Reference no: EM132947333

Question - Run for Life Ltd operates a chain of stores selling athletic equipment across the South West of England. The company is wholly owned by the managing director Chris Cadence who opened his first store in 2000. Since then the business has expanded to its current level of ten stores employing 75 people and with an annual turnover of £5 million. Chris Cadence has requested an audit following the discovery in 2016 of an employee fraud involving purchasing and inventory which is thought to have cost the company up to £100,000.

You are an audit manager at TDL Chartered Accountants and have been assigned to manage the audit of Run for Life Ltd in respect of the year ended 31st December 2017. In carrying out your review you discover that the ten stores are all managed separately and treated as separate units for reporting purposes. Chris likes to reward his staff in accordance with their store's performance and enjoys offering regular incentives to store managers through bonus schemes and competitions. The stores all have separate purchasing and inventory systems and if customers require goods that are out of stock in one store they are not permitted to call another store to locate the stock, instead they must place an order for the stock themselves or ask the customer to try one of their other stores. The company does not have an internet presence and so on-line ordering by customers is not possible.

The stock purchasing system for each store is the same. The store managers are responsible for ordering stock and it is at their discretion to determine when and how much to order. Anybody at the store can raise a purchase requisition, from any supplier, but it must be authorised by the store manager before being processed. When the goods are delivered, they are received by whoever is available in store and the Goods Received Note (GRN) is sent to accounts at the company's head office to be matched to the purchase invoice. If there are any queries then the accounts assistant will contact the relevant store manager for clarification. However, there is no further authorisation required before payment of the invoice by the accounts staff. Chris Cadence reviews cash flow and individual store stock reports on a monthly basis but relies largely on the experience of his store managers and his accounts staff. There is no finance director but an accounts manager who has worked with Chris since he started the business, Chris relies on his accountants to prepare quarterly management accounts and inform him of any concerns.

The employee fraud is thought to have gone on for about two years. It involved an assistant manager who was amending purchase requisitions after they have been authorised by the store manager. When the additional goods were delivered the fraudster ensured that she received the goods and then sent the GRN to head office. She was able to take the additional stock items and sell them on social media sites for personal gain. The store manager alerted Chris to concerns over the assistant manager following her suspicious behaviour.

Required - Identify the weaknesses in the company's purchases and stock control systems and explain how these would have assisted the assistant manager with his fraud.