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You must identify and describe the top 10 internal control deficiencies in the attached case.  In making your assessment of the top deficiencies, you need to consider the associated risks to meeting the objectives of the program (i.e., an effective system of internal control provides reasonable assurance that risk to objectives is at acceptable levels).  When you think about the internal controls, you should decide whether the controls are designed adequately to reduce risk or if the issue is the controls are not operating as intended.  In your discussion you must indicate the implication(s) of each control weakness and what COSO internal control principle(s) is applicable to each one.   Please rank the internal control deficiencies from 1 to 10.  The suggested length for this assignment is 2-3 pages.

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Case Study: Tarheel Textiles

This case has been modified by the instructor. Used with permission of The IIA Research Foundation

 

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Background

Many of Tarheel Textiles’ old Draper looms have recently been replaced with more modern and efficient weaving machines.  Instead of being junked or scrapped, these surplus looms are sent by the plants to the Supply Support Division where they are stripped of all useable parts.  These parts are reconditioned, stored, and placed on perpetual inventory records as used supply items.

 

Manufacturing facilities within Tarheel route all their purchase orders for Draper loom parts through the Supply Support Division.  This includes orders made out to Draper Company and all other vendors from whom Draper parts can be purchased.  Supply Support reviews its inventory records (and will hold the order for no more than one day) to determine the availability of used parts generated from the loom stripping program.  If parts are available within Tarheel, the purchase order to the vendor is altered and the Supply Support Division ships the available parts automatically to the ordering plant.  The altered purchase order is then sent to the vendor.This program has resulted in substantial savings to Tarheel.  Also, many of these older parts are in short supply and are, therefore, difficult to obtain within a reasonable delivery time.

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Operation

The Loom Reclamation Program operates as follows:

 

Receiving

  1. Plant sends to the Supply Support Division all surplus Draper looms. These looms may or may not be operative, but would have been scrapped at the plant, or otherwise disposed of, had they not been shipped to Supply Support.

 

  1. Plant prepares a shipping document, which accompanies each shipment of looms. This shipping document lists each asset shipped, identified with the Tarheel fixed asset tag number.

 

  1. The shipping plant prepares the necessary reports to transfer these surplus items to the Supply Support Division fixed assets ledger.

 

  1. The looms are transferred, unloaded, and placed in a 3-1/2 acre fenced-in field.The looms are stacked on top of each other.

 

  1. Sometimestag numbers are missing from the looms–many of the looms are old and thus the tags have been jarred loose or have fallen off during shipment.

 

  1. Shipping documents are sent to the administrative office, where looms listed on the shipping document are compared to the quarterly printout received from Corporate Accounting which lists all assets transferred to Supply Support during the quarter.

 

  1. The administrative area keeps a manual listing of looms. This list is reconciled quarterly with the computer-generated fixed asset ledger received from Corporate Accounting.

 

 

Loom Teardowns

  1. Looms are torn down daily (as many as time permits). The teardown process includes:

–  Removing the Tarheel Textile asset tag number.

–  Stripping the asset of all useable parts.

–  Reconditioning these parts.

–  Storing any salvageable metal and the residue (or carcass) in a central area. The residue is usually the loom frame and some useable pieces of metal.

–  Teardown crew members try to keep track of all the parts, especially after the parts are steam cleaned, repaired, and repainted.  But with so many parts, it is difficult.

–  Brass pieces are put in separate baskets, and entire baskets will sometimes disappear during weekends

 

  1. A Loom Teardown Report is prepared weekly. The report lists by identification tag number each loom torn down during the week.  As indicated above, sometimestag numbers are missing from the looms.

 

  1. This Loom Teardown Report is sent to the Administrative Office where it is used to authorize removal of these looms from the fixed assets accounting records. The tag number identifies assets on the ledger.

 

  1. The loom parts salvaged as a result of the loom teardown are collected. A quality control person reviews each part to determine whether it is reusable as is, needs to be reconditioned, or should be sold as scrap metal.  The reusable parts are eventually sent to the Supply Room and placed on perpetual inventory records for accountability.

 

  1. If inventory records indicate reconditioned Draper loom parts are available in bins, these parts will be used to fill the order. If inventory records show no parts available, the Supply Room Clerk copies these part numbers/descriptions on a sheet of paper.This sheet of paper goes to the Loom Teardown Supervisor.  Crewmembers will go out to looms in the field and strip the needed parts from the looms.

 

 

Disposal of Residues and Scrap Metal

  1. Johnstone & Company is the primary customer to whom Tarheel sells loom residues and scrap metal. A company representative will often come to Tarheel, select loom residues and scrap parts he wants to purchase from those available, and supervise the loading of his truck.

 

  1. The Loom Teardown Supervisor calls the Administrative Area and requests a shipping document be prepared since Company policy prohibits any vehicle from leaving the premises without a Notice of Shipment. The Teardown Supervisor gives the office all the information necessary to prepare the document.

 

  1. The truck leaves the premises from the loom field through the main gate.

 

 

Other Pertinent Information

  1. According to teardown crew members, they were instructed by the Teardown Supervisor to find 64” X-3 Draper looms in the field and load them onto Johnstone trucks. No 64″ X-3 Draper looms were listed on shipping documents which supported shipments made during the last six months.

 

  1. No customer invoices for brass had been issued during the last 12 months.

 

  1. A physical inventory of looms in the field was taken. The variance relating to 64″ X-3 looms was isolated:

34 looms on inventory records

(5) looms on hand in field

29  loom shortage

 

 

  1. Teardown crew members have expressed concerns to internal auditing about the controls over the program but did not raise them with management.

 

  1. No security persons, guards, or watchmen are used at the site.

 

  1. The main entrance gate and the gate to the field of looms could be locked.The field of looms was located approximately 400 feet from the main gate. Surplus electric motors had also been placed in this field.

 

  1. The average market value for these Draper looms is $750. Converted looms can sell for as much as $7,500.The value of parts varies, but ranges from $2 to $70.  Johnstone & Company has been paying Tarheel Textiles $75 to $100 for each loom residue purchased.

 

  1. Approximately two pounds of brass can be salvaged from each stripped loom. This brass can be sold to a local dealer for 53 cents/pound.
  2. The 64″ X-3 Draper loom parts may be used in converting looms to air-jet looms, which are more efficient and utilize newer technologies.
  3. In recent months, Johnstone & Company has also been purchasing reconditioned loom parts in addition to scrap metal.
  4. Leventhal Parts & Supply Company also purchases a small percentage of loom residues and unusable parts, but only offers Tarheel Textiles $50 per residue.

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