Question

You are the auditor of Fenton Electronics Ltd., which has recently installed a computerized bar code system to record goods received, sales, and inventory quantities. The company is a retailer ofelectrical products.

●		either reads the bar code on the box containing the product or inputs the bar code number manually;
●		manually inputs the number of items received (e.g., a box may contain 100 CDs) and adds the quantity of items received to the quantity of inventory recorded on the computer

1.When the goods are received, the receiving department:

●		either reads the bar code on the box containing the product or inputs the bar code number manually;
●		manually inputs the number of items received (e.g., a box may contain 100 CDs) and adds the quantity of items received to the quantity of inventory recorded on the computer

   2.When goods are sold to a customer, the bar code of the product is either read or input manually, and the computer produces the sales invoice using the selling price of the product, as recorded on the computer’s standing data fie. The quantity of items sold is deducted from the inventory quantity recorded on the computer.   3.Periodically, the inventory is counted and these counts are compared with those on the computer. The inventory quantities on the computer are amended when significant differences are found.
   

4.		The system allows:
●		details of new products and the selling prices of products to be added or amended
●		inventory quantities to be amended from diff erences found at the inventory count
●		special prices to be charged to customers (e.g., when the product is damaged or discontinued)

The main products the company sells are:

●		slow-moving products, such as televisions, video recorders, digital cameras, and audio equipment
●		fast-moving, low-value products, such as batteries, blank CDs, and DVDs

Which of the following are controls that should be incorporated into the computer system to ensure goods received are correctly entered into the computer by the receiving department?

Check digit included in inventory bar code

Match of product code to inventory master file

Authorization of pricing changes

Reasonableness check on quantity entered

Restricted computer access to senior staff member

Check to ensure all relevant field are completed

Answer 1

a)

The bar code should contain a check digit to guard against the risk the code may be incorrectly read by the scanner or incorrectly entered if done manually.

The computer should match the product code with the inventory master file.

There should be a reasonableness check on the quantity entered — for example, the entry should be rejected if zero or negative, or if greater than a pre-specified quantity for each product.

The computer should ensure that all relevant data fields are completed (for example, the date) and that each data field is in the correct format.

b)

(i)

The frequency of test counts depends on the nature of the inventory and on past experience. It may be appropriate to test count high turnover and high-value items more frequently. High turnover items are more prone to recording errors and to a risk of stock-out. Discrepancies in high-value items are more material. Frequent checks may discourage pilfering by staff and will also ensure greater reliability of sales and profit information available to management. If the incidence of discrepancies is low, then a less frequent routine of test counts may be acceptable, such as quarterly. If the incidence of errors is high, the test counts may need to be undertaken more frequently, such as monthly.

(ii)

Discrepancies between test counts and computer records should be carefully investigated. Some may be due to cut-off differences such as sales made before the count but not recorded until after the count. No adjustment need be made but the effect of such differences can distort financial information based on computer records. Differences due to errors in recording purchases or sales need to be investigated as to the cause, and adjusted as necessary. If transactions are omitted, duplicated or recorded at incorrect amounts, it suggests that control procedures are not working properly. The incidence of such errors should be minimized by improving the effectiveness of controls. If no explanation can be identified, there should be a re-count of the inventory lines involved. If a difference persists, discrepancies may be due to pilfering. If there is a substantial shortage of inventory, an investigation needs to be undertaken to attempt to reduce such losses. A cumulative record of adjustments made following each test count provides a basis for assessing the reliability of the computer records.

c)

There need to be procedures for the pricing of new products, changes to pricing, special promotions and deletions. As with all master file changes, access to altering prices should be restricted by use of controls such as passwords to specific senior staff, and confirmed by an authorized price variation form signed by the staff member, and filed in the event of any query as to the legitimacy of any price change. A list of all changes should be printed out. This list should provide for a signature by the staff member authorising the change and by the store manager to the effect that price tickets on display have been properly amended. (It may be possible for the computer program to print out labels for in- store and window display.)

Periodically (weekly or monthly, depending on the frequency of price changes) a complete list of all prices should be printed out. This list should be checked and signed by a senior staff member. It should also be checked against in-store pricing by a staff member who should sign the form in acknowledgment of responsibility for this task. It may also be possible to program the computer to warn of any price change that is less than a set percentage above the most recent recorded purchase of that item, as a check against pricing errors.