(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 and be subsequently matched with a sales invoice.
• All inventory returns should be recorded on sequentially numbered returns notes and be subsequently matched with a credit note.
• A responsible official (e.g. warehouse manager) should authorise any movement out of inventory other than for sales. These items should either be removed from the inventory records and transferred to the non-current assets register (e.g. PCs used by directors) or retained within the inventory records with a note as to their location.
• Physical security over inventory should be improved.
• Until the accuracy of the inventory records is established, monthly counts should be performed.

(2) Customer credit limits
Deficiencies
The system in operation over credit limits has been broken down as:

• credit limits are being exceeded
• credit limits are not being allocated to new customers.

Implications

• Customers may make purchases for which they are then unable to pay, resulting in bad debts.
• Customers may take advantage of the deterioration in credit control and delay payment.

Recommendations

• A credit limit must be set by a responsible official (e.g. sales director) before a new customer can be accepted.
• Before an order is accepted from a customer, a check should be made to see if that order, together with the outstanding balance on that customer’s account, exceeds that customer’s credit limit. If that is the case then either the order should not be accepted at that time, or an increased limit should be authorised.