Garganey Corp. manufactures automobile dashboards and interior components for Big Motors Inc.
(BMI). BMI requires that all its suppliers be connected to its computerized procurement and manufacturing system. BMI’s production planning system generates components requirements lists, which are then transferred electronically to various suppliers’ computers for them to bid on. Garganey’s production system calculates the cost of manufacturing the components at the required times, including materials, labour, overtime charges, overhead, and profit. Garganey makes a bid on the order and, if its bid is accepted by BMI, BMI’s production schedule for that component is downloaded to Garganey’s production system so that the required parts will be manufactured and delivered to BMI’s plants at the times they are required in the BMI assembly lines. When the components are completed, Garganey’s system generates a shipping instructions document, which is signed by the trucking company that picks up the components and delivers them to BMI. When the components arrive at BMI, they are inspected and, if approved, payment for the order is automatically transferred from BMI’s bank account to Garganey’s bank account. Any adjustments for quantities short-shipped are deducted from the amount BMI transfers and an adjustment memo is communicated electronically to Garganey’s sales system.
Develop an internal control audit program that will generate evidence about the effectiveness of Garganey’s internal controls. Using the tests of controls procedures described in the chapter as a starting point, adapt the procedures to be suitable for the IT-based sales system used by Garganey.