- 9 Marks
Question
You are the internal auditor of Moovy Magic Limited, which runs a chain of video rental stores.
The company guarantees that if a video is not available for rental, the customer will get a free rental when that video comes back into inventory. It is not possible for customers to pre-book videos. The company purchases a number of copies of each video, taking the above policy into account, but has no way of monitoring whether their procurement strategy is effective. Procurement decisions are made and auctioned locally, and no central budgets are produced.
You have been asked by the directors to review the procurement and other strategies of the company.
Required:
Identify and explain the potential business risks arising from the above procurement and other strategies. Suggest controls and strategies that the management of Moovy Magic could instigate to mitigate those business risks. (9 Marks)
Answer
- Local Procurement Decisions:
- Risk: Each branch makes procurement decisions independently, which could lead to over- or under-purchasing, increasing costs or resulting in lost revenue.
- Control Strategy: Introduce centralized procurement to optimize order quantities and leverage bulk discounts based on projected demand.
- Lack of Procurement Monitoring:
- Risk: Without tracking demand, it’s difficult to ensure inventory meets customer needs, potentially resulting in stockouts.
- Control Strategy: Implement a demand forecasting system to balance supply with anticipated rentals.
- Customer Guarantee Policy:
- Risk: To avoid offering free rentals, local managers may over-purchase inventory, raising operating costs.
- Control Strategy: Replace the blanket guarantee with a limited one, such as guaranteed availability within two days, supported by inventory transfers across branches as needed.
- No Pre-Booking System:
- Risk: Lack of pre-booking hinders demand estimation, possibly triggering the free rental guarantee frequently.
- Control Strategy: Introduce a pre-booking system with discounted advance rentals to better gauge demand and reduce unnecessary inventory stock.
- Absence of Centralized Budget:
- Risk: Without a central budget, branches may mismanage finances, affecting the company’s profitability.
- Control Strategy: Establish a central budget for procurement, with performance criteria to measure branch efficiency and reduce costs
- Tags: Business Risks, Internal Controls, Mitigation Strategies, Procurement, Video Rental
- Level: Level 2
- Topic: Risk Assessment and Internal Control
- Series: MAY 2016
- Uploader: Kwame Aikins