Question - Enquiries and observations associated with understanding internal control at Hood Furniture Ltd revealed the following. The managing director, Robert Saws, has always play a premium on the values of integrity and ethics. For years, business has been conducted on a hand set and commitments made by the company were always honored. Integrity and ethics are also valued in employees, and this quality has been evidenced in any employee who has been with the company for more than a year or two. In recent years, as a company has directed resources to a new product lines, and company revenue have grown, the company has actively sought out competent employee to fill out the management team by bringing in a new chief operating officer and a new chief financial officer (CFO).
Many accounting and information system issues have been delegated to the CFO, Julia Anderson, who has responsibility for the company's financing needs, accounting and information system. Julia almost immediately initiated a project to operate the company  computerize accounting system. A new director of IT, James Harris, reports directly to Julia and overseas data control and system security. Key positions within IT include a director of computer operations and a programming director. Julia was hired because of her familiarity with benefits and risks of enterprise resource planning systems, and she review progress on the new system installation with the IT manager monthly. The IT manager is also resonsible for managing the current system until the new system has been tested and is ready to use. Furthermore, Julia recently hired Harry Alston to act as an internal auditor. Harry reports directly to the CFO. Currently, the internal auditor is reconciling all bank accounts. The board of director approved the hiring of internal auditor, and, in the absence of an audit committee, Julia plans to discuss internal audit findings with the board of directors on an annual basis.
Julia is currently under pressure to produce financial statement within ten days after the end of the month. Robert Saws believes that this is essential to good business management. Once the financial are produced they are closely reviewed with manager of day-to-day operation to ensure that managers are held accountable for the resources with wish they are entrusted.
Other procedures performed to obtain an understanding of internal control reviewed the following information's:
1. Hood Furniture has identified a small group of office furniture dealer whose operations have deteriorated to the point that their ability to repay the company is doubtful. The company has decided to make additional shipments to these dealers on a COD basis. It is expected that a large allowances for doubtful debts may be necessary to reduce these accounts to estimated releasable values.
2. The tool inventory consists of a conglomeration of miscellaneous items, most of which are small quantities with very minor unique prices. This inventory totals $42,395, which is an insignificant portion of the total inventories.
3. The purchased parts stockroom is segregated from the production areas by a wire fence. While visiting a plant, you notice that the gate was left open all day and access to the stockroom (which contains many valuable and easily concealed items) was available to any employee. The stockroom's perpetual inventory records were formerly checked by an employee who made periodic test counts. This employee has retired and not been replaced. As a result, such counting has ceased. You expanded your tests in view of the situations and are satisfied that the perpetual records reasonably reflect the quantities on hand.
4. The board of directors just adopted a policy that will allow the company to invest excess funds in short term securities. The CFO will have sole authority for purchase and sale of the investments. Securities purchased will be credited to a company accounts at a local brokerage house. The securities are held in the company's name. All correspondence relating to the investments is sent directly to the CFO. She, in turn, forwards brokerage advices to her assistance for recording in the accounts.
5. A complete physical inventory of the company's office furniture has recently been taken.
REQUIRED:
a) Identify the control environment factors that affect the company's internal control.
b) List the strength and weaknesses in Hood Furniture internal control.
c) What suggestions do you have for improving the weaknesses identified in b) above.