In Noname Co, Executive Director Benjamine recently found out there had been an increase in products failing quality checks. These checks were carried out in the Quality control Department,
which tested finished goods before their release for sale. The product failure rate had risen from 1.5%
of items two years ago to 4.5% now, and this meant an increase of hundreds of items of output a month
which were not sold on to Noname's customers. The failed products had no value to the company once
they had failed quality control, as the rework costs were not economic. Because the increase was
gradual, it look a while for Mr Janoon to realise that the failure rate had risen.
A thorough review of the main production operation revealed nothing that might explain the increased
failure and so attention was focused instead on the QÇ Department. For some years, the quality control
Department at Noname, managed by Jane Goo, had been marginalised in the company, with its two
staff working in a remote Department well away from other employees. Benjamine, who designed the
internal control systems in Noname, rarely visited the quality control lab because of its remole location.
He never asked for information on product failure rates to be reported to him, and did not understand
the science involved in the quality control process. He relied on the two quality control staff, Jane Goo
and her assistant John Zong, both of whom had relevant scientific qualifications,
The two quality control staff considered themselves low paid. Whilst in theory they reporled to Mr
Janoon, in practice, they conducted their work with little contact with colleagues. Tho work was routine
and involved testing products against a set of compliance standards. A single signature on a product
compliance report was required
to pass or fail products in quality control and the compliance reports
were then with no-one else seeing them.
It was eventually established that Jane Goo had found a local buyer to pay her directly for Noname's
products which had failed the quality control tests. The increased failure rate had resulted from her
signing products as having 'failed
quality control' when, in fact,
they had passed. She kept the proceeds
from the sales for herself
, and also paid her assistant, John Zong, a proportion of the proceeds from
the sale of the failed products.
Required
(a) Explain typical reasons why an internal control system might be ineffective. (20 marks)
(6) Explain the internal control deficiencies that led to the increased product failures at Noname Co.
(20 marks)
(©) Discuss the general qualities of useful information, stating clearly how they would be of benefit to
Mr Janoon, and recommend specific measures which would improve information flow from the quality
control lab to Mr Janoon (20 marks)