Final Audit Report (1) June

COMPANY’S PROFILE

The company that we have chosen for this assignment is Inflex Sdn Bhd. The

company is a manufacturer of closed cell rubber insulation tubing and sheeting for air-

conditioning, heating, and the refrigeration industry. The company also manufactures plastic

polymer products. Some of the company’s products are insulation tape, adhesive, elastomeric

paint, cutting blades, and other accessories.

The company has more than 30 years of passion and experience in insulation

manufacturing. With the compliance to ISO 2009 and many other convincing factors, Inflex

Sdn Bhd provides their clients with excellent quality insulation products. The company’s

main office is at Bangi and it has factories operated in both Kapar and Bangi.

Other than the quality of their products, the company took an ozone friendly approach

in their product manufacturing, to help to care for our next generation. This is part of the

corporate social responsibility done by the company.

OVERVIEW

It is the company’s management responsibility to maintain an adequate accounting

system and proper internal controls of the company. An accounting system with effective

internal control can help the in prevention of fraud and error, which is also the responsibility

of the company’s management.

From the International Standards of Auditing, (ISA400 – Risk Assessment and

Internal Control), paragraph 7, accounting system is defined as “the series of tasks and

records of an entity by which transactions are processed as a means of maintaining financial

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records. Such system identifies, assemble, analyse, calculate, record, summarise, and report

transactions and other events."

From the ISA400 also, internal control is defined as “all the policies and procedures

adopted by the management of an entity to assist in achieving management’s objective of

ensuring as far as practicable, the orderly and efficient conduct of its business, including

adherence to management policies, the safeguarding of assets, the prevention and detection of

fraud and error, the accuracy and completeness of accounting records, and the timely

preparation of reliable financial information.”

The internal control system will ensure that the contents of the documents, accounting

records, and other records including registers, are complete, accurate and valid. The system of

internal control should have the following features:

1. Physical or custody controls

2. Accounting and recording controls

3. Personnel hiring and training policy

4. Authorisation controls

5. Management responsibilities

6. Organisational structure

7. Segregation of duties

8. Supervision on regular and continuous basis

A strong internal control on the accounting system ensures lesser chances of material

misstatements of the financial statement related to fraud and error. Hence, the auditor will

also be able to form an opinion based on the sufficient and appropriate audit evidence that he

had obtained from the company.

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PURCHASES CYCLE

3

PURCHASE FLOW CHART

4

Purchase Requisition

Stock Record

CANVASS Supplier

Import

Store

Preparation Of L/C. etc

Review & Approved P.R.

Purchase Order

Monitoring/ follow-up on PO

Goods Received

Goods Received Notes

O

Complaints, Returned /

Replacement, etc.

Ensure Insurance Coverge where

necessary

PURCHASE REQUISITION TO ISSUE IN TRIPLICATE

a. Description of itemb. Quantityc. Priced. Payment termse. Expected delivery

datef. Names, address of

suppliers

PURCHASE ORDERS TO BE ISSUED IN 5 COPIES

a. Supplierb. Logistics &

Warehousing/ Production

c. QM Departmentd. Accountse. Purchasing

Department

ATTEND TO COMPLAINTS ON DEFECTIVE MATERIALS RECEIVED

a. Liaising on complaints with suppliers

b. To return or replace defective goods

c. To act on any shortages on quantity

RECEIVING

a.Goods received by Logistics & Warehousing Department

b. Checked by QM Department

Received & Inspected by

QMDNO

YES

YES

PURCHASING REVIEW:

The purchasing process of the organization starts with purchase requisition request

by various departments. After the purchasing agent canvass the relevant suppliers, purchase

requistion will be reviewed and approved. Purchase order is issued and monitored and

followed up until goods are received by Logistic & Warehousing department. Inspection on

quality and quantity of goods received will be carried out by QM department and then goods

received notes are received. Accounts departments will be given the goods received notes and

make a stock recording in relevant accounts.

DOCUMENTS INVOLVED:

Purchase requisition

Purchase requisition will be triplicate and contain description of item, quantity, price,

payment terms, expected delivery date and name and address of suppliers.

Purchase order

Purchase order will be issued in 5 copies and send to supplier, Logistic & Warehousing /

production/ requisitor, QM department, Account department and Purchasing department.

Then purchasing department will import it for preparation of letter of credit to ensure

insurance coverage where necessary before monitor and follow up the purchase order.

Receiving report

Receiving report is a document that record the receipt of goods. It is a copy of purchase

order without the quantity of goods stated. Therefore, staffs from Logistics and

Warehousing department will have to record the amounts, decriptions, date and others

necessry data and it can be compared to the purchase order. Receiving report is important

because it leads to recognition of liabilities.

Goods received notes

Goods received notes are received after goods received have gone through the inspection

on quality and quantity by QM department. There are documents that the suppliers have

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delivered the goods required and the quantity and quality are same as what is stated in

purchase order.

Supplier invoice

Billing from suppliers that indicate the amounts of goods supplied, including freight cost,

cash discount and others.

Cheque

This document is to pay the goods and services received. It is signed by authorised

individual.

DEPARTMENTS INVOLVED:

Purchasing department

Purchasing department issues purchase requisition to fulfill the items request by various

departments.

Purchasing agents are responsible to select and then canvass supplier to get a reasonable

or low price and good quality on purchasing those items.

Purchase orders will be issued and imported for preparation of L/C and so on. This is to

ensure the items are under insurance coverge.

Monitoring and following up on purchase orders until goods are received.

Store:

Logistic & Warehousing department/ Production department

Receive and place the goods order by purchasing department.

Certain amount of goods will be transfered to production department for

producing purpose.

If the goods received are defective, they will issue complaints and return or

replace those goods. The following procedures will be carried out.

Liasing on complaint with suppliers.

Return and/or replace defective goods.

To act on any shortages on quatity

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QM department

Quality Management department is responsible to check or inspect the quality and

quantity of the goods received.

It will provide credential on the goods received after the inpection.

Accounts Department

Goods received notes will be transferred to accounts department for stocks checking and

accounts recording.

Invoicing by suppliers and approve the payment vouchers.

Keeping supporting documents such as purchase order, delivery note and others in

sequence manner.

Journalizing and posting the relevant purchasing activities into purchase ledger and

general ledger.

Preparing bank reconciliation statement on monthly basis.

Cashier

Approve the cheques

INTERNAL CONTROLS:

From the understanding of purchase flow chart, the organization has a strong internal control

on its purchasing cycle.

1. Organization

a. Organization is essential to differentiating jobs and responsibilities of every

employee in an entity.

b. Purchasing agents are concerned to selecting suppliers and negotiate with them.

c. Employees in QM department is required to carry out profesional inspection on

quality of goods received.

d. Employees in Logistics and Warehousing department will take care of the

physical custody of goods and respond to the shortage of goods.

e. Accounts department will test the agreement of balance in general ledger with

amount in relevant accounts. They will make bank reconciliation for monthly

basis.

2. Segregation of duties

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a) In the purchase cash flow, the purchasing function is segregated from the

requisitioning and receiving functions.

Purchasing department is designing the purchase requisition and purchase

order. However, Logistics & Warehousing department is responsible to

receive goods purchased. Therefore, fictitious or unauthorised purchases

cannot be made and theft of goods and possibly payment for unanthorised

purchases will not happen.

b) Physical custody of goods and accessing inventory account recording are done by

different departments

Logistics & Warehousing department is receiving goods while Account

department is counting the physical inverntory whether agree with the amount

of goods received in store and record in the relevant account books. Such

segregation of duties will prevent theft or misappropriate of goods received

and manipulate inventory account to be recorded.

3. Authorization

a) Purchase requisition and purchase order can only be approved and issued by

purchasing department after the reasonable examination on suppliers and nature

of items to be purchased.

b) Accounts department is authorised to access and record various accounts.

Besides that, they are also responsible to approve payment vouchers.

4. Personnel

Personnel is where a employee is competent to carry out his/her works with adequate

skills, knowledge and experience required.

a) Purchasing agents from purchasing department are responsible to select suppliers

and canvass them about the items to be purchased. Without adequate experience

and skills, purchasing agents will select suppliers that are not credible. Purchasing

agents also need skill to negotiate with suppliers on the items especially prices and

credit terms to be purchased.

b) Staffs in QM department have to equip themselves with experiences, skills and

knowledge in order to carry out inspection on goods received. Experiences and

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skills can let them differentiate the defectiveness of goods received immediately,

so that they can negotiate with the suppliers on the spot when goods are delivered.

Therefore, much cost and time can be saved from doing so.

5. Physical custody of assets

The goods are received and placed by Logistics & Warehousing Department.

Therefore, assessment of physical custody of assets are only authorised to Logistics

and Warehousing department. Accounts department can only carry out stock

accounting. Therefore, theft or misppropriate of assets will not happen.

6. Management

The organization has a clear cut mangement system which is the departments have

clear job description and their responsibilities.

a) Purchasing department

They are collecting requests on items needed from various department and design

purchase requistition. Purchasing department is selecting suppliers and negotiate

with them on the items to be purchased. After that, they will issue purchase order,

prepare for L/C and monitor and follow up the purchase order until the goods are

received.

b) Logistics & Warehousing Department

They receive and place the goods purchased. For the goods that are defective, they

will liasing on complaints with the suppliers and return or repalce the defective

goods. Besides that, they also act on any shortages on quantity of goods, so that

they can form request to purchase items needed.

c) QM department

QM department is responsible on quality and quantity inspection of goods

received. Then they will issue the credential to prove the quality of goods

received.

d) Accounts Department

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They collecting all supporting documents issued and received throughout the

whole purchasing process. They will do the book-keeping and approval of

payment voucher of goods purchased.

SUPPLIER EVALUATION AND SELECTION FLOW CHART

SUPPLIER EVALUATION AND SELECTION FLOW CHART

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Sourcing of Suppliers

Evaluation of Suppliers

Request Specification/Sample

Meet Requirement

Approval of Sample

Trial in Production

(if applicable)

Evaluation of Sample

Bidding/Negotiation

Recommendation & Approval

Put Supplier in Approved Suppliers List

Proceed to Purchase

KIV

YES NO

FOR INVENTORY STOCK

The organization has flow chart on evaluate and select supplier to purchase goods

from. This is important for purchasing agents in purchasing process. If wrongly select a

suppliers whom are irresponsible, cannot deliver goods on schedule, and dishonest, the

organization might suffer a loss.

The flow chart starts with sourcing and evaluating the suppliers. For inventory stock

item, specification or samples selling by suppliers are request for quality inspection and

evaluation. After trial of those samples in production, they will decide whether to approve the

samples. If the samples are not reaching certain level of inspection, it will be considered keep

it views and disqualified. In contrast, samples that meet requirement in quality inspection will

be negotiate with suppliers about the prices or credit terms of those goods. Recommendation

and approval of the suppliers will then put them in approved suppliers’ lists. Thus, purchase

can be proceeding smoothly with less risk will be incurred in the purchasing process.

In sourcing and evaluating suppliers, the organization will have a list of information

regarding the goods and services, financial conditions and others related information.

Employees will select the suppliers that fulfill the requirement set by the organization. From

the suppliers selected, they will request samples or specification from suppliers to go through

experiments or trials to test on its quality. Approval of samples will be made by authorized

individual. If the sample or specification reaches meet requirement, bidding and negotiation

with suppliers will be carried out. Then recommendation and approval will be done by

authorized individual and put them in the approved suppliers list. In contrast, if the samples

that provided by suppliers are not meeting the requirement, it will be keep it view and not

approved as qualify supplier.

By selecting the right suppliers, the inherent risk of the organization tends to be

low. Industry related factor engaged in whether the supply of raw materials is adequate and

the volatility of raw materials price. Selecting more than one supplier will lower the risk of

having materials shortage and hence production can still run smoothly. Besides that, the price

of raw materials supplied can be compared, so that prices of raw materials tend to be similar.

Therefore, production cost can be predicted.

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This process of evaluating and selecting suppliers involves the internal control of

authorization, supervision and segregation of duties. Only authorized individual can

approve the samples that are tested and suppliers that are listed in approved suppliers list. This

way will enhance supervision of managers in avoiding employees from misjudge the

suppliers. Besides that, the process if approving samples and suppliers done by authorized

individual is segregated from people who choosing and evaluating suppliers. This is to avoid

placing and approving the disqualify suppliers in the approved suppliers list. Therefore, the

organization has a strong internal control in supplier evaluation and selection.

In conclusion, the internal control in the purchasing cycle of the organization is

strong. The cycle is well managed by using elements of internal control such as personnel,

authorization, physical custody, accuracy, management, organization, supervision and

segregation of duties.

SUPPLIER PERFORMANCE ASSESSMENT PROCEDURE FLOW CHART

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SUPPLIER PERFORMANCE ASSESSMENT PROCEDURES FLOW

CHART

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Annual Appraisal of Approved Suppliers

ASSESSMENT BASED ON:-

A) QualityB) DeliveryC) DocumentationD) PriceE) Service/Response to

Enquiry/Technical Back-up

Final Score

Good-Retain as Approved Supplier

Acceptable-Retain as Approved Supplier

Not satisfactory – remove from ‘List of Approved Suppliers’

Quality Records

Suppliers that are put in the approved suppliers list will be assessed every year. This

way is to ensure that suppliers will maintain or improve their quality in providing goods and

services. This will in turn improve the quality of the goods and services purchased by the

organization and thus lead to an improvement of products quality manufactured. It is a good

method to strenghten the competitive of suppliers and also the organization itself.

The flow chart starting from annual appraisal of approved suppliers. Suppliers

assessment will be based on quality, delivery, documentation, price, and service or respond to

enquiry or technical back-up. The assessment will be carried out by two parties which are

employees and consumers of the organization. Employees are a group of people who respond

to the goods and services supplied. Especially employees from Production Department,

Logistics and Warehousing Department, Purchasing Department and Quality Management

Department. They have direct contact with the goods and services received and also

responsible to respond on the defective goods and services purchased. On the other hand,

goods supplied will affect the quality of products manufactured. Consumers who use those

products will be the one who affected. Questionnaires and surveys are carried out to assess the

quality of products manufatured.

Assessment of suppliers are based on score given. 0 to 3 points will be disqualify as

approved suppliers of the organization. 4 to 6 points are in acceptable-retain as approved

suppliers. 7 to 10 points are those good-retain as approved supplier. Quality of approved

suppliers which score 4 to 6 points and 7 to 10 points will be recorded for the reference of

selecting and assessing in the future.

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SALES CYCLE

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STEP 1- SALES ORDER PROCESSING

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Customer EnquiryPrice list and/or

Quotation

Receipts Customer’s

Purchase Order

Processing of Customer Purchase

Order

Prepare Proforma Invoice (Where

Applicable)

Prepare Order Confirmation

(ACCPAC Order Entry system

Check Order Confirmation Credit Control

Planning On Production Schedule

& Allocation of Goods

Goods Available

Generation of Invoice &

Delivery Order (ACCPAC Order

Entry System)

The first stage of the sales cycle is the sales order processing. The flow chart of the

company shows that there is proper organization and segregation of duties. The flow chart

starts with customer enquiry. Then the company will issue price list and quotation, and

continue with receiving customers purchase order. If the customer is a new customer or the

price of the product has change, it will be send to the account and finance department to

create a new account and price. Next, will be the preparation of order confirmation using the

company accounting software ACCPAC under the order entry system. All the order that the

company have received will be key in to the software. Since everything is computerized, it

will minimize the error that might occur and ensure that all orders are processed, orders are

processed accurately and only valid transactions are processed. By using the accounting

software, it will also reduce the number of files and also reduce the risk of losing the files in

the company. Therefore, the company is said to have a very good management.

After the order confirmation, credit control is next. They will make sure that the

customer’s credit terms and limit is as notify to the applicant during the credit application. If

there are any changes in the credit terms and limit, it will be sent to the authorize designee for

approval. This means that authorization had taken place. Authorization is a very important

factor because without authorization, the company will go haywire.

When the order confirmation is approved, they will then move on to the planning on

production schedule and allocation of goods. They will check whether there are enough goods

to be distributed to the customers. If there is lack of goods, they will order and make sure the

goods reach in time. In this case, it shows the characteristics of efficient physical control.

When all the goods are available, the accounts department will generate invoice and delivery

order using ACCPAC. This proves that the company has a proper accounting record. By

using ACCPAC, the company can establish a proper chart of account and establish proper cut

off. Therefore, the company will overcome errors like sales not recorded and sales recorded in

the wrong financial year.

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STEP 2- CREDIT APPLICATION

In the second stage of the sales cycle which is the credit application, it can be

observed that the company has a proper procedure to go through before approving the

customer credit. The credit authorisation function ensures that the credit limit is not exceeded

without any authorisation. When the company has received the application, the sales

manager will revise the credit limit and terms. The application will be processed and if there

is any error found it will be return to the respective personnel. This shows that the company

has a good supervision over this matter. It is important to do so because if the credit

application is not manage properly it may result in bad-debt losses.

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Application/ Revision of Credit limit/Terms

Processing of Credit Application

Evaluation Process&

Recommendations

Notification to Applicant

STEP 3: DELIVERY OF GOODS

YES

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Delivery Arrangements

Singapore Delivery?

Customer Collects Goods or Warehouse Arranges For Transporter (Lorry)

Booking of Vessels

Approve Delivery

Step three will be the delivery of goods. The warehouse will sort out whether the

delivery is to Singapore. If it is to Singapore, the customers will either collect the goods

themselves or the warehouse will arrange lorry to send those goods. If it is not to Singapore,

the warehouse will book vessels to ship those goods to the customer. Before authorization to

deliver is given, the store keeper will check that delivery note is match with approved sales.

Goods is not shipped or delivered without proper authorisation. The main control that

authorises shipment of goods or performance of services is payment or proper credit approval

for the transaction. With that, the company is said to have practice authorisation. The

company also practice segregation because shipping function is segregated from the billing

function to ensure that unauthorise shipments do not happen and usual billing procedures are

not circumvented. Therefore, unrecorded sales transaction and theft of goods can be avoided.

Besides that, delivery notes are pre-numbered in order to ensure all goods delivered

are billed. All this control procedures are done to make sure that goods delivered is the same

as the customer order and goods are delivered to an authorized customer. Documents used in

this stage are delivery note and approved sales order. Delivery note copy 3 and sales order

copy 3 are filed while delivery note copy 1 is sent together with goods to the customer and

delivery note copy 2 is sent to authorize them to prepare sales invoice. With the proper

document, the company is said to have good organization and accounting.

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STEP 4: BILLING

Then, the billing department will follow up. They bill the customer to demand for

payment. They also keep the documents like approved sales order and delivery note in a safe

place. In order to determine the validity of transactions, they match sales invoice with

delivery note and sales order. If there is any problem the billing department will process

billing adjustments for allowances, discounts and returns. The billing department also account

for pre- numbered delivery notes to determine all delivery are billed. With those control

procedure done, it is proven that the company is having a good organization. Those control

procedures is important to avoid problems like goods delivered is not billed. This could

happen when the workers have the intention to steal the company’s product. In addition to

that, errors like amount billed is incorrect may occur too. Some of the documents used in the

billing department are sales invoice, delivery note and approved sales order. Sales invoice

copy 3, delivery note copy 2, and approved sales copy 2 are filed numerically. Sales invoice

copy 1 is sent to the customer, copy 2 is sent to accounts department for recording to the sales

journal and sales ledger. This shows that there is a proper accounting in the company. The

company also practices segregation of duties because the recording work is done by the

accounts department instead of the billing department itself.

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Issue Sales Invoice

Match Sales Invoice with Delivery Note & Sales Order

Process Billing Adjustments

STEP 5: CUSTOMER COMPLAINTS/ GOODS RETURN

The fifth stage in the sales cycle is the customer complaint and goods return stage.

If there is any complaint, the company will first attend it. Personnel is an important element

in this area so that the workers are motivated to attend the complaints of the unsatisfied clients

to protect the company’s reputation. Then, they will verify the complaints and issue a

corrective action plan. Next the company will issue the goods return form and lastly will the

company will send debit or credit note to their customer.

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Customer Complaints

Attending Customer Complaints

Verification of Complaints

Corrective Action Plan

Issuance of Goods Return Form

Credit Note Requisition/ Debit Note Requisition

STEP 6: CASH RECEIPTS

The final stage is the cash receipts. If the customers pay by cheque prelist of mail

receipts which contain particulars from the cheques and remittance advice is prepared. On the

other hand, if the customers pay by cash, the cashier will compare the cash register reading

with the actual cash receipts. The cashier will also prepare cash count sheet to show the

denominations. Then, the cashier will deposit the cash and cheques. After depositing, the

cashier must confirm that the amount deposited is the same as the amount as per cash count

sheet and prelist of mail receipts. Finally, the cashier will acknowledge receipts from credit

customers. Cashier prepares the official receipts based on the admittance advice. First copy of

the official receipts is sent to the customer, the second copy is sent to the accounts

department. The third copy and remittance advice will be filed in sequence.

In conclusion, the company has a very strong internal control in its sales cycle. The

company has covered all the elements in the internal control which consists of personnel,

accounting, physical, authorisation, management, organization, segregation and

supervision. Therefore, the company sales process will run smoothly.

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Receive and Process Payment

Deposit Cash and Cheques

Confirm Amount Deposited asper Cash Count Sheet and Prelist of Mail Receipts

Acknowledging Receipts from Credit Customers

PRODUCTION CYCLE

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PRODUCTION PLANNING FLOW CHART

PRODUCTION CYCLE REVIEW:

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Weekly Production Planning

Monthly Projection Weekly Schedule

Copies for Distribution

Production Order Form

Materials Requisition

Production

Production Report

Next Planning Schedule

Monthly Materials Requirement

Purchasing (HQ)

Logistics & Warehousing

Finished Goods

Sales Order Status Order Cancellation Stock Level Economy of Production Historical Statistic

All Production Supervisor

Logistic and Warehousing

Sales/Delivery Personnel

Production is part of the inventory management cycle. However, it also influence

amount of raw materials to be purchased. As the organization is a manufacturing company,

production cycle is very important. The productions of the organization are planned in weekly

and monthly.

The production planning flow chart starts with weekly production planning. After

the draft of production planning, schedule will be prepared. Then the weekly schedule will be

distributed to related departments. Production order form will be made to acquire certain

amount of raw materials. Then the Production department will issue materials requisition to

obtain the raw materials needed for production from Logistics and Warehousing Department.

After that, production is started and production report is issued to summarize all the costs

incurred during the production.

After production report is done, the production will set another planning schedule for

the other week. On the other hand, finished goods will be transferred to Logistics and

Warehousing Department.

Production Department also set the monthly planning to predict the amounts of

materials to purchase. In the beginning of the month, the Production Department will make a

monthly projection then monthly materials requirement. Then they will make a request on the

purchasing of raw materials to Purchasing Department. Purchasing Department will make

order to purchase raw materials request by Production Department and the goods purchased

will be placed in Logistics and Warehousing Department.

TYPES OF DOCUMENTS AND RECORDS

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1. Weekly production planning

This is a draft of the production planning every week. Various factors have to be

considered to plan a weekly production. These factors are sales order status, order

cancellation, stock level economy of production and historical statistic.

2. Weekly production schedule

The production schedule is prepared weekly based on the expected demand for the

organization’s products. Weekly production planning is used as reference to prepare the

production schedule. Then the weekly schedule will be copied and distributed to all

production supervisors in Production Department, Logistics and Warehousing and Sales

or Delivery Personnel.

3. Production order form

Production order form will list out all the materials needed in production and Production

Department is using it to issue materials requisition acquires raw materials from Logistics

and Warehousing Department.

4. Materials requisition

Materials requisition is normally used by manufacturing companies to track materials

during production process. It is prepared by the personnel from Production Department

for production purpose.

5. Production data information

This is a report about the transferring of goods and related cost accumulation at every

stage of production.

6. Production report

This is a document that summarizes all the costs incurred during production. Production

report is important to track all the costs and amounts used in every stage of production.

Internal Control:

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Overall, the internal control of Production Department is strong.

1. Personnel

Personnel in Production Department are important to produce quality products. They are

equipped with adequate knowledge, skills and experiences to be competent in carrying

out tasks assigned. The company provides training and bonus to improve their

knowledge.

2. Accuracy

Every cost and materials used during production must be recorded accurately especially

materials requisition form, production report and finished goods transferred. Every

document will be replicate in several copies and send to relevant departments. Personnel

from these departments will check the amount and cost that stated in the documents to

double check the accuracy of amount and cost listed.

3. Physical

Physical custody of assets to prevent loss of assets that is valuable and needed for

production. In the organization, assets or goods are only restricted to authorized

individual or department. Raw materials needed for production can only acquire from

Logistics and Warehousing Department with signed materials requisition form.

4. Authorization

All documents should required approval from authorized personnel. For example,

materials requisition form is approved and signed by officer in charge. Goods to be

purchased are authorized by officer in charge of Purchasing Department. Authorized

personnel in Logistics and Warehousing Department will approve the requisition of

materials, receiving of goods purchased and finished goods that transferred in.

5. Management

Organization has an organization chart that clearly stated the job functions and

responsibilities. Personnel from Production Department are responsible to plan

production schedule, carry out production process and summarize cost used during

production report.

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6. Segregation of Duties

People who acquire materials are different from people that approve the transfer of

materials. This is to prevent theft of goods and reduce the opportunity of fraud.

Production Department will require and acquire materials from Logistics and

Warehousing Department. Logistics and Warehousing Department will approve the

acquisition of materials.

7. Supervision

Supervision is important especially in Production Department. Staffs in Production

Department are properly supervised by authorized individual to maintain the quality of

products and reach the amount of products needed to produce. Besides that, goods can be

preventing from loss due to theft of goods.

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PRODUCTION PROCESS CONTROL FLOW CHART

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Information on Whiteboard

Daily Production Order Form

Mixing Process

Rolling Process

Extrusion process

Vulcanization Oven

Controller Section

Rolls of Sheets Packing Process

Spraying Process

Quality Control

Strapping of Carton Boxes

Slitting into 3’ x 4’ Pre-Cut Sheet

Packed to Rolls

(SHEETS) (TUBES)

PRODUCTION PROCESS CONTROL FLOW CHART

Production process flow chart indicates the production flows of a finish good. Before

the production process, information about the production will be recorded on the white board.

The information will be recorded in daily production order form. Then pre-weighed of

chemical ingredients are prepare for production uses. Then, pre-weighed chemical ingredients

will be mixed in mixing process. After that, goods that are still work in process will go

through rolling process and extrusion process. Lastly it will be transferred to vulcanization

process.

All the good have to go through controller section. Goods are produced into two

shapes which is sheet and tube. For finished goods that are in sheet shape, it will be slitting

into 3’ x 4’ pre-cut sheet or packed to rolls. While for tubes shape, the goods will pass

through packing process, spraying process and lastly quality control. All the tubes shape

goods will be strapping of carton boxes.

INTERNAL CONTROL:

In the production process flow chart, the internal control is strong.

Organization - The responsibilities and lines of reporting are clearly defined and allocated

which stated in organization chart. Responsibilities of personnel in Production Department are

clearly defined as which process they should be in and what tasks to be completed.

Personnel - Staffs in each process are trained to carry out their tasks competently.

Management - The organization has a organization chart that states the job functions and

responsibilities of employees in every departments and every process in production.

Supervision - Supervisors are hired to supervise staffs in every process of production.

The organization has incurred elements of strong internal control such as

management, organization, personnel, segregation of duties, supervision, physical

custody of assets, accuracy, and authorization in the production cycle.

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INVENTORY CYCLE

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Inventory is the most important element in a company as a company needs inventory

to make sales and make profit out of the selling of their inventories to continue surviving in

the competitive market. Different companies have different types of inventories. For example,

retail stores have goods as their inventories, manufacturers have raw material as inventories

and so on. Thus, it is important to make sure that the inventory control in a company is well-

taken care of to avoid any problem that may arise such as stock-shortage or excessive stocks

in hand. The situation turns out worst if there is underestimation or overestimation of

inventories that results from a weak inventory control. This is because it can affect the gross

profit of a company and eventually affect the net profit of the organization. Thus, a successful

company depend largely on good inventory control especially those that have many branches

in varies locations where errors and fraud tends to occur. Thus, a good internal control is

crucial to be implemented in every department especially in the inventory department of a

company because it can help to reduce errors and fraud. A good internal control has to consist

the following elements, Physical, Accounting, Personnel, Authorisation, Management,

Organization, Segregation and Supervision.

In this company, inventory cycle or inventory control is divided into six different

parts. The first and foremost is the incoming goods receiving, handling and storage flow

chart. This flow chart starts with receiving Supplier Delivery Order. The first cycle has

proper organization on differentiating the jobs and responsibilities of every staff under this

section. For instance, the storekeeper’s job is concerned with recording and checking the

goods received from the supplier while Logistic & Warehousing manager or the plant

manager will contact with the supplier if anything goes wrong in the statement of Delivery

Order (DO) or the goods received. It is crucial for a company to have proper organisation in

different department so that every employee understands his own duties. This also implies

segregation of duties at the same time where there are different person in charge of different

duties. Here, the storekeeper is in charge with stocks or inventories and the Logistic &

Warehousing manager is in charge of confirming and approving the goods received from

supplier. Authorization can also be observed here where the Logistic & Warehousing

manager or the plant manager is the one who is responsible for approval if the storekeeper has

certified that the goods received from the supplier is correct and in good condition.

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Step 1: Receiving Goods from Supplier

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Supplier Delivery Order DO matches with PO

Do matches Goods Received

Quality Management Department check

the quality of goods received

Goods ok

Storekeeper issue Goods Received Notes Form

(GRN)

Send to Logistic & Warehousing Manager /

Plant Manager for Approval

Storekeeper updating Raw/Package Material

The second cycle is the outgoing goods for raw or packing materials. The flow

chart has clearly showed that there is still segregation of duties and proper organization in

this segment. The storekeeper is in charge with the materials kept in the store by checking and

updating the records of physical stock in the warehouse from time to time, whereas the

assistant storekeeper picks out the materials needed for the storekeeper to check thoroughly

before sorting the stocks to the production department. This segregation of duties prevents

misuse of power like taking out extra stocks to sell and make own profits. Supervision is

done when the storekeeper supervises his assistant on the warehouse stockcount and transfer

them to the production department. This avoids errors or frauds in the physical flow of stocks

in the warehouse. The following flow chart shows that the company has a very good

systematic way of keeping the records for accounting purposes. The production department

will send the Raw Material/Packaging Material Requisition Form (RMRF/RPRF) to the

storekeeper to acknowledge him about the quantity and items needed for manufacturing. The

storekeeper will then check the stock available and send the stock required to the production

department and uses the RMRF/RPRF to update the stock level in the warehouse and keep the

forms as evidences of requisition of materials for the manufacturing division.

The next cycle is for finished goods handling & storage. In the next flow chart, there

is personnel element here where the storekeeper is competent to carry out his work whereby

he checks and records the physical amount of the stocks sorted in and out from the warehouse.

Under this finished goods handling & storage flow chart, he had enough training to carry out

his duty - making sure the physical inflow and outflow of the inventories is of good condition,

correct items and accurate quantity. Besides that, there is physical custody of assets where

only the storekeeper and the assistant are permitted to access the organizing of stocks in the

warehouse. The assistant will be helping him to enlighten his burden and to avoid any error or

fraud made. Yet, the segregation of duties is still maintained like precious flow chart. In this

stage, the storekeeper is responsible for receiving the finished goods from production

department and matches Finished Goods Transfer Note against the physical goods received.

The production supervisor, on the other hand will take any necessary action if there is any

discrepancy on the sorting of goods to the warehouse.

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STEP 2: OUTGOING GOODS (RAW/PACKAGING MATERIAL)

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Received of Raw Material/Packaging

Material Requisition Form from production

Department

Storekeeper check available/stock level

Material AvailableStore assistant to pick up/sort & arrange stock

Storekeeper checks & verifies stock quantity & items

against RMRF/RMPF

Goods Received in Correct

Quantity & Items

Store assistant transfer Material

Requested to Production Department

Production Supervisor verifies the Material

Received

Production Supervisor signs on

RMRF/RMPF

RMRF/RMPF return to

Storekeeper to update Stock Level

Filling by Storekeeper

STEP 3: FINISHED GOODS HANDLING & STORAGE

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Received Finished Goods from Production Department

Storekeeper matches Finished Goods Transfer Note (FGTN)

against Physical Goods Received

Inform Production Supervisor if there is any Discrepancy. Skip

this step if there is no Discrepancy.

Storekeeper acknowledges FGTN & forward to Logistic &

Warehousing Manager/Plant Manager for Approval

Distribution of FGTN

Finished Goods stored at Designated

Location

The fourth flow chart is finished goods delivery for domestic. There is segregation

of duties where Logistic & Warehousing Executive or the clerk will be in charge of the order

confirmation, while the storekeeper will receive a Delivery Order from the department to pick

up finished goods to be shipped to the customers. The delivery boy delivers goods ordered to

the respective customers and collect signature from them. After that, the Logistic &

Warehousing Executive or the clerk will update the stock level of the warehouse and

outstanding report while the storekeeper updates the stock card to record the stock taken out

from the warehouse. Segregation is important here as well because if the storekeeper does all

the sorting out of stocks, approving the delivery order and even deliver the goods to the

customers himself, error or fraud will definitely occur.

Also, supervision took place here where the storekeeper makes sure the finished

goods sorted out is of correct items and quantity to ensure there is no any miscommunication

between the workers and the storekeeper. Supervision is very important in the warehouse

where the staff is properly supervised so that there will be no plagiarizing or stealing of

inventories from the warehouse and causes the company to incur loss or even worst, losing its

reputation due to internal issues between the management and the employees. Besides that,

the company uses different types of documents to record the inventory sorted in and out from

department to department. Systematic documentation will lead to good accounting system

where the internal accountant is able to record the transaction of inventories based on existed

documents which act as evidences. For example, the storekeeper uses stock card to update the

finished goods, Logistic & Warehousing Executive issues invoices and delivery order to

customers that have made order from the company.

In this flow chart, there is proper authorization as well. It can be observed here where

the Logistic & Warehousing Executive or the clerk of the same department has the power to

sign the invoice as well as the Delivery Order to confirm the order of clients. The storekeeper

will only pick put the finished goods required if the photocopy of the Delivery Order received

by him is signed by the executive or the clerk. These documents are important to serve as

proof to recognize there is an order made by particular customers. Thus, authorization is very

important in a company and it has to be assigned to those that are superior, competent and at

the same time dependable to avoid any theft cases in the company.

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STEP 4: FINISHED GOODS DELIVERY FOR DOMESTIC

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Logistic & Warehousing Executive/Logistic and

Warehousing Clerk receive Order Confirmation from Sales

& Management Department

Clerk prints Invoice & Delivery Order from

ACCPAC Computer System - Order

Clerk signs Invoices & Delivery OrderA photocopy to Storekeeper

Picking of Finished Goods

Storekeeper checks the Quantity &

Items of the Stock

Finished Goods loaded up and the person collecting the

Finished Goods sign & affix company’s rubber stamp on

Delivery Order

Storekeeper updates Stock Card (Finished

Goods)

Logistic & Warehousing Executive/Logistic Clerk

update Stock Level & Outstanding Report

Distribution of Invoice & Delivery Order

STEP 5: STOCK CONTROL (STOCK TAKE & AGING REPORT)

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Supplier Deliver Goods- Timely supply of material delivery- Error-free on quantity & items of goods received

Purchasing Division- Monitor Material Level- Avoid low-stock/excessive stock

Customer Service Department- Accuracy- Timely

Logistic & Warehousing

Account & Finance Department- Monthly stock check- Collect relevant documents to record

Manufacturing Division,Production Department,Quality Management Department (QMD)- Request material from Logistic & Warehousing

Sales & Marketing Department- Update daily stock level/outstanding report & aging report

There are evidences showing there is a good internal control in the company. The

company is using software named ACCPAC computer system for order entry. According to

our finding, ACCPAC is a type of Business Management software that helps small-sized and

mid-sized businesses to manage their accounting, operations, and customer relationships

accounting software. In this case, there is segregation of duties as well as accounting

element in this segment. The charts show clearly that there are different individuals handling

the initiation, authorization, execution, custody and recording the transaction. Under this

segment, only certain employees is permitted to access to the checking, recording, and lastly

transferring the data in hand received from the storekeeper into information to the decision

makers of or internal users of the company.

Last but not least, the last flow chart shows the stock control of stock take and

aging report. In this chart, the organization has sketched out a simple chart that summarizes

the responsibilities and functions of each and every department that has to do with the

company’s inventories. There is a well management where every division is clear about their

job description. For example, the Purchasing Division will be monitoring the company’s

material level to ensure there is no low-stock or excessive inventories in the warehouse as too

much unnecessary storing amount of inventories will become an expenses to the company.

The Account & Finance Department, on the other hand, is in charge of the monthly stock

checking so that the physical stock amount matches the quantity recorded in the book of

records. This clearly shows that there is a segregation of duties as well where no employees

are in a position that mixes the three primary functions of recording, authorizing, and custody

of asset at any one time. Furthermore, there is a good authorization as well as the flow chart

has stated clearly the responsibilities and job description of every department in inventory

part. Thus, it is clear to show that the organization has a strong internal control on the

inventory cycle.

Hence, the organization has aan overall strong internal control in its inventory cycle.

It covers every essential element of internal controls (physical, personnel, accounting,

authorisation, management, organisation, segregation and supervision) and therefore the

continuous usage of the flow charts for the inventory cycle ensures the smooth operations of

the company from time to time.

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PERSONNEL

CYCLE

42

PAYROLL AND PERSONNEL CYCLE

Hiring Personnel

Distribute Pay Cheques Time Keeping

Approve Pay Cheques Prepare Payroll Register

The payroll and personnel cycle begins with an employee performing a job, and

recording the time spent on a time card (timekeeping). The time card is approved by the

supervisor before forwarding to the payroll department. In time keeping, punch card is used to

record the attendance of employees. The data will be reviewed and sent to the IT department

for processing. Lastly, payment is made after pay cheque approvals, either directly to the

employee or depositing the payment into the employee’s bank account.

There are 2 main types of transactions in the payroll and they affect certain accounts in the

income statement:

Types of Transactions Accounts Affected

Payroll transaction Cash

Inventory

Direct and Indirect Labour Expenses

Various payroll-related liability and expenses

Accrued payroll liability transactions

Cash

Various accruals (EPF, SOCSO, pension costs)

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DOCUMENTS AND RECORDS INVOLVED IN THE PAYROLL CYCLE

Personnel Records – contain information on employee’s work history (including hiring date,

wage rate or salary, payroll deductions, salary adjustment authorisations, performance

evaluations, and termination notice).

Deduction Authorisation Forms – detail the regular or monthly deductions from employee’s

gross pay. The deductions include Employee Provident Fund (EPF), SOCSO, income tax,

staff car or housing loans, union dues, medical insurance, retirement contributions and other

benefits.

Time Card – records the hours worked by the employees.

Payroll Cheque – indicates the amount paid to the employee for the service rendered (gross

pay less required deductions).

Payroll Register – referred as payroll journal, summarising all pay cheques issued to

employees. (Indicates the gross pay, deductions and net pay)

Payroll Master File – computerised file maintaining employee’s name, identity card number,

pay rate and authorised deductions.

Periodic Payroll Reports – a manufacturing company’s payroll expense report shows the

allocation of direct labour to various products.

Various Tax Reports and Forms – prepared for governmental agencies.

Monthly payments of the employer and employee’s contribution to EPF and SOCSO

must be submitted to the relevant authorities or government agencies accompanied by

the appropriate returns and forms.

Employers also have to prepare the tax forms (EC form) for employees to file their

tax returns for each year of evaluation.

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STAGE 1: PERSONNEL CYCLE

The personnel cycle is part of the Human Resource Management process and its

function is to manage the human resource needs of the organisation. This includes hiring and

terminating employees, setting wage rates and salaries, and establishing and monitoring

employee benefit programs. The flowchart below shows the personnel cycle of the company.

Figure: Employee Recruitment

HR gets requisition fromdepartments

Personnel Requisition Form

Approval fromHead of HR & Admin

Approval fromGeneral Manager

Start Hiring

Firstly, the Human Resource Department gets requisition from any department who

needs workers. In cases of a vacancy rising from resignation or termination of service, the

procedure established by the company to recruit a replacement is by completing the

Employee/Personnel Requisition Form. Each department or division that need workers

would have to fill in a personnel requisition form to state the number of workers that they still

need. The personnel requisition form is then reviewed and approved by the Head of Human

Resource & Administration Division. Once approved by the department head, the personnel

requisition form will be sent upwards to the General Manager of the company to be

reviewed and approved again. Only after the approval of the General Manager, the company

can start hiring staff.

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This control is done to prevent the company from hiring too many staff. The personnel

requisition form approved states only the adequate amount of staff that the company needs to

hire to continue its operations. This will also help the company to save cost as the company

will not need to pay more wages and salaries to any extra number of employees because they

will only hire just the right amount of employees needed. The authorisation control is done

in the employee recruitment as the personnel requisition forms were approved by the Head

of Human Resource & Administration Division, and also the General Manager.

Figure: Interview and Hiring

Interview

Management Non-management

Interviewed by

Group HR & Admin Manager Plant Manager

Interviewer’s Appraisal Form

To Group HR & Admin Manager

Send out

Letter of Employment

After the approval of the personnel requisition forms, the company accepts

applications and carries out interview sessions to select the potential candidates. Interviews

are done to select the competent and qualified staff (personnel control) for the company.

The Group Human Resources and Administration Manager will be responsible to be the

interviewing panel for management category applicants whereas the Plant Manager is

responsible for the non-management category. As the Plant Manager has knowledge about

the activities in the factory, therefore he or she knows what skills, qualifications and

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experience the candidate-to-be-chosen should possess and he or she looks for these

characteristics during the interview, to select the competent personnel to work for the

company. After the end of each interview, the panel will decide the rating and suitability of

the candidate by completing the Interviewer’s Appraisal Form. When all the candidates

have been interviewed, the Group Human Resources & Administration Manager will obtain

the necessary approvals pertaining to the successful candidates, remuneration package, Job

Grading and Benefits Category starting date and designation from either the Group Managing

Director or Chief Operating Officer and the Head of Business Unit concerned, to allocate the

right candidates to the right department of the company. The letter of employment will be

sent out to the successful candidates. This is part of the internal control used for personnel

hiring.

Internal Control: Personnel, Organisation And Supervision Controls

Other activities that the company uses to maintain the right people for the right job include:

New employee orientation

On-the-job training analysis

Training programs

For every new employee employed by the company, there will be an orientation program for

them to be familiarised with the environment and operations of the company. Any one of the

officers (Group Managing Director, Chief Operating Officer, and Managing Director) or the

President of the company officiate the occasion for management employees category. In the

Manufacturing Division, the Plant Manager or his designee will be officiating. This is to

organise the new staff into the field that they are most capable of.

For the on-the-job training, each new employee will be assigned tasks or assignments

to gauge their capacity to learn or acquire knowledge and skills for the job during the

probationary period. Each new employee in the Plant or office will be under the supervision

(supervising control) of the Supervisor, Executive, or Manager in charge, who completes the

On-the-Job Training Analysis Form to ensure proper performance of the new employees.

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Besides that, even the existing employees will be under supervision, which is carried

out on a regular and continuous basis. Supervision is an important control tool not only to

maintain competent employees in the company, but also to prevent any fraud or error from

happening. When employees know that they are being constantly evaluated, they will perform

better in their work. On top of that, supervision also reduces the risks of theft. The supervision

activities include the review and approval of employees’ attendance and time information and

also monitoring of employee scheduling, productivity, and payroll cost variances.

The training programs are conducted for new recruitment as well as experienced staff,

to improve knowledge, duties and existing skills, in a structured manner (no inferior person to

do superior jobs).

Other than employing people, the personnel cycle includes resignation of employees

too. Authorisation control is involved here as the resignation of the employee has to be

approved by the department of the particular employee first. Then, the approval will be done

by the Board of Directors. The Board of Directors will also get the reasons of the resignation

and later decides if that particular position should be filled or not.

STAGE 2 & 3: TIME KEEPING AND COMPUTING PAYROLL

In payroll computations, it is important to prevent any monetary misstatements. The

responsibility of computing the payroll lies in the Human Resource Department.

Internal Control: Segregation of Duties, Authorisation and Custody Control

The company uses payroll software for their payroll transactions. Details (summary of hours

worked) from the time cards would be keyed in by Staff A, and then checked by staff B. Only

then, the details are sent to the authorised signatories at the Human Resource Department to

release payments to the staff. The segregation of duties and custody controls are

implemented in the payroll cycle, whereby the access of documents and records are restricted

to the authorised personnel only. Two different people are involved in departmental payroll

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processing. The person verifying the Payroll Registers is different from the person entering

payroll data into the software. Also the payroll cheques are distributed by a personnel not

involved in processing the payroll.

Figure: Time Keeping and Payroll Cycle

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Collect time cards and Prepare a summary of

hours worked

Obtain approval from officer

Payroll transactions affect many expense accounts and accrued payroll liabilities accounts.

The liabilities are recorded in respect of deductions from employee remuneration and they are

to be paid to the relevant authorities. The two main activities in computing the payroll are:

Prepare payroll register from summary of hours worked.

Compute deductions according to statutory EPF, IRB, SOCSO contributions

The two main deductions from gross pay of employees in Malaysia are the EPF and SOCSO.

The credits to the EPF (Employee Provident Fund) account represent the recognition

of EPF expense at the end of each pay period. These amounts can be traced to the various EPF

returns or other documentation filed by the company and should agree with the amount of

EPF expense included in the income statement. The debits to the EPF account represent

payments made to relevant authorities or government agency. These payments can be verified

by tracing the amounts to the cash disbursement journal. These accounting controls are good

internal controls to ensure the validity, completeness and accuracy of the transactions.

Also, the EPF and SOCSO (social security) contributions accounts accrued amounts

are “cleared out” periodically. For instance, if the company submits EPF payments on the 15 th

of each month, the accrued EPF amount will have a zero balance after the payment. Thus, at

the end of any month, the accrued EPF account should contain only an accrual for EPF since

the last payment made.

MANAGEMENT’S ASSERTION ON EPF AND SOCSO DEDUCTIONS:

Existence and valuation – the recorded liabilities (EPF expense) are valid obligations and are

included in the financial statements at the appropriate amount. EPF forms and reports states

the amount of EPF to be deducted from employee’s gross pay.

Completeness – all payroll liabilities are recorded and, EPF and SOCSO contributions are

determine if the accruals have been made for.

Cutoff – all payroll liabilities are recorded in the proper period.

Presentation and Disclosure – accruals are properly disclosed based on their nature. Payroll

and related expenses are disclosed separately as “staff cost” according to FRS101.

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STAGE 4 & 5: APPROVE AND DISTRIBUTE PAYROLL

The distribution of payroll is done by the Accounting Department and the cheques are

paid based on cashier’s payroll and matched with the payroll register. The personnel would

have to produce their ID and acknowledge receipt when collecting pay cheques. Unclaimed

wages are returned to the cashier. The Accounting Department will also journalise the basic

pay, allowances, deductions and net pays made into the General Journal, Cash Book, and the

General Ledger.

INTERNAL CONTROLS WHEN APPROVING AND DISTRIBUTING PAY

CHEQUES

Authorisation - the pay cheques are approved by an authorised officer in the Human

Resource Department first before being forwarded to the Human Resource Department to be

distributed.

Supervision - the wage payout is controlled by an independent paymaster, accompanied by a

foreman who is able to identify employees. The supervision function prevents fictitious

employees appearing on payroll records and no unauthorised payments can be made.

Accounting and Recording – by recording the payments, there is less possibility that

payrolls are recorded to the wrong accounts and recording provides for the accuracy, validity

and completeness of the payroll transactions.

Segregation on Duties – the duties in the payroll transactions are assigned to the personnel in

a way that no one individual can control all phases of processing a transaction, thus permitting

misstatements to go undetected.

An Employee who... Should not...

Opens mail and endorses cheques Handle cash receipts

Prepares a document Approves the same document

Handles cash receipts Endorse cheques

Maintain petty cash funds

Receive deposits or corrections from banks

Prepares bank deposits Receive deposits or corrections from banks

Verify cash receipts

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Maintain petty cash fund

Perform audit function

Distributes payroll cheques Prepare payroll input

Therefore, based on the evidences, explanations and flowcharts in this section, the

company has a relatively strong internal control for their personnel and payroll cycle. The

company maintains relevant controls like authorisation, supervision, segregation of duties and

custody controls to prevent any happenings of fraud and error and to maintain the well-being

of the company in the industry.

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References

Boh M. Messier, Glover, Prawitt. 2007. Auditing and Assurance Services in Malaysia (Third Edition) – Mc-Graw Hill (Malaysia) Sdn. Bhd.

http://basiccollegeaccounting.com/internal-control-the-importance-of-segregation-of-duties/

http://74.125.153.132/search?q=cache:kPz_2PfT6v0J:www.auditnet.org/docs/PayrollPersonnelCycleAP.doc+payrollpersonnelcycleAP&cd=1&hl=en&ct=clnk&gl=my

http://searchcrm.techtarget.com/definition/sales-cycle

http://ezinearticles.com/?Identifying-The--Stages...Sales-Cycle

http://blog.econsultant.com/seven-stages-of-a-typical-sales-cycle

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