Final Audit Report (1) June
Transcript of Final Audit Report (1) June
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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
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PURCHASE FLOW CHART
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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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