and • quantity;
sales in a computerised • amounts;
system) • description/type 1
• re-perform the 1
mathematical accuracy
of all documentation. 1
 Select a sample of receipts and 1
issues from the inventory
records and follow them
through to the GRN and issuing 1
documents.
Any discrepancies noted
should be followed up with
management. 1

1
Regular inventory counts Attend an inventory count and: 1
and comparison with • observe the how the
inventory records: count is performed; 1
• Follow up of • perform test counts and
differences; compare it with client's
• Adjustment of counts; 1
inventory records after • any discrepancies
proper management between your count and
authorization (inventory managements count
adjustments) needs to be followed 1
up.
• Enquire of management
how regularly stock
counts are performed
since these are 1
perishable items.
• Inspect all inventory
adjustments for
authorization. 1

Obsolete/slow-moving Enquire of management the 1

cakes and pastries are policies for identifying obsolete
identified timeously and cakes and pastries, since these
systematically written off items are perishables.
according to company Using the policy provided by
policy. management, observe the 1
inventory for obsolescence and
damage.
Inspect and re-perform
management’s calculation of
the write-off to inventory.
Confirm that this calculation is 1
performed in accordance with
the company policy.
1
Available Marks 29
Maximum Marks 10
QUESTION 4 (11 MARKS)

Your best friend, Lindiwe Maseko, approached you for some advice. She recently made
a big investment when she decided to purchase a newly developed building in a well-
established neighbourhood, which is close to the University of Johannesburg. This
building will be transformed into a modern restaurant and bar. She hopes that this will be
a great investment, because she reckons that the university will always have students,
and students always want a place to socialise and take a break from their studies.

Lindiwe provided you with the following information on her new endeavor. She
specifically wants your advice on the investment she is making, her idea to produce her
own beer, and the computer system she is planning on installing. Below you will find all
the information you need.

Beer making process:

Lindiwe decided to brew her own unique beer that will be sold at Lindiwe’s Jazz, to add
to the authenticity of the restaurant and bar. The beer sales will be seen as a separate
revenue stream, and an opportunity for more income. She has a separate section in the
building that she has allocated to the brewing process. She has appointed staff in this
division to ensure the brewing process runs smoothly. Below is the brewing process that
will be followed:

1. A pre-numbered raw materials issues slip (RMI) is issued to request for the issue of
raw materials required for the brewing of beer.
2. The RMI is prepared by the production manager who signs as proof of authorisation.
3. All such issues of raw materials to production are captured on a customer job card
(CJC).
4. At the end of the day the raw materials issued to production are listed on the daily
production report and a copy is sent to the raw materials stores staff in order to
compare it with the raw material inventory master file records for that day.
5. The time spent by the brewing staff on each stage of brewing, or on machine time, is
captured onto the CJC by simply writing the time on the card, or by the employee
using the card to ‘clock in and out’.
6. At the end of each day, the total time recorded on job cards is reconciled to the total
hours worked by brewing staff. Any differences are accounted for.
7. If more hours are recorded on the job cards than were actually spent by the employees
at work that day, or week, the discrepancy is queried and corrected by the production
manager.
8. The production manager is assigned the responsibility of inspecting that each stage of
the brewing process has been properly completed, before the beer passes on to the
next stage. This authorisation is done via a signature on the relevant on the job card.
9. Once the brewing process is complete, a quality control inspection should be
performed, this is done before the beer is transferred to the finished goods store. A
beer tasting test is part of the quality test.
10. The raw materials, labour and machine hours worked, as well as overhead allocations
on the completed job card should be inspected by the production manager to ensure
all production charges are correctly recorded. Any differences or variances from
standard costs, and any unexpected items such as labour overruns, is authorised by
the production manager, before the beer is physically transferred to and accepted by
the finished goods inventory stores staff.
11. The factory manager authorises, by signature on the completed job card, the transfer
of the packed and wrapped beer crates to inventory.
12. Acceptance of the goods into finished inventory should be acknowledged by signing
the completed production report by the finished goods inventory stores staff.
Explain the test of controls that can be performed to ensure that the internal controls that
Lindiwe has implemented regarding the beer making process are functioning as
designed. (10)

Your answer should be in table format as indicated below:

E.g. 1. (Only write the number Test of controls

as per the scenario)
QUESTION 4 (SUGGESTED SOLUTION)

Number Test of control Marks

per
scenario
1 Enquire from the store man, production manager and sales 1
personnel about issuing procedures.
Select a sample of RMI’s and inspect that the RMI’s are numerically 1
numbered.
2 Select a sample of RMI’s and inspect that the RMI’s are signed by 1
the production manager as proof of receipt of goods.
3 Select a sample of CJC and inspect that the raw materials that are 1
issued to production is captured on the CJC.
4 Enquire from the raw materials stores staff if they receive a copy of 1
the daily production report to compare to the raw material inventory
master file.
Select a sample of daily production reports and inspect that all the 1
raw materials are listed on the report.
5 Observe that the time is written on the CJC in the brewing process. 1
Select a sample of CJC’s and inspect that the time spent on each
stage of production is captured on the CJC. 1
6 Select a sample of reconciliations and inspect that the time on the 1
job card corresponds to the hours worked.
Inspect that any differences are signed as proof of review/following 1
up.
7 Enquire from management what the process is should there be 1
discrepancies in the hours/time captured.
Inspect any discrepancies for a signature as proof that it was
reviewed and corrected by the production manager. 1
8 Observe that the production manager inspects each stage of the 1
brewing process.
Select a sample of CJC and inspect that the manager signed the
CJC as proof of authorisation for the beer to move to the next stage 1
in production.
9 Observe that a qualify controls inspection is performed before the 1
goods move to the next stage.
10 Select a sample of completed job cards and inspect that the 1
manager signed the job card as proof of review, and authorisation in
the case of any unexpected items. 1
11 Select sample of completed job cards and inspect that the factory 1
manager signed as proof that the goods could be transferred to
finished goods and that all was in order regarding the capturing of
the time.
12 Select a sample of the completed production reports and inspect that 1
the finished goods inventory stores staff signed as proof of receipt of
finished crates of beer.
Available marks 19
Maximum marks 10
Presentation 1
QUESTION 5 (20 MARKS)

Dewland Meat Productions (Pty) Ltd (hereafter DMP) is situated in Devland, Soweto.
DMP is a local butchery and produces different cuts of meat for several local spaza
shops within Soweto, they also package the meat exactly according to the specifications
of the client. DMP was recently in the news because of allegations made with regards to
their use of meat that had reached its expiry date. They simply relabel the meat
packages with a new expiry date, and then sell it again to their clients.

You have been selected as one of the internal auditors to inspect and observe the
production process of DMP. The head butcher provided you with the following
production system description.

To: UJ Student Internal Auditor

From: Johannes Mahlangu, Dewland Meat Productions (Pty) Ltd, head butcher
Subject: Production process
Upon receiving an order from one of the clients, Sarah Smith (the tea lady/receptionist) will
write the order in her diary. Thereafter, she will determine what pieces of meat is required
for the order and write it on a separate piece of paper. She will then collect the packaging
raw materials needed from the storeroom, and then hand the packaging and the piece of
paper over to Johannes, who is the head butcher in charge of the production process.

Johannes will then collect the meat from the cold room to start with the preparation of the
meat, as well as the cutting of the meat.

Once Johannes has cut the meat for the order, he will then send the different cuts to the
next stage in the production process, where the meat will be packaged. They make use of
vacuum packaging as it ensures that the meat stays fresher for longer.

Once everything is vacuum packed, Johannes will estimate the weight/kilograms of the
meat and determines the prices in this manner. Hours spent on processing, cutting,
preparing and packaging of meat does not influence the price Johannes charges. No
inspection is done on the quality of the meat, as Johannes says he is part of the process,
and he has never made a mistake in 30 years.

Once the order is complete, it is sent to the final goods cold room where the meat is then
frozen to ensure it stays fresh until the day of the delivery.

While you were busy with your investigation, you were contacted by a journalist from The
Eleventh Hour, an investigative journalism television show. The journalist mentioned to
you that a staff member of DMP, who wants to remain anonymous, informed the
television show that the revenue and receipt process was ineffective. You decided that it
would be a good idea to also inspect and observe the revenue and receipts process and
requested that the financial manager provide you with the system description. The
financial manager provided you with the following system description regarding the
revenue process.

You are required to:

Identify the weaknesses from the production process and provide internal controls that
should be implemented to ensure that these weaknesses are mitigated. (20)

Your answer should be in table format as indicated below:

Weakness Internal Control

QUESTION 5
Weakness
Sarah receives the order and
writes the information in her diary.
Sarah writes the pieces of meat
that is needed on a piece of
paper, thus there is no raw
material issue slip for the order
received, and the RM that need to
be issued to production.
No issues of meat or packaging is
accounted for on a Customer Job
Card (CJC).
There is no mention of a daily
production report being used or
sent to the raw materials
department.
Johannes does not sign any
documentation that he has
removed meat from the cold
room.
There is also no supervision and
review of movement of inventory
raw material as Johannes
performs this function on his own.
The meat cuts are not inspected
by anyone before they move to
the next stage of production,
which is the packaging.
During the production process the
amount of meat, packaging, hours
spent on the order (of cutting
meat etc.) is not captured on any
documentation such as the CJC.
The cost of the order cannot be
correctly calculated by estimating
the weight of the meat. Proper
controls are missing in this
instance.
(SUGGESTED SOLUTION)
Marks Internal Control Marks
1 The pre-numbered raw materials 1
issues slip (RMI) is a request for 1
1 the issue of raw materials required
for a particular production run.
1
1 All such issues to production must 1
be accounted for as allocated to
the particular work in progress
customer job card (CJC).
1 All raw materials issued to 1
production should be listed on the
daily production report and a
copy sent to the raw materials 1
stores staff to compare with the
raw material inventory master file
records for that day.
1 Johannes should sign a raw 1
materials issue slip before
removing meat from the cold room
There must be supervision and
review for the movement of any
inventory or raw materials.
1 The manager/foreman should be 1
assigned the responsibility of
inspecting that each stage of the
production process/meat cutting,
and packaging has been properly
completed, before the meat is
passed to the next stage.
This authorisation should be
done via a signature on the 1
relevant on the job card.
1 The raw materials (packaging), 1
labour and machine hours worked,
as well as overhead allocations on
the completed job card should be
inspected by the production
manager to ensure all production 1
charges are correctly recorded.
1
These should then be compared 1
to the details reflected on the
completed production report.
Any differences or variances
from standard costs, and any 1

When the order moves to the final
stage, to be placed in the cold
room, there is no inspection that
is done.
There is no one that signs that
they received the order (correct
quantity and good quality) in the
finished goods section.
Available marks
Maximum marks
unexpected items such as labour
overruns, should be duly
authorised by the production 1
manager, before the goods are
physically transferred to and
accepted by the finished goods
inventory stores staff.
1 Once the production process is
complete, a quality control 1
inspection should be performed to
detect any apparent defects before
the produced goods are
transferred to the finished goods
store.
1 The factory or production manager
should authorise, by signature, 1
the transfer of the manufactured 1
goods to inventory.
Acceptance of the order/meat into 1
finished inventory should be
acknowledged by signing the
completed production report by
the finished goods inventory stores
staff.
12 Available marks 18
8 Maximum marks 12
QUESTION 6 (17 MARKS)

Cover Your Tab (Pty) Ltd (hereafter CYT) is a company that manufactures and produces
covers for tablets and cell phones. They sell only to large wholesale stores in South
Africa.

Their internal auditors indicated to the financial director (Ms Lesley Ledwaba) that they
have weaknesses in their production and inventory cycle, and it is having a negative
financial impact on CYT as they are not calculating their cost correctly. The internal
auditors said this was due to internal controls that are not being implemented and
adhered to. The internal auditors provided the following system descriptions to Ms
Ledwaba.

• Inventory is produced based on how the factory foreman feels on the specific
day. If he thinks a certain cover is low in stock, then he will order the factory staff
to manufacture that cover.
• Raw materials needed for the specific order is then issued to production on a
purchase order.
• As the goods move through production, factory employees have to write down
their raw materials and hours spent in their diaries. The factory foreman will then
collect all the hours from the employees at the end of each week.
• Every employee is responsible for inspecting the goods for quality and sending it
to the next phase in production.
• Once the tablet covers are finished, the covers will be sent to finished goods. No
quality control is needed as it was done by employees throughout the production
process.
• The finished goods will be stored in the storeroom with all the other finished
goods. Every week die factory foreman will inform the accounting department of
the cost of the inventory. No other accuracy tests are performed by the
accounting department.
• Once the goods are dispatched to the customer, a goods sent note is issued to
the customer.
• Inventory counts are performed once a quarter to prevent stock outs and
obsolete stock.

You are required to:

a) Identify the weaknesses in the production and inventory cycle of CYT, and for
each weakness, provide an internal control that CYT should implement. (17)

Your answer for a) should be in table format as follows:

Weakness Internal Control

QUESTION 6 (SUGGESTED SOLUTION)

Weakness Marks Recommendations Marks

Inventory is produced based on 1 Inventory production should be
how the factory foreman feels, and based on trends/ Re-order 2
not on low inventory levels or levels / Out of stock.
orders.
A purchase order is issued for the 1 A pre-numbered raw material 1
production of inventory. issue slip is issued by the
production department or factory
manager (manual/electronic) for
the issue of raw materials to
production.
Raw materials and hours are 1 • For raw materials it should 1
written in the employee’s diaries. be aaccounted for on
Customer Job Card
/Inventory Job Card; 1
• It should be accounted for on
daily production report, and
• Copy should be sent to Raw 1
material store to compare
with raw material master file.
• Machine/Man Time on each 1
process should be recorded
on Customer Job
Card/Inventory Job Card
The foreman captures the hours 1 Time recorded at end of day 1
worked once per week. should be reconciled to the total
hours worked by production staff
(all hours recorded versus hours
on clock cards);
Production manager to follow-up 1
discrepancies.
Employees inspect goods for 1 The shift foreman should 1
quality as they move from one authorise goods before moving
stage to the next in the production to next stage.
process.
No quality inspection is done when 1 Quality control inspection of all 1
goods move to the finished goods goods should be done before
(FG) department. they move to the FG department.
There is no mention that the FG 1 Receipt should be acknowledged 1
department signs to acknowledge by the finished goods
receipt of goods. department on the Goods
Transferred Note (GTN),
There is no mention of a goods 1 (Signature).
transfer note (GTN) There should be a goods 1
transfer note (GTN) for transfer
to final goods
No accuracy tests are performed 1 The accounting/costing
on the hours and costs submitted department should monitor
to the accounting department. accurate recording of:
• Direct material/ 1
consumables; 1
• Direct payroll; 1
 • Overhead allocation; 1
• Transfer of cost between
production stages; 1
• Transfer of final cost to
finished goods inventory.
A goods sent note is issued for 1 A delivery note should be issued 1
goods delivered to a client. when goods are dispatched.
Inventory counts are done one in 3 1 Inventory should be managed
months. and counted on a regular basis
to ensure that you prevent stock 1
outs, identify possible theft, and 1
monitor deliveries. 1
Available marks 11 Available marks 21
Maximum marks 6 Maximum marks 11
QUESTION 7 (15 MARKS)

African Pizazz (Pty) Ltd is a company that designs, manufactures and sells traditional
African wear with a modern twist for all occasions. African Pizazz was founded by a
group of friends namely Lira, Bongi and Sweetness who enjoyed designing and making
their own traditional wear. They received a lot of compliments from the public when they
wore their own designs, and then decided to open a boutique where they could sell their
creations to the public.

African Pizazz has grown in the recent months and Lira, Bongi and Sweetness decided it
was time to implement proper internal controls within African Pizazz. Lira, Bongi and
Sweetness came to you for advice with regards these internal controls. Below you will
find all the information you need to assist them in implementing a system of internal
controls.

Production process of traditional African wear:

As production is one of the main contributors to the business, they implemented internal
controls around their production process. They are certain that these controls are
sufficient and effective and suggest that you test these controls to confirm that they are
working as designed.

*When referring to the production process of clothing we are referring to the cutting,
sewing, adding of accessories, washing, ironing of the clothing that is manufactured.

1. A pre-numbered raw materials issues slip (RMI) is issued to request for the issue
of raw materials (material, needles, thread, patterns, accessories etc.) required for
the production process.
2. The RMI is prepared by the production manager who signs as proof of
authorisation.
3. All such issues of raw materials to production are captured on a customer job card
(CJC).
4. At the end of the day the raw materials issued to production are listed on the daily
production report and a copy is sent to the raw materials stores staff in order to
compare it with the raw material inventory master file records for that day.
5. The time spent by the design and manufacturing team on each stage of production
or on machine time, is captured onto the CJC by simply writing the time on the
card, or by the employee using the card to ‘clock in and out’.
6. At the end of each day, the total time recorded on job cards is reconciled to the
total hours worked by the staff. Any differences are accounted for.
7. If more hours are recorded on the job cards than were actually spent by the
employees at work that day, or week, the discrepancy is queried and corrected by
the production manager.
8. The production manager is assigned the responsibility of inspecting that each
stage of the production process has been properly completed, before the clothing
passes on to the next stage. This authorisation is done via a signature on the
relevant job card.
9. Once the production process is complete, a quality control inspection should be
performed, this is done before the clothing is transferred to the finished goods
store. A quality control test and clothing fittings are part of this process.
10. The raw materials, labour and machine hours worked, as well as overhead
allocations on the completed job card should be inspected by the production
manager to ensure all production charges are correctly recorded. Any differences
or variances from standard costs, and any unexpected items such as labour
overruns, is authorised by the production manager, before the clothing is physically
transferred to and accepted by the finished goods inventory stores staff.
 11. The factory manager authorises, by signature on the completed job card, the
transfer of the completed clothing to inventory.
12. Acceptance of the goods into finished inventory should be acknowledged by
signing the completed production report by the finished goods inventory stores
staff.

You are required to:

Explain the test of controls that can be performed to ensure that the internal controls that
African Pizazz has implemented regarding the production of clothing are functioning as
designed. (14)

Your answer for b) should be in table format as indicated below:

E.g. 1. (Only write the number as Test of controls

per the scenario)
Presentation mark (Terminology) (1)
QUESTION 7 (SUGGESTED SOLUTION)

Number Test of control Marks

per
scenario
1 Enquire from the store man, production manager and sales 1
personnel about issuing procedures.
Select a sample of RMI’s and inspect that the RMI’s are numerically 1
numbered.
2 Select a sample of RMI’s and inspect that the RMI’s are signed by 1
the production manager as proof of receipt of goods.
3 Select a sample of CJC and inspect that the raw materials that are 1
issued to production is captured on the CJC.
4 Enquire from the raw materials stores staff if they receive a copy of 1
the daily production report to compare to the raw material inventory
master file.
Select a sample of daily production reports, and inspect that all the 1
raw materials are listed on the report.
5 Observe that the time is written on the CJC in the production 1
process.
Select a sample of CJC’s and inspect that the time spent on each 1
stage of production is captured on the CJC.
6 Select a sample of reconciliations and inspect that the time on the 1
job card corresponds to the hours worked.
Inspect that any differences are signed as proof of review/following 1
up.
7 Enquire from management what the process is should there be 1
discrepancies in the hours/time captured.
Inspect any discrepancies for a signature as proof that it was
reviewed and corrected by the production manager. 1
8 Observe that the production manager inspects each stage of the 1
production of clothing process.
Select a sample of CJC and inspect that the manager signed the
CJC as proof of authorisation for the clothing to move to the next 1
stage in production.
9 Observe that a qualify controls inspection (e.g. fittings) is performed 1
before the goods move to the next stage.
10 Select a sample of completed job cards and inspect that the 1
manager signed the job card as proof of review, and authorisation in
the case of any unexpected items. 1
11 Select sample of completed job cards and inspect that the factory 1
manager signed as proof that the clothing could be transferred to
finished goods and that all was in order regarding the capturing of
the time.
12 Select a sample of the completed production reports and inspect that 1
the finished goods inventory stores staff signed as proof of receipt of
complete clothing.
Available marks 19
Maximum marks 14
Presentation 1
QUESTION 8 (21 MARKS)

Bhukuda (Pty) Ltd (hereafter Bhukuda) is a professional swimming school for registered
swimmers, situated in Kliptown. The swimming school was founded in 2002 by Jill
Brukman, a South African Olympic swimmer. Jill decided to start Bhukuda swimming
school to ensure that amazing swimmers from rural areas are identified and provided
with the necessary swimming opportunities to develop into strong competitive swimmers.

Even though Bhukuda is a swimming school, this organisation is large, and constantly
growing. They manufacture their own swimming costumes, caps and goggles, and
profits from these are used to sponsor students who cannot afford the monthly fee. They
also organise swimming galas once a month, where swimming schools compete against
each other. They have a canteen that sells food, drinks, sweets and swimming kits
(these include a swimming costume, goggle and cap) during these galas.

One of your school friends, Sipho Lengana, who is a registered swimming coach at
Bhukuda, approached you to assist the organisation with its internal control environment,
as you are a recent UJ graduate. Sipho explained that the organisation is growing at a
rapid pace, and that they need to improve their internal control environment. Sipho
asked the accountant (Mercy Mahlanga) to send you a direct email explaining the
current control environment. This email can be seen below:

To: UJ Graduate
From: Mercy Mahlanga (mercym@bhukuda.co.za)
Subject: Internal control environment Bhukuda (Pty) Ltd
Dear UJ Graduate

Thank you so much for your willingness to assist us with the improvement of our internal
control environment. I would like to discuss the following matter with you in this email:
1. The production of our own swimwear range;
1. Production process:

The production process consists of the manufacturing of swimming caps, swimming

goggles and swimming costumes for both boys and girls. The manufacturing is done on
the premises, in the production factory.

Bhukuda takes orders from clients on the day of a gala event, or during the month from
parents who order swimming goods for their children. As soon as they receive an order,
they follow a formal production planning and design process. For the production of the
orders, the following process is followed:

The manufacturing:

A pre-numbered order is requested for the issue of raw materials for a particular
production run. The pre-numbered order is prepared by the foreman of the raw materials
storeroom. All issues of raw materials are accounted for on the production summary sheet
and are also listed on the completed production report on a daily basis. A copy of the
completed production report is sent to the accounting department every day.

Movement of components through the production process:

The time that is spent on each stage of production, by production employees and in
machine time, is captured by the storeman on a loose piece of paper. He then ensures
that he sends the piece of paper to the accounting department in order for them to capture
the time spent on each stage of the production.

At the end of each month, the total time recorded on the production summary sheet, is
reconciled to the total hours worked by production staff. Any differences are sorted out
during month end.

No swimming gear is inspected for quality before they pass to the next stage, as Bhukuda
has perfect controls during the production process, thus resulting in no flaws in the
swimming gear that they manufacture.

Transfer of manufactured goods to finished goods inventory:

Once the production process is complete the swimming gear is transferred to the Swim
Gear Shop on the premises.

The raw materials, labour and machine hours worked, as well as overhead allocations on
the completed production report is inspected by the foreman to ensure all production
charges are correctly recorded. Any differences are authorised by the financial manager,
before the goods are physically transferred to and accepted by the Swim Gear Shop staff.

The storeman authorises, by signature, the transfer of the manufactured goods to

inventory.

Acceptance of the goods into finished inventory is acknowledged by the Swim Gear Shop
staff through the signing of the finished goods report.

You are required to:

a) With specific reference to “4. The production of the swimwear range” identify
the weaknesses in the production process, and for each weakness identified,
provide an internal control that Bhukuda should implement. Also provide the
control objective that they will achieve with the implementation of the internal
control. (20)

Your answer should be presented in table format as follows:

Weakness Internal Control Control Objective

Presentation mark (format) (1)

QUESTION 8 (SUGGESTED SOLUTION)

Weakness Marks Internal Controls Marks Objective Control Marks

A pre-numbered 1 The pre-numbered raw 1 Validity 1
order is requested for materials issues slip
the issue of raw (RMI) is a request for
materials for a the issue of raw
particular production materials required for a
run. particular production
run.
The pre-numbered 1 It should be prepared Completeness
order is prepared by 1 either by the
the foreman of the production planning 1 1
raw materials department or, more
storeroom. No likely, the production
segregation of department or factory
duties manager.
All issues of raw All such issues to Completeness
materials are ONLY 1 production must be
accounted for on the accounted for as
production summary allocated to the 1 1
sheet. particular work in
progress customer job
card (CJC) or
inventory job card
(IJC)
ONLY completed 1 All raw materials issued Completeness
production is to production should be
reported on a daily listed on the daily 1 1
basis. production report.
A copy of the 1 A copy should be sent 1 Completeness 1
competed production to the raw materials
report is sent ONLY to stores staff to compare
the accounting with the raw material
department every inventory master file
day. records for that day.
The time is captured 1 Time spent on each 1 Completeness 1
by the store man on a stage of production, by
loose piece of paper. production employees
or in machine time,
should be captured onto
the relevant job card
(CJC or IJC) by simply
writing the time on the
card, or by the
employee using the
card to ‘clock in and
out’. 1 Authorisation 1

The foreman should

authorise the time
captured on the relevant
job card.
ONLY at the end of At the end of each day, 1 Recording 1
each month, the total 1 the total time recorded
time recorded on the on job cards should be
production summary reconciled to the total
sheet, is reconciled to 1 hours worked by 1
the total hours worked production staff. Any
by production staff. differences should be
Any differences are accounted for
sorted out at month immediately.
end ONLY.
No swim gear is 1 The shift foreman or 1 Authorisation 1
inspected for quality production manager
before they pass to should be assigned
the next stage the responsibility of
inspecting that each
stage of the
production process
has been properly
completed, before the
goods pass to the next
stage. This
authorisation should 1
be done via a
signature on the
relevant on the job card.
The raw materials, The raw materials, Recording 1
labour and machine labour and machine
hours worked, as well hours worked, as well
as overhead as overhead allocations
allocations on the 1 on the completed job 1
completed production card should be
report is ONLY inspected by the
inspected by the production manager
foreman to ensure all to ensure all production
production charges charges are correctly
are correctly recorded. recorded.
Any differences are Any differences or Authorisation 1
authorised by the 1 variances from standard
financial manager costs, and any
ONLY, before the unexpected items such
goods are physically 1 as labour overruns, 1
transferred to and should be duly
accepted by the authorised by the
finished goods production manager,
inventory stores staff. before the goods are
There is no signing physically transferred to
of documentation as and accepted by the 1
proof of receipt or to finished goods inventory
the finished goods stores staff.
department. All documentation
authorised should be
signed by the relevant
individual as evidence
of review and
authorisation.
Store man 1 The factory or 1 Authorisation 1
authorises, by production manager
signature, the transfer should authorise, by
of the manufactured signature, the transfer
goods to of the manufactured
inventory/Swim Gear goods to inventory/swim
Shop. gear shop.
Acceptance of the Acceptance of the Completeness 1
goods into finished goods into finished
inventory/swim gear 1 inventory/swim gear
shop is acknowledged shop should be
by the inventory acknowledged by 1
store staff through signing the completed
the signing of the production report by
finished goods report. the finished goods
There is no completed inventory stores staff.
production report that
is signed by the staff.
Available marks 15 Available marks 16 Available marks 13
Maximum marks 7 Maximum marks 8 Maximum marks 5
Presentation mark (Table) 1
QUESTION 9 (30 MARKS)

You are employed by Tsotetsi & Associates Inc, as a manager. You have responsibilities
in inter alia governance, risk and compliance, assurance for audit and non-audit
purposes, and technology risk services. Your company, Tsotetsi & Associates Inc, has
recently added Ilanga Matrix to your growing clientele base. Ilanga Matrix is a leading
South African based e-commerce company with a head office in Johannesburg CBD. As
the biggest African-based online shop, Ilanga Matrix has contributed significantly to the
growth of online shopping not only in South Africa, but also, on the African continent.
The company offers a market place for third parties to advertise and sell their products. It
is also credited for the growing influence of customer participation in the Black-Friday
shopping holiday where many stores offer highly promoted discounts. Ilanga Matrix
credits its growth to its customer-centric values where they believe in the motto; “the
customer is always right”.

You were recently contacted by Ilanga Matrix to provide services relating to governance,
risk, assurance and technology. Before your first meeting with the management from
Ilanga Matrix, the below system descriptions regarding online payment, asset investment
and disposal policy, human resources practices, inventory production, purchases and
payments, revenue and receipts and information technology policy regarding the control
environment and applications were sent to you.

Inventory Production
Ilanga Matrix recently decided to increase their revenue by manufacturing and selling
their own products on their market place. After several meetings, their marketing team
decided on manufacturing and selling printers and scanners. Their reasoning behind this
product was that many/most people are now working from home, and many scholars and
students are also working from home. Therefore, there is a large demand for a cost
effective, all in one printing and scanning machine.

Their design team was able to design a printer/scanner machine that will cost their
clients only R899,00. This is an all in one product, and also includes the first ink
cartridge.

The manufacturing of this machine takes place as follows:

• The pre-numbered order document is a requested for the issue of raw materials
required for a particular production run. This document is prepared by the raw
materials department.
• All issues of the raw materials are captured on the customer invoice.
• The time spent on each stage of production, is not captured during the
manufacturing process, as the employees’ clock in and out, and their clock cards
are used for the purposes of capturing time spent.
• If there are differences between the hours captured by the employees, and those
captured by the foreman, the foreman will write off any differences.
• The printing machines are inspected at the end of the production process to
ensure there are not scratches on the machines. The inspection is done by random
employees.
• The goods are then sent to the storeroom where they are ready to be delivered. No
further inspections are done as the paperwork is complete at this stage, and they
don’t want to create unnecessary administration for the storeroom staff.
You are required to:
a) With reference to the production and inventory control environment, describe
the weaknesses, and for each weakness describe the internal controls that
Ilanga Matrix can implement to improve their control environment. (15)

Your answer should be presented in the following table format:

Weakness Internal control

b) With reference to the production and inventory control environment, describe

the internal control that Ilanga Matrix can implement to improve their control
environment, and for each internal control, state which control objective will be
achieved through that specific internal control. (15)

Your answer should be presented in the following table format:

Internal control Control Objective

QUESTION 9
a)
Weakness
The pre-numbered order
document is a requested for the
issue of raw materials. Thus, there
is no raw material issue slip (RMI).
This document is prepared by the
raw materials department, which is
the incorrect department.
All issues of the raw materials are
captured on the customer invoice.
Thus, there is no customer job
card (CJC) or inventory job card
(IJC)
There is no daily production report
where any of the allocated costs
are captured (such as raw
materials, labour and machine
hours).
The time spent on each stage of
production, is not captured during
the manufacturing process.
There is no reconciliation between
the hours captured on the clock in
machines, and the relevant job
cards.
If there are differences between
the hours captured by the
employees, and those captured by
the foreman, the foreman will
write off any differences.
These differences cannot be
ignored and written off.
There is no inspection by the shift
foreman or production manager
between the different stages of
production.
There is no authorisation that the
goods may move to the next stage
in production.
The printing machines are
inspected at the end of the
production process to ensure there
(SUGGESTED SOLUTION)
Marks Internal control Marks
The pre-numbered raw materials 1
issues slip (RMI) should be
1 requested for the issue of raw
materials.
The RMI should be prepared either
1 by the production planning 1
department or, more likely, the
production department or factory
manager.
1 All such issues to production must 1
be accounted for as allocated to
the particular work in progress
customer job card (CJC) or
inventory job card (IJC).
1 All raw materials issued to 1
production should be listed on the
daily production report.
1 Time spent on each stage of 1
production, by production
employees or in machine time,
should be captured onto the
relevant job card.
1 At the end of each day, the total 1
time recorded on job cards should
be reconciled to the total hours
worked by production staff.
1 Any differences should be 1
accounted for.
Any discrepancies should be 1
queried and corrected by the
production manager.
1 The shift foreman or production 1
manager should be assigned the
responsibility of inspecting that
each stage of the production
process has been properly
completed, before the goods pass
to the next stage.
1
This authorisation should be done 1
via a signature on the relevant on
the job card.
The inspection should be done by 1
a foreman or production manager.
are not scratches on the
machines. The inspection is done
by random employees.
A completed job card is not used
to capture all the costs incurred in
the production process.
For this reason, the completed job
card cannot be inspected by the
production manager.
As there is no completed job card,
there is no confirmation that the
incorrect costs may have been
captured.
There is no one who authorises
the transfer of the goods to
finished goods.
The goods are then sent to the
storeroom where they are ready to
be delivered. No one
acknowledges that they have
received the goods.
Available marks
Maximum marks
1
1 The raw materials, labour and 1
machine hours worked, as well as
overhead allocations on the
completed job card should be
inspected by the production
manager to ensure all production
charges are correctly recorded.
1 Any differences or variances from 1
standard costs, and any
unexpected items such as labour
overruns, should be duly
authorized by the production
manager, before the goods are
physically transferred to and
accepted by the finished goods
inventory stores staff.
1 The factory or production manager 1
should authorize, by signature, the
transfer of the manufactured goods
to inventory.
Acceptance of the goods into
finished inventory should be
1 acknowledged by signing the
completed production report by the
finished goods inventory stores 1
staff.
14 Available marks 15
7 Maximum marks 8

b)
Internal control Marks Control Marks
objectives
The pre-numbered raw materials issues slip (RMI) 1 Validity 1
should be requested for the issue of raw materials.

The RMI should be prepared either by the production

planning department or, more likely, the production 1
department or factory manager.
All such issues to production must be accounted for as 1 Completeness 1
allocated to the particular work in progress customer
job card (CJC) or inventory job card (IJC).
All raw materials issued to production should be listed 1 Completeness 1
on the daily production report.
Time spent on each stage of production, by production 1 Completeness 1
employees or in machine time, should be captured onto
the relevant job card.
At the end of each day, the total time recorded on job 1 Accuracy 1
cards should be reconciled to the total hours worked by
production staff.
Any differences should be accounted for. 1 Accuracy 1
Any discrepancies should be queried and corrected by
the production manager. 1
The shift foreman or production manager should be 1
assigned the responsibility of inspecting that each
stage of the production process has been properly Completeness 1
completed, before the goods pass to the next stage.

This authorisation should be done via a signature on 1 Authorisation 1

the relevant on the job card.
An inspection should be done by a foreman or 1 Completeness 1
production manager before the goods move to the
finished goods department.
The raw materials, labour and machine hours worked, 1 Accuracy 1
as well as overhead allocations on the completed job Recording
card should be inspected by the production manager to
ensure all production charges are correctly recorded.
Any differences or variances from standard costs, and 1 Authorisation 1
any unexpected items such as labour overruns, should
be duly authorised by the production manager, before
the goods are physically transferred to and accepted by
the finished goods inventory stores staff.
The factory or production manager should authorise, by 1 Authorisation 1
signature, the transfer of the manufactured goods to
inventory.
Acceptance of the goods into finished inventory should Authorisation 1
be acknowledged by signing the completed production 1
report by the finished goods inventory stores staff.
Available marks 15 Available 13
marks
Maximum marks 8 Maximum 7
marks
QUESTION 10 (20 MARKS)

After obtaining a BCom Accounting degree from the University of Johannesburg, you are
serving SAIPA articles with Lerumo-Kotze Inc. Lerumo-Kotze Inc. is an African firm that
delivers quality and continuously seeks opportunities to create a global footprint. The
firm was a result of a merger between Black-Owned accounting firms, Lerumo Mothapo
Advisory Services and Kotze Consulting Services. Lerumo Mothapo Advisory Services
was founded by Mokgaetsi Mothapo, the first black woman to qualify as a chartered
accountant in South Africa, whilst Kotze Consulting Services was founded in 1995 by
Maureen Kotze. The merger meant the firm was the biggest Black-Owned accounting
firm and the fifth largest overall in South Africa. They offer a full spectrum of governance,
risk management, auditing, and information technology services.

As a requirement of SAIPA, you will be required to rotate between the various services
offered by Lerumo-Kotze Inc. This is done to ensure that you experience and learn about
more than one role and assess your skills and interest in different roles. Your work will
be assessed throughout the year by the financial manager and he will provide you with a
rating during your performance appraisal. Lerumo-Kotze Inc. has many skilled
employees providing you with the opportunity to interact and learn from them. You are
hopeful that after serving your articles, you will become a critical thinker and an
innovative problem solver.

Your services will only be limited to South African Golden Brewers (Pty) Ltd. South
African Golden Brewers (Pty) Ltd was founded in 1895 as Imbizo Brewers to serve a
growing market of miners and prospectors in and around Johannesburg. Two years after
its formation, it became the first company of its kind to list on the Johannesburg Stock
Exchange (JSE). The company operates 7 breweries and 42 depots in South Africa with
an annual brewing capacity of 3.1 billion litres. Its portfolio of beer brands meets the
needs of a wide range of consumers and includes brands rich in heritage such as
Tembisa Gold, Alexander Pilsner and Carling Green Label. Information relating to your
first assignment is provided below.

Production and Inventory

As a result of the lockdown, and massive decline in sales, South African Golden Brewers
Board of Director’s made the executive decision to have regular inventory counts. The
reason for this decision was to manage the inventory levels, and to reduce the
manufacturing costs. The Board felt that due to the decline in sales, their production had
to slow down, in order to ensure that they minimise the risk of obsolete inventory.

The rise of illegal sales during lockdown has also sparked a concern with the Board, and
they suspect that some employees are steeling stock and selling it to family for extra
money.

The following inventory count process was decided upon by the Board.
1. Inventory counts are done on random days, and staff members are informed on
the morning of the count. This way, anyone stealing stock will be caught off guard
and will not be able to ‘prepare’ for the count.
2. On the day of the count, the staff is be given an iPad, and they will have to do
their count on the iPad. They can return the iPad to the storeroom manager the
following day.
3. The Board decided that they will continue receiving and making deliveries on
these days. They will simply allocate a designated spot to incoming and outgoing
stock.
4. The Board hopes that the stock is packed neatly in the storeroom but feels that
the storeroom manager should manage this on the day.
5. The staff is supervised during certain times of the day. If a delivery is received or
 made, the storeroom manager will have to be absent from the count in order to
sign the relevant documents for dispatch/receivables.
6. All of the iPads will have the same log in details, to ensure ease on the day of the
count. Thus, the count sheets will not have any specific details of the counters.

You are required to:

a) For the inventory count, identify and describe the weaknesses in the scenario
provided above, and for each weakness, provide an internal control that South
African Brewers can implement. (20)

Your answer should be presented in the following table format:

Weakness Internal Control

QUESTION 10
Weakness Marks Internal Control
Inventory days are 1 The date for the inventory count should
randomly done, and there
is no fixed date for the
inventory count.
Staff members did not 1 Explicit explanations and instructions in
receive any instructions
about the count.
The counters are given an
iPad on the day of the
count. No responsibility is
defined prior to the count.
There is no mention that
inventory is divided into
portions for each of the
counters to count.
There is no cut-off date for
the inventory count.
(SUGGESTED SOLUTION)
Marks
1
be fixed.
All employees concerned with the count 1
should be informed, well in advance, of
the date of the count, or dates, where 1
the count will occupy several days.
1
writing should be given to all staff
participating in the count.
The explanation and instructions should
cover the:
• overall inventory count plan; MAX
• preparation of inventory prior to the 3
count;
• method of counting;
• method of recording the counts;
• responsibility for issuing, collecting
and controlling records; and
• the addressee’s specific task.
All participants should be fully informed,
during the planning stages, of the 1
procedures to be adopted for the count
and each person’s part therein, thus
providing a framework for an efficient
and accurate inventory count.
1 Responsibility for the work should be
clearly defined and all staff involved in 1
the count informed to facilitate
cooperation.
1 This may be done by dividing the 1
building(s), or portions thereof, in which
inventories are stored, into clearly
defined areas and assigning each of
these to a particular person as
supervisor.
1 A cut-off point should be established, to 1
designate the exact point of time up to
which goods received are to be included
in inventory, and sales made treated as a
reduction thereof. After such point goods
received from suppliers and goods sold 1
are treated as having been received and
issued in the new financial year, the
relevant invoices from suppliers and to
customers being recorded in that year.
Care must be taken to ensure that a
correct cut-off will be obtained at the date 1
 of the count for purchases, sales and
interbranch transfers of goods and goods
in transit at the year end.
The counters are able to 1 It is imperative to maintain control over 1
take the iPads with all the the medium used to record the count,
count sheets and whatever the method of recording may
information home and be, to ensure accountability for all count
return it the following day. forms issued.
They will still be receiving 1 In law, goods remain the property of the 1
and making deliveries seller until delivery. In practice, however,
when the inventory count unopened packages from suppliers for
takes place. which invoices have not yet been
received may be omitted from inventory, 1
and inventory sold, set aside and
invoiced, may be treated as sales.
It is thus important that no stock is
received, or deliveries are made on the 1
day of the count.
The inventory is not 1 During the period leading up to the 1
prepared for the count prior count, the inventory should be prepared
to the count. This is only for the count.
done on the day. Care should be taken to identify and
separate slow-moving, obsolete and 1
damaged inventory.
Good housekeeping, such as neat
stacking, like items brought together, 1
aisles kept clear, and other means of
facilitating the count should be attended
to prior to the count.
The staff is not supervised 1 The actual counting and recording of the 1
for the duration of the inventory should be done under proper
count. supervision and the instructions issued
strictly followed.
The count sheets do not 1 All counters, recorders and checkers 1
contain the information of should sign or initial the count sheets (or
the counters. other record), identifying their functions.
The supervisor should scrutinize the
record for such signatures or initials and 1
add his or her own.
It seems like the counters 1 Count teams should consist of two 1
are alone in a team, and employees with one doing the count and
that there aren’t two people the other recording the count details.
in a count team.
The procedure to be followed – where
differences arise between the two
recorded quantities, regarding reporting 1
to the supervisor and adjusting the
records – should be laid down in
advance and strictly adhered to. This
should involve a further count to
establish the true quantity of inventory on
hand.
Available marks 11 Available marks 25
Maximum marks 7 Maximum marks 16