[Date]

AUE2602 Assignment
4A Semester 1 2024 -
DUE 9 May 2024
QUESTIONS AND ANSWERS
AUE2602 Assignment 4A Semester 1 2024 - DUE 9 May
2024

ShoeCraft (Pty) Ltd is a reputable shoe manufacturing company known for its
high-quality footwear. As an auditor conducting an inventory cycle audit, you
have been tasked with evaluating ShoeCraft's internal controls. During your
review, you note the following:
1. Mrs Nike is responsible for receiving completed goods at the companys
warehouse. She checks the slip received from the production section,
compares it with the number of boxes entering the warehouse and signs it. She
then updates the inventory records on the company’s accounting system,
Thyme-Accounting, by signing in with her unique password.
2. The warehouse has four entry points, therefore entering and exiting the
warehouse are quick processes.
3. Staff responsible for filling orders can manage their task quickly by
entering through sliding doors and selecting the boxes that they need from the
shelves.
4. These staff members then manually write down which stock they have
taken from the selves on a list kept in the warehouse.
5. This list is then totaled at the end of the week and the Thyme-Accounting
system is updated accordingly.
6. The Thyme-Accounting system is not updated in real timebecause staff has
not been trained to use the system, and prefer not to engage with the system
unless it is absolutely necessary.
7. When staff do need to access the system, they use Mrs Nike’s password to
gain access to and update the necessary records.
8. Inventory counts take place once a year, just before the year-end audit.
9. There are no established procedures for reconciling physical inventory
counts with the inventory records in the system.
10. The company lacks consistency in its inventory valuation methods. This is
due to a disagreement between two of its diretors, Miss Adidas and Mr Puma.
11. Staff in the production department complain about insufficient
documentation of raw material.
REQUIRED
a) Related only to point 1 in the scenario, identify and describe two control
activities that are in place relating to ShoeCraft’s inventory cycle. (3)
b) Identify the weaknesses in the controls over ShoeCraft's inventory and
production cycle. For each weakness, briefly describe a potential consequence
associated with the weakness (i.e. what could go wrong). (25)
Communication skills: logical flow of arguments. (1)
a) Control Activities related to Point 1
1. Signing received goods slip: Mrs. Nike compares the information on the slip
from production with the number of boxes received and signs the slip. This
provides a documentary record of the receiving process and helps ensure that the
quantities received match what was documented.
2. Updating inventory records: Mrs. Nike updates the inventory records in the
accounting system after verifying the received goods. This process helps to
maintain an accurate record of inventory levels in the system.
b) Weaknesses in ShoeCraft's Controls and Potential Consequences
1. Lack of Segregation of Duties (Points 1 & 7):
• Weakness: Mrs. Nike is responsible for receiving goods, updating inventory
records, and has sole access to the inventory control system. This lack of
segregation of duties creates a risk of errors or fraudulent activity going
undetected.
• Potential Consequence: Mrs. Nike could manipulate receiving documents
and inventory records to hide theft of inventory or raw materials.
2. Physical Security of Inventory (Point 2):
• Weakness: The warehouse has four entry points, making it easy for
unauthorized personnel to enter and exit.
• Potential Consequence: Inventory could be stolen without proper
monitoring or detection.
3. Inaccurate Inventory Records (Points 4, 5 & 6):
• Weakness: Warehouse staff update inventory records on a list manually at
the end of the week, and the accounting system is not updated in real-time.
This delay and manual process increase the risk of errors in recording
inventory movements.
• Potential Consequence: Inaccurate inventory records could lead to
stockouts, overstocking, and difficulty fulfilling customer orders.
Additionally, outdated inventory valuation due to lack of real-time updates
could affect the financial statements.
4. Weak Access Controls (Point 7):
• Weakness: All warehouse staff use Mrs. Nike's password to access the
inventory control system. This lack of individual passwords makes it
difficult to track who is updating the system and increases the risk of
unauthorized access.
• Potential Consequence: Inventory records could be manipulated by
unauthorized personnel, leading to inaccurate inventory balances and
potential theft.
5. Infrequent Inventory Counts (Point 8):
• Weakness: Inventory counts are only conducted annually. This infrequency
makes it difficult to detect inventory discrepancies throughout the year.
• Potential Consequence: Inventory shrinkage or theft could go unnoticed for
a long period, leading to financial losses.
6. Lack of Inventory Reconciliation (Point 9):
• Weakness: There are no established procedures for reconciling physical
inventory counts with the system records. This makes it impossible to verify
the accuracy of the inventory records.
• Potential Consequence: The financial statements may contain inaccurate
inventory valuations, impacting the company's financial health and
potentially misleading investors.
7. Inconsistent Inventory Valuation Methods (Point 10):
 • Weakness: The disagreement between directors regarding inventory
valuation methods creates inconsistency in how inventory is valued. This
inconsistency makes it difficult to compare financial statements over time
and assess the company's true financial performance.
• Potential Consequence: Inconsistent inventory valuation methods could
lead to misleading financial statements and make it difficult for investors
and creditors to make informed decisions about the company.
8. Insufficient Documentation of Raw Materials (Point 11):
• Weakness: Production staff complains about a lack of proper documentation
for raw materials. This could lead to difficulties in tracking raw material
usage and costing finished goods accurately.
• Potential Consequence: The company may not be able to accurately
account for the cost of raw materials, leading to inaccurate product costing
and potentially impacting profitability.
These are some of the key weaknesses in ShoeCraft's controls over their inventory
and production cycle. By addressing these weaknesses, ShoeCraft can improve the
accuracy and reliability of their inventory records and mitigate the risk of errors or
fraud.
For exam pack with questions and answers, quality notes, assignments and exam
help:
email: musyokah11@gmail.com
WhatsApp: +254792947610

c) Write an email to the financial director of ShoeCraft, Mrs Reebok, and

propose recommendations to strengthen internal controls in the inventory
cycle of ShoeCraft, related only to the weaknesses in the control system. (15)
Communication skills: clarity of expression. (1)
Subject: Recommendations to Strengthen Internal Controls - ShoeCraft
Inventory Cycle
Dear Mrs. Reebok,
This email follows up on my recent audit of ShoeCraft's inventory cycle. While I
identified some strong control activities, there are also areas for improvement.
To strengthen internal controls and mitigate potential risks, I recommend the
following:
• Segregation of Duties: Separate the tasks of receiving goods, updating
inventory records, and having access to the inventory control system. This
can help prevent errors and unauthorized activity.
• Physical Security: Implement stricter access controls for the warehouse,
such as limited entry points and requiring proper identification for entry.
• Real-time Inventory Updates: Train warehouse staff to use the inventory
control system for real-time updates. This will ensure accurate and timely
records.
• Individual User Accounts: Implement a system with individual user
accounts and passwords for all staff accessing the inventory control system.
• Regular Inventory Counts: Conduct physical inventory counts more
frequently than annually, perhaps quarterly, to ensure timely detection of
discrepancies.
• Inventory Reconciliation Procedures: Establish clear procedures for
reconciling physical inventory counts with the system records to verify their
accuracy.
• Standardized Inventory Valuation Methods: Resolve the disagreement
between directors regarding inventory valuation and implement a consistent
method across the company.
• Improved Raw Material Documentation: Ensure proper documentation of
raw materials received and used in production for accurate cost tracking.
Implementing these recommendations will strengthen ShoeCraft's internal controls
and improve the accuracy and reliability of its inventory records.
I am available to discuss these recommendations further at your convenience.
Sincerely,
[Your Name]
Auditor
For exam pack with questions and answers, quality notes, assignments and exam
help:
email: musyokah11@gmail.com
WhatsApp: +254792947610

d) Describe two risks relating to the production needs of Shoecraft (Pty) Ltd
(manufacturing too little or too much inventory) and explain the manual
controls that could be implemented to address these risks.
Risks in Production Needs at ShoeCraft
ShoeCraft faces two main risks related to production needs:
1. Overproduction: Manufacturing too much inventory can lead to:
o Storage Costs: Excess inventory requires additional storage space,
increasing storage costs.
o Obsolescence: If styles or trends change, excess inventory may
become obsolete and unsellable, resulting in write-downs and
financial losses.
2. Underproduction: Manufacturing too little inventory can lead to:
o Stockouts: If demand is higher than anticipated, ShoeCraft may
experience stockouts, leading to lost sales and customer
dissatisfaction.
o Production Delays: To meet unexpected demand, ShoeCraft may
need to rush production, potentially leading to quality issues or delays
in fulfilling orders.
Manual Controls to Address Production Risks
1. Minimum and Maximum Inventory Levels:
• Establish minimum and maximum inventory levels for each product based
on historical sales data, seasonality, and lead times.
 • Regularly review and update these levels to reflect changing market
conditions.
• Implement a system to generate automatic alerts when inventory levels fall
below the minimum or exceed the maximum, prompting production
adjustments.
2. Production Planning and Scheduling:
• Develop a production plan based on sales forecasts and purchase orders.
• Regularly review and update the plan to reflect any changes in demand or
supply.
• Schedule production runs efficiently to meet anticipated demand while
minimizing lead times and storage requirements.
3. Safety Stock:
• Maintain a buffer of safety stock for critical items to mitigate the risk of
stockouts due to unexpected demand fluctuations.
• Determine the appropriate safety stock level based on factors like lead time
variability and product criticality.
4. Communication and Collaboration:
• Ensure clear communication between sales, production, and purchasing
departments.
• Sales forecasts should be shared with production to inform planning, and
purchase orders should be adjusted based on production needs.
5. Regular Inventory Reviews:
• Conduct regular inventory reviews to identify slow-moving or obsolete
items.
• Implement procedures to address such items, such as discounts, promotions,
or discontinuing production.
By implementing these manual controls, ShoeCraft can achieve a better balance
between production needs and actual demand, reducing the risks of overproduction
and underproduction. However, it's important to note that for long-term efficiency,
ShoeCraft should consider investing in inventory management software that can
automate many of these controls.
DISCLAIMER: THE ABOVE ASSIGNMENT MIGHT BE DOWNLOADED
BY MULTIPLE STUDENTS, NOT ADVISABLE TO SUBMIT DIRECT!!
For exam pack with questions and answers, quality notes, assignments and exam
help:
email: musyokah11@gmail.com
WhatsApp: +254792947610