You have been appointed as internal auditor of a Company manufacturing and trading in Chemicals. You have asked your team to review the internal…

Based on the observations made by the internal audit team, the following violations of the principles of an adequate internal check system are identified: (i) The Head of the Purchase Department, being a relative of the promoter, has been entrusted with both purchasing and sanctioning of payments for several years without allowing anybody to question him. This violates the fundamental principle that no single person should have complete control over any important aspect of business operations and that every employee's actions should come under the review of another person. It also breaches the principle relating to distribution of financial and administrative powers and their periodic review. (ii) There has been no rotation of duties for several years of most of the employees, in particular, the Chief Accountant, who has a good rapport with major customers. This violates the principle that staff duties should be rotated from time to time so that employees do not perform the same function for a considerable length of time. (iii) The Storekeeper has failed to maintain proper stock records and no physical verification of assets has been carried out since his appointment. This violates the principle that that those with physical custody of assets should not have access to accounting records. It also violates the principle that there should exist an accounting control in respect of each class of assets, in addition there should be periodical inspection so as to establish their physical condition. Impact of Control Deficiencies on Inherent and Control Risk: Increased Inherent Risk: The nature of the procurement and inventory functions makes them inherently susceptible to fraud such as fictitious purchases, overbilling, or theft of stock. The lack of proper controls means that these inherent risks are not mitigated. Increased Control Risk: Non-rotation of accounting staff increases the risk of collusion and manipulation of receivables, while absence of stock records and physical verification exposes the company to theft, pilferage, and incorrect inventory valuation. The identified deficiencies demonstrate that the company's internal control system is not operating effectively. This leads to a high control risk in the procurement and inventory cycles.