As part of your preliminary audit work on Southwell Ltd you have reviewed its internal control over the purchase receipt, storage and issue of raw materials. You have prepared the following comments which describe Southwell Ltds procedures.

1. Raw materials, which consist mainly of high cost electronic components are kept in a locked storeroom. Storeroom personnel include a supervisor and four clerks. All are well trained and competent. Raw materials are removed from the storeroom only upon written or oral authorisation of one of the production supervisors.

2. A perpetual inventory system is maintained. As items are removed from the storeroom one of the clerks notes the removal in the perpetual system. A rolling inventory count is completed so that all stock is counted over a 12-month period. Any discrepancies between the count and the perpetual record are adjusted by the supervisor.

3. The perpetual system identifies if any part is at re-order level. The supervisor then enters the part number on a materials requisition list and sends the list to the accounts payable clerk. The accounts payable clerk prepares a purchase order for a predetermined order quantity for each part and emails the purchase order to the vendor from whom the part was last purchased.

4. When the ordered materials arrive at Southwell Ltd they are received by the storeroom clerks. The clerks count the merchandise and check the counts against the suppliers bill of lading. They then enter the quantity received into the perpetual inventory system. All suppliers bills of lading are initialled dated and filed in the storeroom to serve as receiving reports.

Required:

Identify two (2) internal control strengths and two internal control weaknesses (2) in the system.

a) For each internal control identify the risk that the internal control is designed to avoid and its related assertion. Write an audit test for each of these internal controls. (3 marks)

b) For each internal control weakness that you have identified, describe the misstatement that could occur because of the weakness and recommend changes to the system which would eliminate the weakness. (3 marks)

Write your answer in answer booklet, using the following table format:

Strength (1 mark)	Risk (1 mark)	Audit test (1 mark)

Weakness (1 mark)	Potential misstatement (1 mark)	Recommendation (1 marks)