Overview
Hamad Al Mansoori operates TechLine Electronics, a growing retail business in Abu Dhabi specializing in computer accessories such as flash drives, keyboards, and headphones. Although sales have expanded rapidly, Hamad is increasingly concerned about the accuracy of inventory valuation and the effectiveness of cash control practices. He employs a perpetual inventory system and applies the FOP Destination to all its transactions and FIFO method.
At the beginning of April 2025, TechLine Electronics had an opening inventory of 50 units, each valued at AED 20. On April 8, the company purchased an additional 100 units at a cost of AED 22 per unit, increasing the total inventory available for sale with shipping cost of 2 AED per unit.
During the month, the company made two major sales. The first sale occurred on April 15, when 80 units were sold at a selling price of AED 35 per unit, with shipping cost 3 AED per unit. Later in the month, on April 20, another purchase of 60 units was made at a higher cost of AED 25 per unit, reflecting rising supplier prices, with shipping cost 2 AED per unit. The final sale took place on April 25, involving 70 units sold at AED 38 per unit, benefiting from the upward trend in prices, with shipping cost 3 AED per unit.
Moreover, the board of trustees of the company has expressed concern regarding the adequacy of internal accounting controls over cash collections and disbursements at certain branches. The trustees have asked you to serve on a three-person audit team alongside the internal auditor of a local college and a CPA who has recently joined the company.
At a meeting between the audit team and the board of trustees, you learn that the board has delegated responsibility for financial management and the audit of financial records to the finance committee. This committee prepares the annual budget and approves major disbursements but is not involved in cash collections or recordkeeping. No audits have been conducted in recent years because the same trusted employee has maintained the company’s records and served as financial secretary for the past 15 years. The company does not carry fidelity insurance.
Furthermore, cash collections and disbursements at some branches are handled by a team of employees, some of whom are trainees. The cashiers deliver the collected cash to the main office and hand it to the head cashier, who then counts the cash received. The head cashier records the amount, places the funds in the company safe, and is currently employed on a short-term, one-year contract.
The following morning, the financial controller opens the safe and recounts the cash. The controller withholds AED150–AED200 for petty cash, depending on anticipated cash expenses for the week, and deposits the remaining balance in the bank. Each month, the financial controller reconciles the bank statements and submits a copy of the reconciliation to the board of trustees. Historically, these reconciliations have shown very few bank errors and no discrepancies in the company’s books.
In addition, further concerns have been raised about potential fraud in financial reporting. The audit team has been tasked with developing a comprehensive framework to detect and prevent financial statement fraud.
Required
- Journalize all inventory transactions under a perpetual system.
- Apply both FIFO and LIFO valuation methods to determine ending inventory and COGS.
- For each of the following roles— (1) Cashiers, (2) Head Cashier, (3) Financial Controller, and (4) Finance Committee—Identify at least two specific weaknesses in internal accounting controls related to the handling of collections. Clearly state what the weakness is, why it is problematic, and the potential risk (e.g., theft, misstatement, fraud). Recommend at least two practical improvements or enhancements to the internal control procedures that address each identified weakness. Support your discussion with citations from relevant academic or professional literature
- Critically reflect on how inventory valuation and cash control jointly influence Financial statement reliability, Liquidity and profitability assessment, and Stakeholders confidence. Support your discussion with citations from relevant academic or professional literature
You must submit the assignment as PDF.