InstaPanaloHotNaHot Corporation

Internal Control Review

Objectives Risk(s) Potential Control Points Suggested Control Test IC Review Conclusion/ Process Narrative
Identified/ Weaknesses;
Action Taken
PRODUCTION PLANNING AND CONTROL
Systematic Estimates may be Sales Forecast should be as Reconciliation of sales IC Review Weakness: This process begins on InstaPanaloHotNaHot
authorization, wrong because some accurate as possible to forecasts with production InstaPanaloHotNaHot Corporation with receipt by the
planning and of the underlying support purchasing and plan and financials. Regular Corporation's production Manufacturing Manager of the sales forecast
establishment of data are inaccurate production monitoring of sales planning clerk does not verify that from the Marketing Department, and the
routes and or unavailable planning/budgeting. Work accuracy and data gathered the sales order and sales inventory status from Inventory control
schedules of work shift policies and plans for an are fed back into the forecast are properly Based on these data, a Production Budget is
activities to increase or decrease in forecasting process. approved by the marketing prepared, which is to be sent to the Inventory
achieve optimum manufacturing activity are and sales department Manager. Based on these data, a Production
utilization of based upon the sales forecast. supervisor. Budget is prepared, which is to be sent to the
materials, workers The production clerk should Inventory Purchasing Manager.
and machines; verify that the sales order and
efficiency in sales forecast are properly
production of approved by the marketing
goods/services; and sales department
and to provide the supervisor.
means of ensuring
that the operations
to be in
accordance with Recommendation: Sales
the plan orders and sales forecasts
that support the production
plan should be verified if
they are properly approved
by their respective
supervisors.
Effects of Frequent changes in Master The amount of work IC Review: Master Upon receipt of the Production Budget,
unexpected changes Production Schedule result in scheduled for the factory or Production Schedule is Purchasing Manager then computes for the
in Master Production due-date changes in open department should be equal made after finalizing the total material requirements for production.
Schedule may affect orders, quantity and timing or slightly greater than the plans for production which Once the target ending materials inventory is
the materials needed for planned order of end production cycle. It is enables the company to set, the raw materials to be purchased will be
for a particular order products. Minor changes in desirable that minimum have minimal changes only. assessed. Based on these data, two copies of
and may not be Master Production Schedule changes be made after purchase requisitions are made, where one is
available. The can create significant changes schedules are established. sent to the Purchasing Department personnel
availability of in Materials Requirement for purchasing and the other to Inventory
materials is often Planning (MRP). Control bookkeeper for recording.
limited due to the
fact that suppliers
have similar
bottlenecks and
schedules variations
transmitted from
sub-tier suppliers.
Unauthorized Inventory purchases are Examine requisitions for IC Review: Authorization, Upon the receipt of raw materials purchased,
purchases may be appropriately authorized. indication of Authorization. approval and control of the receiving clerk (from Purchasing Cycle)
made resulting in Duties of authorization, Inquire of client personnel. activities are properly made will inspect if the goods are in accordance
misappropriation of receiving and purchasing and executed in accordance with the specifications in the purchase order
assets of the should be properly to management's decisions and check its quality. Furthermore, the
corporation. segregated. and plans. approval for changes in specifications must
Segregation of duties be properly documented. If the inventory
might be does not meet the standards of quality
compromised in inspection, a report must be prepared and the
purchasing materials purchasing department must be notified for
and authorization of the subsequent return of the goods
purchases. purchased, if necessary.

Recommendation: Check if
duties are properly
segregated
Unauthorized Movement of Inventory items Examine requisitions for Recommendation: To begin the preparation of production
quantities may be is authorized by requisitions. indication of approval. Movement of Inventory control documents, the Production Budget
requested which may Inquire of client personnel. items must be verified if and BOM are sent back to the manufacturing
result in Prepare statements of they are authorized by manager to be used together with the
misappropriation or criteria for determining requisitions received Route Sheet and Engineering
misuse of assets of which products are to be Specifications to make a Production
the corporation. produced and in what Schedule, which is a formal plan and
quantities. authorization to begin production. Two
copies of Production Schedule are prepared
and sent to the Work center and the other to
the Manufacturing Clerk to be kept in the
open Work Order files. Furthermore, the
other control documents such as the Move
Ticket, Work Orders, and Material
Requisitions are prepared. The route sheet
obtained from its file and the Engineering
Specifications received from the Engineering
Department will be used to create the Move
Ticket, whereas the information from the
route sheet and BOM is used to create the
Work Orders. Also, the materials required in
production determined beforehand are
allocated to the different processes in the
Route Sheet to create the Material
Requisitions document. Elaborating further,
four copies of the Work Order are prepared,
where one is sent to the Manufacturing Clerk,
one to the Cost Accounting clerk, and the
other two is sent to the Work Center
supervisor. Also, two copies of Move Ticket
and three copies of Material Requisitions are
prepared and are all sent to the Work Center
supervisor for processing.
 Unauthorized Select a sample of recorded The Manufacturing Clerk then receives the
quantities or purchases and vouch to last Move Ticket and the Production Schedule
products may be documents authorizing from the work center supervisor, which
produced, purchase. signals the end of production cycle. At this
potentially resulting point, he will take the open work order file
in obsolete, excess or and together with these two documents, close
otherwise unusable the open work order file.
inventory and excess
carrying costs.
WORK CENTER
To establish Unauthorized Prepare inventory processing Examine requisitions for Aside from preparing The work center supervisor initiates
procedures for personnel may manuals, including indication of approval. processing manuals production under the work center by giving
using and circumvent existing procedures for controlling Inquire of for controlling inventory instructions to the work team about the
physically procedures, inventory movement. client personnel. movement,the management production plan through the prepared control
transferring potentially resulting must also provide a list of documents (Move Ticket, Work Orders, and
inventory in in stolen or misused personnels with their Material Requisitions) and Production
accordance inventory. corresponding access to Schedule received from the Manufacturing
with Inventory may be Movement of inventory items Restrict access to inventory inventory records. Manager of the Production Planning and
management's misplaced, resulting is authorized by requisitions. to authorized personnel. Control Department. After this, the work
authorization. in unused assets. center supervisor requests for raw materials
from the storekeeper to begin the production.
The materials requested and the machine and
labor hours required for manufacturing all
The management may also sticks to what is written in the Work Order.
establish physical controls
over inventory such as
fences, locks, and other
similar ways.

To record the Inventory placed in Maintaining logs of inventory Review logs of inventory. Management must have Inventory count is a key control in the
inventory used or production may not movement duplicate copies of conversion cycle. It helps in monitoring
transferred at the be recorded, into and out of storerooms inventory logs inventory levels and inventory movement.
correct amount, in potentially resulting and production stages. that in case of loss of Since the company’s products are
the proper period, in records from unwanted homogeneous, counting of inventories is
and properly misstated inventory events, there usually done on a quarterly and annual basis.
classified. and cost of sales. will be supporting
documents available for the
Examine physical auditors
safeguards.
To establish Employees could Manuals for personnel and Review personnel file for The management should As part of the payroll processing cycle, the
payroll and process paychecks payroll procedures should be authorizations. always keep an updated personnel
personnel for established. personnel department prepares and submits personnel
procedures in terminated or records for all employees action forms.
accordance with fictitious employees, and periodically verify These documents identify employees
management's potentially employee authorized to receive
authorization. resulting in reassignments and a paycheck and are usedto reflect changes in
misappropriated personnel action reports. hourly pay rates,
cash. payroll deductions, and job classification.

To record amounts Payroll costs, labor Putting data on Time tickets Examine time cards. The management should The work center is also responsible for
due to employees costs, and related and Job tickets segrate the functions of overseeing the timekeeping process. Aside
at the liabilities may be should be properly observed authorizing, executing and from supervising the recording by the job
proper amounts, inaccurate, and supervised. recording payroll and workers of their own working hours, the
in the proper resulting in personnel Work Center Supervisor also verifies the data
period, and misstated expenses transactions. The from the worker’s Job Time Tickets and
properly classified. and liabilities. managementsshould also prepares the Payroll Time Cards at the end of
maintain an the workweek.
updated lists of authorized
pay rates.
Separation of personnel, Observation.
payroll, and timekeeping
functions.
Compare time card dates
with recording date and
paycheck dates.
Examine job time tickets for
indication of reconciliation
and approval.
STOREKEEPING
To ensure that Authority on the Forms on Material Account for numerical *Independent Verification: Upon receiving three copies of Material
control on raw release of raw Requisition, Excess Material sequence of the forms. The Storeroom Receiving Requisitions and/or Excess Material
materials, excess materials and excess Requisitions and Material Clerk might be influenced to Requisitions, the Storeroom Receiving Clerk,
raw materials, and raw materials and Return Tickets are pre- commit improper validation after reviewing the documents for proper
material return custody of material numered. procedures such as allowing approval or authorization, passes these
tickets is properly returns is overriden incomplete documents to documents to the storekeeper. [KC8 –
executed pass through his channel Storeroom receiving clerk reviews the
due to management material requisitions and/or excess material
override or collusion among requisitions and materials return tickets for
them. *Accounting records: proper indication of authorization, and to
Employees may involve in approve the release of materials.] The
producing fraudulent forms storekeeper will then issue the requested raw
or unauthorized issuance of materials to the Work Center. [KC9 –
authentic forms for the Materials storekeeper issues raw materials to
release of raw materials in work center/s in exchange for material
order for these forms to requisitions and additional materials for
account in the inventory excess material requisitions]
records and to form part of
audit trail.

Forms bear authorized Determine whether sampled *Transaction Authorization:

signatures
Filed Material Requisition,
Excess Material Requisition,
Material Return Tickets are
properly recorded in the
books.
forms bear authorized
signatures
Trace sample forms to the
inventory books to ascertain
completeness of records.
The opportunity that an
employee takes to
misappropriate inventories
may lead to forged
signatures of him due to his
familiarity with the
authorized signature.
*Independent Verification:
The Storeroom Receiving
Clerk may be involved in
employees' collusion to
misappropriate inventories
To ensure that raw Inventories are lost The Inventory stockroom is Inquire and observe the Access control: An The Storeroom Receiving Clerk receives the
materials are not or stolen. properly locked when not in physical security over the employee may get copy of the Work Order documents together
misappropriated use. inventory stockroom unauthorized access with the manufactured product and after
through the custodian's recording, the manufactured product will be
confidence on him. This forwarded to the Finished Goods Storekeeper
unauthorized access leads for storage. Physical safeguards over
to theft due to pressures inventory storerooms and work centers are
from co-employees and also in place to restrict access to inventories
personal motives and (e.g. door locks and passcodes, CCTV
opportunity. Due to cameras, security alarms, security guards,
employees' confidence identification cards/badges for authorized
among themselves, control personnel and employees). Further, the
on inventory logs may no storeroom maintains a visitor logbook and a
longer be performed. log of inventory movement to track the
personnel that visit the storerooms and the
transfer of inventory into and out of the
storeroom. [KC12 – Inventory custodians
(materials storekeeper and finished goods
custodian) maintain a logbook as a separate
listing of authorized personnel that visit the
storerooms/warehouses]; [KC14 –
Appropriate maintenance of logs of inventory
movement into and out of storerooms and
production stages]
Establish physical controls Ascetain the degree of At the end of the production, the work team
over inventory. control to master keys representative returns the items not used, if
custody there is any, together with the Materials
Return Ticket. On the other hand, the
Storeroom Receiving Clerk, upon receiving
three copies of the Materials Return Ticket
together with the goods, checks if it reconciles
and then forwards them to the Storekeeper.
The Storekeeper then puts these unused
materials back to stockroom.
To ensure that the Some inventories Perform inventory count at When approriate, perform Independent Verification: Inventory count is a key control in the
entity has rights reflected on the every year-end in the some test counts on the Error on inventory level's conversion cycle. It helps in monitoring
on inventories financial statements presence of an external inventory. record may be due to timing inventory levels and inventory movement.
held and are not owned by the auditor. differences. * Segregation of Since the company’s products are
inventories are entity Duties: The storekeeper homogeneous, counting of inventories is
properly valued. must not be involved in the usually done on a quarterly and annual basis.
inventory count process, The team responsible for the count is
unless his task is only spearheaded by a financial officer from the
concerned on answering finance department, together with the
inquiries and possible storekeeper.
discrepancies.
Observe physical count and Quarterly counts. Quarterly counts are
reconcile the result of such carried out to measure the accuracy and
count to the entity's record completeness of the inventory items. Also,
quarterly counts determine any discrepancies
between the actual inventory in the
storeroom and the inventory recorded in the
system. The count team usually conduct the
count at the last day of the quarter.

Properly document the Review documentation over Annual counts. Annual counts are performed
inventory count and test the annual inventory count to verify whether inventory items exist at
count to ensure proper adherance year-end. As the name suggests, this type of
to prescribed process and inventory count is performed as close as the
verify the proper valuation of fiscal year-end.
inventories

Acccomplished Work Orders Trace samples of The procedures for the quarterly and annual
correspond to respective accomplished Work Orders counts are similar. These procedures include:
Finished Goods in the to ascertain the existence of (1) previewing and pre-counting inventory;
Stockroom their corresponding finished (2) sealing and tagging/labelling inventory
goods before actual count; (3) assigning count areas
to count teams; (4) notifying customers and
suppliers during freeze of operations (sales
and procurement); (5) actual counting of
inventory; and (6) tallying results in the
inventory count sheets.

INVENTORY CONTROL
To ensure that all *Fraudulent or *Upon receipt of documents
records regarding erroneous from storekeeping and work
inventory are documents center, the inventory
updated bookkeeper reviews the
accurately, and authenticity of said
secured from documents.
unauthorized
access.
*Incompatible duties *Separate bookkeeping
of recording and functions are present. One
custody of receives the documents for
documents and verification and custody, the
inventory other recieves advise from the
former regarding record
update information.
*Periodic inventory counts
are performed by personnel
separate from the
recordkeepong function.
*Inquire and observe the
review procedure being done
to verify documents.
*Inquire regarding the
custody and recording
functions, and determine
whether proper segregation
is observed.
*Observe the inventory
counts and determine
whether personnel
performing the count is
independent of
recordkeeping.
*Independent verification
of documents; Review
procedures may be
circumvented through
skillful forgery, there must
be a more in-depth
verification of documents
that are considered
material.
*Segregation of Duties;
Circumvention may occur
due to collusion of
bookkeepers. Such
functions must be
physically segregated to
prevent familiarity.
*Segragation of duties;
Collusion between
recordkeeping and custody
function may occur. Such
functions must be
physically segregated to
prevent familiarity between
In addition, the count team supervisor
(financial officer) should clearly document
the criteria used in determining which items
to be included as inventory. He should also
ensure that all items listed in the count sheet
are properly classified. If unusual items are
discovered, they should be further
investigated.
Once the above procedures are performed,
the ending inventory balance is reconciled
with the inventory count sheet through the
use of IMS. [KC15 – Periodic inventory
counts are performed by personnel separate
from the recordkeeping function.]
*After receiving the Materials Requisition,
Excess Materials Requisition, and Materials
Return Ticket from the Storekeeper and the
Work Order file from the work center
supervisor, the Inventory bookeeper1 reviews
the authenticity of each file and advises the
bookkeeper2 for recording.
*The bookkeeper1 keeps a copy of these
documents to the file of the department, and
the other copies are sent to the Accounts
Manager in the Cost Accounting Department.
*As advised by the bookeeper1, the
bookkeeper2 will then update the accounting
records related to the raw materials inventory
based on the documents forwarded by
Storekeeper previously mentioned.
*The finished goods inventory, on the other
hand, is updated based on the Work Order
file.
*Upon updating the finished goods inventory

*Loss or destruction *Upon recording to the
of documents. Journal Voucher, one file
copy is sent to Inventory
Control to accompany the
Journal Voucher and the
other for permanent filing.
To ensure proper *Excessive and *Inventory Control compares
approval of unnecessary actual inventory levels with
purchase purchases. budgeted inventory levels to
requisition assess the reasonableness and
validity of line items in the
purchase requisition.
*Observe the procedure of
transferring documents from
record function to custody.
*Observe approval
procedures.
employees. records, the bookkeeper2 will now prepare
the journal entry voucher.
*Accounting records;
Records and documents
may be lost and or stolen.
*Access; Physical security
must be implemented and
access to such files must be
restricted.
*Transaction Authorization; *Upon determining the inventory status, the
Purchase Requisitions are Inventory Control Manager will then approve
received from Purchases the Purchase Requisition provided that it is in
Department which take accordance with the budget.
inventory information from
the same body that *This will prevent holding inventory above
authorizes purchases. the required status and to avoid idle
production due to shortage of production
*There is risk in excessive materials.
purchases which may result
to excessive inventory
levels, and possible
misappropriation of assets.
Approval of purchases must
be separate from the
function which provides
inventory information to
purchasing department.
*Supervision may be
required if segregation is
impracticable.
To ensure accurate *Incompatible duties *The inventory bookkeeper *Observe the procedure of *Segregation of Duties; The *Upon determining the inventory status, the
recording and of preparing journal prepares the journal voucher preparing journal vouchers bookkeeper and inventory Inventory Control Manager will then approve
proper approval of vouchers and and the inventory control and approval control manager may have the Purchase Requisition provided that it is in
Journal Voucher. approval manager approves the same. familiarity due to the accordance with the budget.
function being performed in
the same room. Such *This will prevent holding inventory above
functions should be the required status and to avoid idle
performed in different production due to shortage of production
areas. materials.

*Supervision; Adequate
supervision may be
required if segregation is
impracticable.
*Inaccurate *The inventory control *Observe the review *Independent verification;
recording to the manager reviews the journal procedure. Errors may exist
Journal Voucher and voucher for accuracy before notwithstanding the review
subsequently to the forwarding to the General process of the inventory
General Ledger. Ledger function. control manager. Material
transactions must be
examined thoroughly.
To ensure proper *Inaccurate records *Inventory counts are *Observe inventory counts *Independent verification; *The Inventory Control Manager reviews the
documentation of of inventory levels. conducted periodically and and the reconciliation Errors in inventory levels inventory records and provides Materials
Finished Goods reconcile with inventory process. may involve timing Inventory Status to the Inventory Purchasing
and Raw Materials records. differences. Manager that is used to assess the raw
inventory. materials required to be purchased, and
*Accuracy of documents are *Review the audit trail for separately reviews finished goods inventory
verified through several the effectiveness of *Accounting records; records and provides the Finished Goods
functions. verification process. Inventory information may Inventory Status to the Manufacturing Clerk
be inaccurate due to to be used in determining the number of
fraudulent activities. goods to be produced.

COST ACCOUNTING
To ensure that Misstated cost data Transaction Authorization: Work orders are authorized Key control for initiating The receipt by the Cost Accounting
appropriate costs for direct materials, Work orders, move tickets and received by the cost WIPI record does not state Department’s Accounting Clerk of the
have been assigned dirrct labor and and materials requisitions accounting clerk in their that the cost accounting original copy of the Work Order file from the
to work in process, manufacturing original copies. clerk should also verify first Manufacturing Manager initiates the cost
finished goods and overhead may be if the work orders received accounting process for the production run.
cost of goods sold. used for assigning are properly authorized. [KC17 – Cost accounting clerk should receive
costs the original copy of the work order to initiate
the cost accounting process]

Segregation of duties: Cost
accounting records separate
from work centers.
Cost accounting function
accounts for WIP and should
be separate from the work
centers in the production
process.
Key control 17 for updating
WIPI file does not match
because the process is
already based on the
materials requisition, excess
materials requisition,
materials’ move ticket and
job tickets, not on the work
order.
Charges are made on the basis of the received
Materials Requisitions, Excess Materials
Requisitions and Materials Return ticket
from the Inventory Control Manager, and
timekeeping documents such as the Job
tickets and Move tickets from Work Centers
upon throughout the production process at
rates indicated in the standard cost file for
materials, direct labor and manufacturing
overhead. [KC17 – Cost accounting clerk
should receive the original copy of the work
order to initiate the cost accounting process]

Independent Verification:
Cost accounting function
reconciles all costs of
production.
Cost accounting reconciles
material usage (material
requisitions) and labor usage
(job tickets) with prescribed
standards, and variances are
investigated.
Key control for the
calculation of variances
does not state that the cost
accounting clerk should
reconcile the materials
usage and labor usage with
prescribed standards and
that variances should be
investigated.
The differences between actual and standard
usage during the production are then
computed and are specifically indicated as
materials, direct labor and manufacturing
overhead variances which are then
documented for use in the management
reporting system upon the receipt of the
supervisor, and specifically for updating the
Work in Process file. [KC20 – The supervisor
recomputes the variances to verify the
accuracy of the figures]
GENERAL LEDGER
To ensure that all The inventories and Upon receipt of journal entry Reconcile the journal entry Independent After receiving the journal entry voucher
raw materials used costs placed in vouchers from both the vouchers received from Verification; The Genreal from the Inventory control, the general ledger
and conversion production may not inventory control department inventory control with the Ledger Accountant should accountant should verify this by matching the
costs incurred are be accurately and cost accounting Raw Materials and Finished have an alternative means records with the current status of raw
recorded at the recorded resulting to department, verification of goods inventory status and of verifying the accuracy of materials inventory and finished goods
correct amount, in a misstated the accuracy of amounts reconcile costs with the the accounting records. inventory. Similarly, journal entry vouchers
the proper period, inventory balance recorded should be done Work in Process report. from the Cost Accounting department should
and properly and cost of sales. immediately. be matched with the work in process report.
classified. Costs are materially General Ledger Department Close supervision between Segregation of Duties;
misstated because of should be independent from the departments should be The Inventory Control and
fraudulent activities. other departments. observed. Cost Accounting managers
can manipulate records if
the general ledger
accountant is lenient and
familiarity exists between
the three. Proper
segregation of duties should
be observed. The General
ledger duties should be
entirely independent from
the inventory control and
cost accounting duties.
To update the Inaccurate records Review the recorded amounts Close supervision should be Independent After the verification process of matching
general journal due to unintentional check if it matches the correct observed. Verification; Errors might records with cost summaries and inventory
and general ledger errors in the amount in the journal entry occur in the process of totals, the general ledger accountant updates
with the updating process. voucher. updating the general the the general journal and general ledger.
corresponding file journal and general ledger This process should be accurately entered to
documents kept which is why verification is avoid deviation from the correct amounts.
for recordkeeping. important to recheck if the
recorded amounts are
accurate.
Supervision; in the
recording process,
supervision is essential to
prevent errors.
 Loss or destruction Upon receipt of Journal Entry
of file documents. Voucher and updating the
general journal and ledger
one file copy of each
document should be kept for
permanent filing.
Observe the procedure of
transferring documents from
record function to custody.
Accounting records;
Records and documents
may be lost and or stolen.
Access; Physical security
must be implemented and
access to such files must be
restricted.
In updating the books, physical file copies are
then printed for recordkeeping. The
accountant keeps file documents and create
backup files in case the original files are
corrupted or completely destroyed.

Prepared by: Reference: InstaPanaloHotNaHotCorporation

BSA V-A Group 2 Acctg43_A_2_APB_BMG_DJG_LMM_NFL_PCL_SIG_ZJC_B_V2
Members:
Aviso, Kate Louise C.
Biñas, Jhon Christian G.
Campita, Noemi S.
Evangelio, Veronica S.
Imperial, Hans Christian G.
Lozada, Joceline A.
Nobleza, Mark Anthony S.
Tanay. Michael Salvador O.