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Group 5 :

Turbo, Inc. that located in Cityville, Ohio is subsidiary of

National Engine Corporation that manufactures and sells
turbochargers for use on new and used cars and trucks
and spare parts
National Engine Corporation was purchased Turbo in
2003, and the policy is National Engine must review of
purchasing practices at each newly acquired subsidiary
within the first two or three years of the ownership
In 2006, Ken Bauer is audit staff of National Engine
Corporation was sent to Cityville to review this company
Product : turbine wheels, turbine housings, compressor wheels,
compressor housings, compressor plates
40,000 model combinations are possible, but in practice Turbo
makes only about 2,300 turbocharger models each year
Turbo uses MRP (material requirements planning) system to
convert its forecast sales of finished turbochargers and parts
into net machining and purchasing requirements
Purchasing department receives schedules of Turbos materials for six months
each week
buyer with the
best record
Corporate Discount

There is headquarters list of corporate

discount. This list consist of item for which the
parent company has negotiated favorable
prices due to the large volume purchased by They were not
all national engines subsidiary combined.
If they used this list, saving in 2005 would have aware of the
been $30,354 corporate
But potential saving could not be quantified program
because each part number would have to be
quoted separately
Turbo only
Turbine wheel and compressor wheel were had one
purchased from the same vendor supplier
For bearing housing vendor is only Castco,
that in difficult financial. Arthtur felt Castco
was a valuable vendor, so he ordered extra inventory of
bearing housings to help keep them float. bearing
But, Arthur had not obtained approval from
Doug before ordering these extra parts
housing was
because he thought that no obsolescence almost half of
exposure (used in all turbocharger model) the 2005

Most of expense was for patterns and dies

made for Turbo by the casting vendors.
John had not inspected any of Turbos Large amount
equipment at vendor locations, but recently of money spent
John heard rumors that some of the casting
vendors were using Turbos equipment to
for tooling
produce casting for sale to other companies.
What operational deficiency(s) explain that
buyers were not aware of the corporate discount
There is no good communication about the policy from National Engine
Corporation to Turbo. Especially Turbo newly acquired.
No integrated system to inform head office policy with subsidiaries. The
integrated system should release a bill of material from the headquarters for
all list items and suppliers that have a discount program if purchased in big
No assessment against specific and non-specific inventories. For specific
inventory such as a certain supply must be from a specific vendor.
MRP system is not integrated with the headquarters resulting missed
information for some items that have been in arrange with suppliers at the
central level. This creates an overpayment for items that should be
obtained with low price if Turbo uses a bill of material level headquarter.
In what ways could that deficiency(s)
have been discovered?
Compare agreements between that has made by headquarters and
agreement made by the subsidiary for each same item
Compare the bill of material Turbo with bill of material headquarters for the
same items but have different price of acquisition
Compare prices between items listed on Turbo bill of materials with other
suppliers that provide similar materials on the market.
If National Engine elects to pay for casting molds
for its vendors what protective actions should be
If National Engine invests funds to vendors to create casting mold items, it is
necessary to strictly supervise vendors, if it is difficult to put people in full
control, patent the products that other vendors will make, then enter into
agreements on a legal basis and do inspection to vendors occasionally.
And supervision have to control the cost of bills for pattern and dies
Protective actions in the form of contract on things that bind vendors, such
as how the quality of goods produced, how much quantity of goods can
be produced, and delivery of goods in a timely manner
The Turbo procurement department shall periodically review suppliers for
certain items, to ensure that the procedures for the manufacture or
procurement of such material items conform to Turbo's specifications and
Arthur Gunn had ordered an unusually large amount of
bearing housings for Castco to help the firm (Castco)
weather financial difficulties. What issues are present in this
action ?
There is no formal procedure for purchase of inventories above the supposed
value by MRP on Turbos purchase policy
There is a weakness in the MRP system, because the system still receives the
purchase with an amount above its maximum value. The absence of automatic
restrictions on the system against purchases with minimum or maximum value.
Whereas computer-based purchases made by MRP are based on the rate of
use of an item, the delivery time of the vendor and the minimum or maximum
amount of stock required should be able to automatically refuse this purchase
The termination agreement does not apply to the Turbo purchase procedure,
Doug as the inventory manager admits to not knowing about the purchase
Possibility of bribery from the supplier to the procurement of goods Turbo.
Write the first sections of the audit report as
you think Ken should write them ?

For corporate discounts problem, headquarter must immediately sets

up an integrated and controlled MRP system from headquarter to all
subsidiaries. The method of procurement of goods can use
decentralized, but there is a limit on the maximum amount that can be
done by the subsidiary and the headquarter
The quantity of ordered materials should also be controlled using
integrated and synchronized MRP systems between headquarter and
subsidiary, so that both of them can control the system, how much
material is consumed by the order and how much is left of a particular
For sourcing problem, procurement system should be overhauled by using
the program from the parent level of the company, so the company gets
the best suppliers and can save some cash
For tooling problem, Turbo and National Engine must create a contract that
has a strong legal force that all the patterns and dies casting ordered,
should only be used by National Engine or Turbo. If violated then the
vendor must be subject to penalties and lawsuits. This needs to be
supported by periodic inspection of suppliers by checking directly the
manufacture of materials