(1) Inventory records and PCs held by directors
Deficiencies
The inventory records are not a reliable record of actual inventory held because:

• customer returns have not been recorded
• some items recorded as being in inventory are missing
• Some ‘missing’ items are held at directors’ own homes.
  Implications
• Year-end inventories may be misstated if reliance is placed on year-end inventory records instead of a year-end count.
• Inventory losses may go unnoticed until the next physical count delaying insurance claims and making theft more likely.
• Customers may not be given credit for goods returned such that trade receivables will be overstated and there may be a loss of customer goodwill.
• PCs ‘borrowed’ by the directors are unlikely to still be suitable for resale at their full value and may need to be written down in the financial statements.
• Orders could be accepted which cannot be fulfilled if decisions are taken based on incorrect inventory records.
  Recommendations
• All inventory despatches should be recorded on sequentially numbered despatch notes.
• Customer returns should be recorded on sequentially numbered returns notes and matched to the original despatch note.
• Physical inventory counts should be conducted at least quarterly, with discrepancies investigated and resolved promptly.
• A policy should be implemented prohibiting directors from borrowing company assets for personal use, and any existing borrowed items should be returned and inspected for resale suitability.
• Inventory records should be reconciled regularly with physical counts, and any discrepancies should be investigated and corrected.

(2) Credit limits
Deficiencies

• Two customers have been allowed to exceed their credit limits.
• New customers in the last year have not been allocated credit limits.
  Implications
• Allowing customers to exceed credit limits increases the risk of bad debts, which could lead to financial losses.
• Failure to allocate credit limits to new customers means there is no control over the credit extended, increasing the risk of uncollectible receivables.
• Poor credit control may damage relationships with suppliers or financiers if cash flow is impacted by uncollected debts.
  Recommendations
• Implement a formal credit control policy requiring credit checks and approval before sales are made to new customers.
• Assign credit limits to all customers based on their creditworthiness and review these limits regularly.
• Install system controls to prevent sales to customers who have exceeded their credit limits without senior management approval.
• Regularly review aged debtor reports and follow up promptly on overdue accounts to minimize bad debt risk.