Smaller Company is a manufacturer of plastic golf balls. Since the company was organized, it has used central processing for all of its computerized accounting operations. Early this year management decided to use microcomputers to process inventory transactions and maintain inventory records in the branch offices.

Several operators (who had previous word processing experience with microcomputers) were hired in each branch office. A number of programmers and computer operators in central processing were terminated. The newly hired microcomputer operators were given a two-week training course in the use of the appropriate software to process inventory transactions.

The microcomputers were located wherever they "would fit" in the respective branch offices. Diskettes were used for file storage and were stored in the same file drawers as the printouts of inventory transactions and records. All employees had access to the files. Only one set of diskettes was maintained.

The auditor for Smaller Company had not been consulted about the change to microcomputers for processing inventory transactions at the branch offices. Therefore, when he arrived late in the year to update his understanding of internal control, he discovered the following:

1. No one at the branch offices knew the correct amount of inventory for each type of plastic golf ball. The inventory amounts on printouts did not match the inventory control account in the general ledger maintained in the central accounting offices.

2. Diskettes were not labeled, and no one seemed to know the contents of each diskette.

3. Discounts were being lost because no one in the branch offices had the necessary invoice information to know when merchandise orders had been filled by vendors.

Because of these and other microcomputer inventory problems at the branches, the auditor was considering assessing a maximum control risk to inventory controls and performing extensive substantive tests on inventory assertions of existence and completeness.

Required:

a. Give probable reasons why the auditor found the previously described conditions.

b. What controls should now be put in or strengthened?

c. What potential problems are inherent in the use of microcomputers for accounting applications of this type?