I.

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

Nuts and Kisses Co. (NNK) is a peanut butter manufacturing company

with differentiated and low cost products. It sells peanut butter added
with flavors of rice krispies, chocolate bars and nips at a price of P85
per 340g jar and sells them through orders and direct-selling.
NNK is formed for compliance of BA15 requirements of Xavier
University Ateneo de Cagayan and its name is registered as sole
proprietorship under the name of their general manager, Crisha May
Caharian. There are no requirements for formation or registering
except to register business name. No formalities are required such as
Board Meeting or forming buy-laws but the company will have her own
business rules. Sole proprietorship enjoys full authority and managerial
control on the business. It can control business cost at individual level
and at own decisions.
The companys policy is to sell everything that they have produced on
that period. As such, the entity expects that there is neither spoilage
nor ending inventory left on that month. However, the company is not
fined or pressured if their actual figures do not meet their projected
amounts.
II.

UNDERSTANDING OF THE ENTITYS INTERNAL CONTROL

GENERAL MANAGER

FINANCE

PURCHASING

MARKETING

PRODUCTION

OPERATION

CASH
CUSTODIAN

NNK is composed of seven members all under the direct supervision of their
general manager. Authorization, recording, and custody functions are
separated. The cash custodian is solely of custody function, however, still
reports the cash movement of cash in his/her hands. The purchasing
manager, however, keeps the receipts from the purchases and maintains a
record of such purchases. This may indicate lack of control, but since the
company is a small entity, the general manager can easily supervise such
purchases and records. The general manager gives the authorization of the
production to their production manager and the latter executes it. Therefore,
my preliminary understanding of NNKs internal controls is that these
controls are reliable and the preliminary assessment of control risk is less
than high level. However, it is inefficient for the auditor to obtain evidence to
justify such assessment. Since test of controls cannot be performed, the
substantive testing of the auditor would be extensive.
III.

MANAGEMENT REPORT

SALES
Budgeted vs Actual
350
300
250
200
150
100
50
0
June

July

August

September

October

Budgeted Sales in units

November December

January

Actual Sales

Analysis:
The lowest sales reported are in the month of January due to low demand for
this month. Demand for their products vary across the months, this is why
NNKs production also varies. And since, the companys sales is directly
related to their production (because of the companys policy of no spoilage
and no ending inventory at the end of the month), then their sales are also
related to the demand of the reported months. This is why in July, when the

company produced the highest amount of units, NNK reported the highest
amount of sales.

Total Unit Sales

1380
1360
1340
1320
1300
Unit sales

1280
1260
1240
1220
1200
1180

Budgeted Sales

SALES in units
SALES in PHP

Forecasted Sales

Actual Sales

Variance
120 units favorable
P10,200 favorable

ANALYSIS:
The variance arises solely from the difference in the number of units sold and
not from the selling price since the company sells the product for a fixed
price of P85 no matter how much their cost of production is. The variance is
favorable because their actual sales exceeds their budgeted sales by 120
units or Php10,200.

Sales Trend Analysis

350.00
300.00

Actual Sales

250.00

Moving average (Actual

Sales)

200.00
150.00
100.00
50.00
0.00
1

With a two-period moving average formula for the computation of the trend
of NNKs sales, this shows that their actual sales varies slightly with the
forecasted sales based on the same formula. In this case, for the third month
of operation, August, sales dropped down by 56.88% or 186 units. This may
be due to low demand for the month compared to July.

COST
Unit Variance Analysis
Month
June

Actual
production
120
175

July

200

327

127

August

180

September

200

150
240
160
205
53
100
1410

-30
40
90
55
-87
-30
220

October

Budgeted
Production

70

November

150

December

140

January

130

TOTAL

1190

Variance
55

The variance is favorable since the company produced more than what was
projected. And the total variance for the cost per unit shows a favorable

P107.13 since the company incurred lower cost compared to their budgeted
costs.
Budgeted Cost per
Actual Cost
unit
per unit
PHP
54.59
66.09
PHP
55.42
66.09
PHP
54.91
66.09
PHP
52.78
66.09
PHP
54.61
66.09
PHP
49.11
66.09
PHP
47.21
66.09
PHP
52.87
66.09
TOTAL
PHP528.72
PHP 383.84

Variance
PHP (11.50)
PHP (10.67)
PHP (11.18)
PHP (13.31)
PHP (11.48)
PHP (16.98)
PHP (18.79)
PHP (13.22)
PHP (107.13)

Overall, the company was able to lower their cost per unit and increase the
production.

GROSS PROFIT
Actual vs Budgeted

140000
120000
100000
80000
Sales
Cost of sales

60000
40000
20000
0
Actual

Budgeted

Analysis:
The company was able to increase its actual sales and lessen its actual cost
of sales per unit compared to the budgeted figures.

OPERATING EXPENSES

PHP 6,000.00
PHP 5,000.00
PHP 4,000.00
PHP 3,000.00
PHP 2,000.00
PHP 1,000.00
PHP -

Total expenses

Expenses are mostly fixed including utilities expense and salaries expense.
The company has contracted the warehouse owner on these fixed expenses
no matter how much they produce. The expenses vary on transportation
expenses, and unusual expenses that are not incurred each month like bank
registration fees, permit fees, training expenses.

BALANCE SHEET ACCOUNTS

Cash
PHP 35,000.00
PHP 30,000.00
PHP 25,000.00
PHP 20,000.00
PHP 15,000.00
PHP 10,000.00
PHP 5,000.00
PHP -

CASH BALANCE AT THE END OF THE PERIOD

Cash balance shows an upward trend although it declines on periods where

the company incurs unusual/extraordinary expenses like training expenses
for its employees, payment of legal fees for operation such as business
permits, or when the company may incur net loss. Overall, the company is
liquid to pay its expenses and incurs no debt.

Inventory

PHP 3,000.00
PHP 2,500.00
PHP 2,000.00
PHP 1,500.00
PHP 1,000.00
PHP 500.00
PHP -

Inventory

Although the companys policy is that there should be no inventory left at the
end of the month, this objective however, is no attainable. The company
then sells the inventory on a FIFO basis as these peanut butters have
expiration dates. These ending inventories arise from excess of produced
units and sold units especially when the company produces products near
the end of the month. As such, inventories about to be sold are still present
at cutoff dates.

ITEMS FOR DISCUSSION WITH

MANAGEMENT
1. Areas of Further Improvement
a. The company should contract with a supplier so they may
have consistency in cost of sales and production
2. Proper Identification and Recording business transactions
a. The company should maintain appropriate records of all
time; thermal receipts may be taken a photo of before they
fade
b. The company maintain appropriate ledgers and journals
3. Proper Classification of Appropriate account titles
4. Areas of Concern
a. Record ending inventories if they exist at cutoff; even if it is
against the primary objective of the company
5. Proper handling, keeping and deposit of cash

RECOMMENDED ACTIONS
1. An individual with adequate knowledge and training of accounting may
join the company and perform its accounting functions.
2. The company may do its own accounting but make sure to journalize
all its business transactions in a General Journal. Also, maintain
Subsidiary ledgers.
3. Employ the appropriate managers; e.g. financial management majors
for finance manager and not marketing manager and vice versa
4. Obtain and file all necessary receipts, preserve thermal receipts
through different medium
5. Employ the use of Payment Vouchers in purchasing