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In Akhwan Company, operations director Mr Tamad recently realized there had been an increase in products failing during the final quality checks. These checks were carried out in the QC (quality control) laboratory, which tested finished goods products before being released for sale. The product failure rate had risen from 1% to 4% in two years' time which meant an increase of hundreds of items of output a month which were not sold to Akhwan's customers. The failed products had no value to the company once they had failed QC as the rework costs were not economic. Because the increase was gradual, it took a while for Mr Tamad to realize that the failure rate had risen. A thorough review of the main production operation revealed nothing that might explain the increased failure and so attention was focused on the QC laboratory. For some years, the QC laboratory at Ikhwan, managed by Ramly, had been marginalized in the company, with its two staff working in a remote laboratory away from other employees. Operations director Mr Tamad, who designed the internal control systems in Ikhwan, rarely visited the QC lab because of its remote location. He never asked for information on product failure rates to be

In Akhwan Company, operations director Mr Tamad recently realized there had been an increase in products failing during the final quality checks. These checks were carried out in the QC (quality control) laboratory, which tested finished goods products before being released for sale. The product failure rate had risen from 1% to 4% in two years' time which meant an increase of hundreds of items of output a month which were not sold to Akhwan's customers. The failed products had no value to the company once they had failed QC as the rework costs were not economic. Because the increase was gradual, it took a while for Mr Tamad to realize that the failure rate had risen. A thorough review of the main production operation revealed nothing that might explain the increased failure and so attention was focused on the QC laboratory. For some years, the QC laboratory at Ikhwan, managed by Ramly, had been marginalized in the company, with its two staff working in a remote laboratory away from other employees. Operations director Mr Tamad, who designed the internal control systems in Ikhwan, rarely visited the QC lab because of its remote location. He never asked for information on product failure rates to be

Auditing: A Risk Based-Approach (MindTap Course List)
Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter11: Auditing Inventory, Goods And Services, And Accounts Payable: The Acquisition And Payment Cycle
Section: Chapter Questions
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QUESTION 2 A. In Akhwan Company, operations director Mr Tamad recently realized there had been an increase in products failing during the final quality checks. These checks were carried out in the QC (quality control) laboratory, which tested finished goods products before being released for sale. The product failure rate had risen from 1% to 4% in two years' time which meant an increase of hundreds of items of output a month which were not sold to Akhwan's customers. The failed products had no value to the company once they had failed QC as the rework costs were not economic. Because the increase was gradual, it took a while for Mr Tamad to realize that the failure rate had risen. A thorough review of the main production operation revealed nothing that might explain the increased failure and so attention was focused on the QC laboratory. For some years, the QC laboratory at Ikhwan, managed by Ramly, had been marginalized in the company, with its two staff working in a remote laboratory away from other employees. Operations director Mr Tamad, who designed the internal control systems in Ikhwan, rarely visited the QC lab because of its remote location. He never asked for information on product failure rates to be reported to him and did not understand the science involved in the QC process. He relied on the two QC staff, Ramly and his assistant Rahman, both of whom did have relevant scientific qualifications. The two QC staff considered themselves low paid. In practice, there are supposed to report to Mr. Tamad. The work was routine and involved testing products against a set of compliance standards. A single signature on a product compliance report was required to pass or fail in QC and these reports were then filed away with no-one else seeing them. It was eventually established that Ramly had found a local buyer to pay him directly for any of Ikhwan's products which had failed the QC tests. The increased failure rate had resulted from his signing products as having 'failed QC' when, in fact, they had passed. He kept the proceeds from the sales for himself, and also paid his assistant, Rahman, a proportion of the proceeds from the sale of the failed products. Required: b. Discuss deficiencies in the internal control that led to the increased product failures at Akhwan.
Transcribed Image Text:QUESTION 2 A. In Akhwan Company, operations director Mr Tamad recently realized there had been an increase in products failing during the final quality checks. These checks were carried out in the QC (quality control) laboratory, which tested finished goods products before being released for sale. The product failure rate had risen from 1% to 4% in two years' time which meant an increase of hundreds of items of output a month which were not sold to Akhwan's customers. The failed products had no value to the company once they had failed QC as the rework costs were not economic. Because the increase was gradual, it took a while for Mr Tamad to realize that the failure rate had risen. A thorough review of the main production operation revealed nothing that might explain the increased failure and so attention was focused on the QC laboratory. For some years, the QC laboratory at Ikhwan, managed by Ramly, had been marginalized in the company, with its two staff working in a remote laboratory away from other employees. Operations director Mr Tamad, who designed the internal control systems in Ikhwan, rarely visited the QC lab because of its remote location. He never asked for information on product failure rates to be reported to him and did not understand the science involved in the QC process. He relied on the two QC staff, Ramly and his assistant Rahman, both of whom did have relevant scientific qualifications. The two QC staff considered themselves low paid. In practice, there are supposed to report to Mr. Tamad. The work was routine and involved testing products against a set of compliance standards. A single signature on a product compliance report was required to pass or fail in QC and these reports were then filed away with no-one else seeing them. It was eventually established that Ramly had found a local buyer to pay him directly for any of Ikhwan's products which had failed the QC tests. The increased failure rate had resulted from his signing products as having 'failed QC' when, in fact, they had passed. He kept the proceeds from the sales for himself, and also paid his assistant, Rahman, a proportion of the proceeds from the sale of the failed products. Required: b. Discuss deficiencies in the internal control that led to the increased product failures at Akhwan.
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