Control and Internal Audit, ACCT 462

The rubric of the case study 2 – Industry based

By: AZZAH ALZAHRANI

General information:

Topic of the case study: This case study was in class as group. It was about a real chain of fast
food restaurants which provided by Wealth Preservation Holding Company. Students were
provided with information about these restaurants and their risks result in incresing in the
purchases cost and decreasing in profits. In addition to the effects of these risks and the control
activities to mitigate them in incorrect order. Students should state the type of each given risk
and identify correctly its effects and the appropriate internal control to mitigate them.

Total points expected:

- 15 points of your total grade.

- Students in a group will receive the same grade.

Group size 5 students in each group:

- Students have to join a group on the black board and they cannot change their group after
signing up.
 The assessment rubric is as follows:

Item Advanced Proficient Novice Unsatisfactory Marks

Question 1 - Identify correctly the - Identify correctly the - Identify correctly - Fail to identify 5
type of the five risks. type of the four risks. the types of 2-3 correctly at least the
risks. type of one risk.
Question 2 - List correctly the - List correctly the - List correctly the - Fail to list correctly at 5
effects of five risks. effects of four risks. effects of 2-3 risks. least the effects of one
risk.
Question 3 - state correctly the - state correctly the - state correctly the - Fail to state correctly 5
appropriate internal appropriate internal appropriate internal at least the appropriate
control activity for control activity for control activity for internal control activity
five risks. four risks. 2-3 risks. for one risk.
Total 15

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 Case Study 2 , Industry based

Model ”A”
A chain of fast food restaurants owned by a number of partners, headquartered in the capital,
Riyadh. Reports have been raised of an increase in the purchases cost and a decrease in profits,
with the absence of an accounting system that calculates the cost of goods sold. The Board of
Directors tried to know the reason for this, especially with the continued high operating costs
and low profits, and a decision was taken to seek the assistance of an internal auditor from one
of the external offices. The company owns four stores dedicated to restaurants due to the large
number of its branches inside Riyadh. These stores and stores are managed by a manual
system, and there is a manager responsible for each store.

Each store’s manager purchases directly from suppliers, receives the goods and redistributes
them to the branches near to the branch. Inventory reports are submitted to the Executive
Director every three months for each store separately. There is no clear inventory system. The
report contains the total items that are purchased on a monthly basis.

The purchases cost for meal manufacturing is 250 thousand riyals per month at the branch
level, and the monthly sales is 350 thousand riyals. It was found that the sales returned, due to
the inability of delivery companies to reach customers, are 25 thousand riyals for the fiscal year.

It was also found that the restaurant chain deals with different suppliers with no specific
regulation and work procedures; the supplier drops the goods at different times with no store’s
manager, and sometimes supplies the goods to the restaurant directly when there is a peak of
business. A violation has been detected on the company due to the inaccuracy of the tax
return, in addition to the external auditor provided qualified opinion on the financial
statements; Which increased the need for an internal auditor to discover the sources of the
risks.

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The effects of these risks are:

1. Wasting money on buying low quality products.

2. Not controlling incoming stock.
3. Failure to control supplier balances
4. Loss and theft of inventory.
5. Imposing fines due to not commit to laws and regulations.
6. Incorrect product pricing policy.
7. Paying for not received goods.
8. Sales return, lost customers, & suffering loss.
9. The company's inability to compete in the market.
10. Closing the company when repeating the violation and non-compliance.
11.Imposing fines due to low quality goods.
12. Wastage of goods.
13. Inaccurate inventory and increase human errors.

The suggested control activities to mitigate risks to acceptable level are

1. The received goods are checked and the damaged goods are returned to
the supplier.
2. Training all employees to apply regulations and policies company subject
to.
3. The purchasing department should not receive any invoice from supplier
unless it was approved and signed by the store manager.
4. Publishing the regulations and policies to all employees and emphasizing
compliance with them.
5. Copies of checks should be received from the cashier and payment slips
from the accounts payable department.
6. Verify products sources to avoid imposing quality fines.
7. Matching supplier invoice with purchase order and receipt report.
8. Transactions should be posted to the general ledger on a daily basis.
9. Make a reconciliation between the general ledger and the accounts
payable file.

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 10. Imposing fines and penalties in the case of employees do not complywith the regulations.
11. Goods are checked for quality standards.
12. Verify payment terms including cash discounts if any.
13. Make a reconciliation between The general ledger with the inventory records.
14. Purchasing employees must be informed of the Food and Drug Authority’s system (SFDA) to
be familiar with the licensed products items.
15. Matching packaging vouchers with purchase orders, ensuring that only the goods received
are ordered and identifying differences, if any

Requirements: (15 MARKS)

1. What is the risk type for each risk identified in the following schedule?(2.5 Marks)
2. Identify the impact or the consequences of each risk? (5.5 Marks)
3. As internal auditor, what are control activities you suggest to mitigateeach risk to acceptable level? (7
Marks)