Material Weakness Memo

Can a lack of controls over the purchasing process lead to a material weakness?

• 99 Cents Store's Case

Yahoo Finance - Business Finance, Stock Market, Quotes, News

Deficiencies in Merchandise Inventory Management. During the year, the Company identified the following significant deficiencies, which were considered a material weakness when aggregated. Formal buying limits and purchase approval thresholds were not finalized or implemented for merchandise purchasing. Merchandise shipped from the warehouses to the stores was not adequately spot checked.

Also, the store inventory transfer reports and inventory scrap reports were not consistently utilized.

Additionally, there was no formal review of certain processes associated with the corporate inventory management system.

Specifically, there was:

(i) no formal review of input of new product data, including merchandise costs and retail selling prices,

(ii) no formal review of certain changes to the inventory master data file, and

(iii) no periodic review of the inventory master data file. Furthermore, the warehouse perpetual inventory records in the inventory master data file were not reconciled to the general ledger.

These deficiencies increased the likelihood of potential material errors in the Companys financial reporting.