GEAR 371

STUDY UNIT 6
Internal controls within the Business cycles
Question Pack
Copyright © 2024 edition.
North-West University
No part of this document may be reproduced in any form or in any way without the written permission
of the publishers

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Homework questions:

QUESTION 1: Muscat (Pty) Ltd .............................................................................................................................. 3

QUESTION 2: Tiapas ............................................................................................................................................... 4
QUESTION 3 ACSE 6.7(TYCO INDUSTRIES (PTY) LTD.)............................................................................................ 7
QUESTION 4 BEAUTHA SHOES (PTY) LTD ............................................................................................................... 9

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QUESTION 1: Muscat (Pty) Ltd
12 marks
Muscat (Pty) Ltd (hereafter Muscat) selis custom-made furniture and its year-end is 31 July 2016.The
company purchases its inventory from a wide range of suppliers.
Below is a description of Muscat's purchase and payment cycle:
A. When inventory personnel require inventory, they complete a requisition form and this is submitted
to the purchase ordering function. Requisition forms do not require authorisation and no reference is
made to the current inventory levels of the materials being requested.
B. Staff in the purchase ordering function use these requisitions to raise sequentially numbered
purchase orders (PO's) and the suppliers are based on the approved suppliers' list, which was
updated 24 months ago. The blank PO's are subject to sound stationery controls.
C. The purchasing director authorises the orders after checking the order to the requisition for
accuracy and authorisation, and reviewing the order for suitability of supplier, reasonableness of price
and quantity and the nature of the goods being ordered.
D. The purchase ordering function files these requisitions sequentially and reviews it frequently for
requisitions which had not been cross-referenced to a PO. A copy of the PO is filed sequentially and
the file is sequence checked and frequently cross-referenced to goods received notes (GRN's) to
confirm that goods ordered have been received.
E. When the goods are received in the designated area of the receiving function in the warehouse,the
goods receiving clerks verify the quantity to the suppliers' delivery note and check that the quality of
the goods received are satisfactory. They complete a sequentially numbered GRN and send a copy
of the GRN and the delivery note to the finance department.
F. Purchase invoices are sent by the suppliers directly to the purchase ledger clerk in the finance
department, who stores them in a temporary file until the end of each week. At the end of the week,
he matches each invoice to the corresponding GRN, delivery note and PO (all of which are
sequentially numbered) for quantity and description of goods and the correct prices and discounts.
He also reviews the invoice to confirm that the amounts on the invoice have been allocated to the
correct account. He then enters the invoices in the purchase journal and allocates a unique number,
based on the supplier's code, to the invoice.
SUB
QUESTION 1 REQUIRED: TOTAL
TOTAL
1.1 Identify and explain the weaknesses in the purchase and payment
cycle of Muscat (Pty) Ltd, as evident from the information provided
above. You do not have to address weaknesses in the "receiving
function" of the warehouse.
Your answer must be presented in the following format:

Identify weakness Explanation of weakness 12

12x1
TOTAL 12 12

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QUESTION 2: Tiapas
15 marks
You have just been appointed as the new financial manager at Tiapas, a well-known Mexican grill,
fast food franchise restaurant situated in Sandton, Johannesburg, whose food is also Halaal certified.
Tiapas has a smart phone app, which allows customers to conveniently order Tiapas' meals from
anywhere in the surrounding Sandton area on their smart phone or tablet to pick it up at the branch,
where it is then paid for in cash. Customers can build their meal just the way they like it by choosing
any of the different starting options available, e.g. tacos, burritos, or nachos. The app enables
customers to then browse the range of additional ingredients, by viewing the details and if necessary,
the relevant prices.
First time customers need to create a Tiapas profile to easily access their saved information and order
history for future orders. To create this profile, customers need to register with a unique username and
password, where after certain personal 11:31
details such as name,
＊金
surname,
11:317 cell phone number and any

food allergies is entered. Returning customers can log in with their username and password selected
during the registration process. After a customer has logged in, they can start the ordering process by
selecting a starting option (e.g. burrito) and then add any of the ingredients. An example of this is
displayed below:
The operational director of Tiapas, Nonni Radebe, has mentioned to you that they have experienced.
a few problems in the storeroom. You are starting your employment on 1 July 2019 as the new
financial manager and for you to prepare for your first day on the job, she has sent you the
following email with an extract from their purchase and payment cycle:

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From: nonni.radebe@riapas.co.za
To: me@ymail.co.za
Subject: Storeroom: receiving of goods function - Tiapas
Sent: Mo 03/06/2019 10:59

Dear new financial manager

Welcome to the team! The information thar you need to familiarize yourself with, is set out below.
Goods ordered from suppliers, are received at a designated goods receiving section at the back of
the branch. This receiving section has only one entry/exit point at the back, which is physically
controlled with access cards to gain access. Any of the employees can however gain access
through this entrance.as well as the storeroom, by swiping their access card. The building is secure
with a solid structure. Minimum windows and the receiving area have surveillance, with cameras
recording the entire receiving process.
On arrival of the delivery vehicle, goods are offloaded in the presence of a goods receiving clerk
who obtains the supplier delivery note (DN) from the delivery personnel and refers to the purchase
order (PO) number thereon. He then locates the PO, which have been filed numerically in the back
office of the receiving section. He compares the quantity of the goods delivered against the PO
and the supplier's DN.
He performs at least a superficial test of the condition of the goods delivered e.g. broken or wet
boxes and rejects all incorrect or damaged deliveries. He accepts goods short delivered but
identifies such goods clearly on the DN's and POs, where the quantity actually accepted is clearly
identified.
He issues a pre-numbered, Ulti-copy (2) goods received note (GRN) and includes only those
goods which have been accepted on the GRN. Should there be any short deliveries, he ensures
that the suppliers' personnel sign both copies of these DN's. He signs all the supplier's DN's and
the GRN's as proof of goods received and subsequent delivery to the storeroom.
On transfer of the goods to the storeroom, the storeroom clerk accepts the physical goods together
with the GRN's and packs it away. The storeroom areas are always kept dry, clean and neatly
packed. Pest free and temperature controlled where necessary.
Oh yes, before I forget, there is one more thing that should be treated separately from the above.
We have heard that it is good to have disaster recovery controls in place and at this stage I don't
think that we have adequate controls in place should a disaster occur. Will you please send me
the control activities that you think should be in place over the disaster recovery plan and backup?
Please let me know if you have any more questions.

Regards
Nonni Radebe
Operational director- Tiapas

Tiapas
IMPORTANT: The information transmitted is for the use of the intended recipient only and may
contain confidential and/or legally privileged material. Any review, re-transmission, disclosure,
discrimination, or other use of, or taking of any action in reliance upon this information by persons
or entities other than the intended recipient is prohibited and may result in severe penalties. If you
have received this email in error, please notify the Privacy Hotline of the Tiapas Head Office,
telephone 011 852 7892 and delete all copies of this transmission together with any attachments.

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 SUB
QUESTON 2 REQUIRED:
TOTAL TOTAL
2.1 Identify seven (7) weaknesses in the "storeroom - receiving of
goods" function of Tiapas, as evident from only the information
provided in the email.
For each weakness identified, provide a recommendation that will
improve their purchase and payment cycle.
Your answer must be presented in the following format:
Identify weakness Recommendation
7x1 15
(max 7 marks) (max 7 marks)
7x1
Communication mark-presentation and layout
1x1

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QUESTION 3 ACSE 6.7(TYCO INDUSTRIES (PTY) LTD.)
30 marks

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QUESTION 4 BEAUTHA SHOES (PTY) LTD
12 marks
1 Background

Beautha Shoes (Pty) Ltd (‘Beautha’) is a manufacturer and retailer of African branded
sneakers. Theo Kganane, the chief executive officer, started Beautha in 2015. Beautha’s
business has grown substantially and now has 17 stores across South Africa, consisting of
ten megastores in large cities and seven small stores in towns. In 2017, Beautha acquired a
5 700m² factory and warehouse in Centurion that houses its manufacturing operations. The
company has a 30 September financial year end. Beautha’s functional and presentation
currency is the South African rand (ZAR). Beautha offers a range of sneakers, with selling
prices varying from ZAR1 000 per pair for a standard design to ZAR8 000 per pair for an
exclusive design.

4.2 Inventory
Beautha operates a perpetual inventory system. Beautha’s inventories consist of raw
materials, work-in-progress and finished goods. The cost of raw materials is assigned on a
first in, first out (FIFO) basis. The cost of work-in-progress and finished goods is determined
using the standard costing method. Inventories is a material balance in Beautha’s financial
statements.

Raw materials, comprising a plastic and rubber compound, rolls of fabric, and leather are kept
on a consignment basis from local suppliers. Smaller items, such as the thread, glue, and
shoelaces, are purchased free-on-board from international suppliers. Since 1 April 2021,
Beautha has been receiving most of its soles free-on-board from Hiro. Each type of item is
stored in boxes with each box containing a specific quantity.

Work-in-progress consists of soles and different fabric pieces that have been cut, but not
assembled. These items are packed in boxes containing 100 items of the specific component.

All boxes are labelled with the following:

• A description of the items inside;
• A unique barcode;
• A picture of the item; and
• The quantity of items in the box.

Finished goods consist of the completed sneakers. Each pair of sneakers is individually
wrapped and packed into a box which has a label and barcode. Twenty pairs of individually
boxed sneakers are packed into large cartons containing the same size, colour and design,
for delivery to stores. The value of finished goods kept at the warehouse is very low as most
of the finished goods is delivered to the stores. The inventory value at each of the various
megastores is more or less equal.

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 5 Year-end procedures and audit

You are a trainee accountant at Auditors Inc. and have been assigned to the 30 September
2021 audit of Beautha. Auditors Inc. is a medium-sized audit firm with offices in some of the
metropolitan areas in South Africa. Its largest office is in Edenvale, Gauteng.

Beautha always performed the annual year-end inventory count on the first Sunday on or after
30 September. This is because Beautha does not want to close the shops over a weekend
following a month end. You received Beautha’s inventory count instructions, Annexure A, for
the inventory count scheduled for 3 October 2021.

ANNEXURE A

BEAUTHA SHOES (PTY) LTD

INVENTORY COUNT INSTRUCTIONS FOR THE FACTORY AND WAREHOUSE

Confidential

Addressed to: Auditors Inc. and accountant only

Procedures to be followed for annual year-end inventory count on 3 October 2021:

1 All inventory items must be neatly packed and barcodes must be easily accessible.
2 All raw materials, including the plastic and rubber compound, rolls of fabric, and
leather, must be grouped together in the raw materials section as per the warehouse
floor plan. The same applies to the work-in-progress and the finished goods sections.
3 All open boxes must be sealed and the opening of boxes will not be allowed during the
inventory count.
4 All inventory items will be counted using the company’s barcode scanners.
5 The warehouse staff will be responsible for counting the inventory.
6 These counters will work on their own and can randomly decide which items they want
to count.
7 The counters will scan the barcode on the label of each box.
8 Once a counter is of the opinion that he/she has counted enough items, he/she can go
home.
9 If inventory items need to be moved between the two facilities during the inventory
count, one of the counters must ensure that the barcodes of these inventory items are
scanned before they are moved.
10 Inventory received during the inventory count must be placed in the correct section
(i.e. raw materials, work-in-progress or finished goods) as specified on the floor plan.
11 The inventory system must be adjusted for inventory items where the quantities per
the system are less than the actual quantities counted.
12 Inventory items where the quantities per the system are more than the actual quantity
may be ignored, as it could possibly be ascribed to errors made by the counters.

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 MARKS
QUESTION 4 REQUIRED: Sub-
Total
total
4.1 Recommend improvements to the inventory count procedures in 12 12
annexure A that were followed by Beautha’s employees during the
year-end inventory count.

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