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Internal control weaknesses
According to the conversion cycle in this company, we see that everything seems going smoothly and successfully. However, there are still some of the internal control weaknesses exist. Internal control included transaction authorization, segregation of duties, supervision, assess control and independent verification.
This company is not perfoming well in segregation of duties. The storekeeping and inventory control department is not separated. Commonly, inventory control department is responsible to minimize the total inventory cost and ensuring the inventories is adequately exist for production demand. It usually, provides production planning and control with status of finished goods and raw materials inventory, updates the raw materials inventories continually during production process and updates the finished goods inventory when the process of production is completed. On the other hand, the inventory control department of this company is also performing the job of sending the raw materials requested by the work centers. However, this task suppose should be performed by storekeeping but not the inventory control department. This segregation of duties is needed to prevent workers who work for inventory control steal the inventory easily.
Besides that, this company is also not perfoming well in supervision. We couldn’t see that there is any internal control of supervision in the work center. Work centers will begin the production operation once they get the raw materials from inventory control department(storekeeping is not exist in this company). The raw materials obtain from inventory control department need supervision by the work centers supervisors. It is significance to prevent wastage of raw materials in the production process.
Despite the supervision of work center, there is another supervision which is also not seems to have been performed by this company. The supervision of employee time cards and job tickets by supervisors is also significance in the conversion cycle of this company. Job tickets is used to account for the time spent by the worker on each production job which time cards are used to capture the total time worked each pay period. Supervision of these two is needed for checking of accuracy to prevent employee from “clocking in” for each other.
Moreover, the independent verification in this company also not performing well. There are only four department existed in this company which include production planning and control department, work center, inventory control department and cost accounting. The general department is excluded in this company where it is important for the internal control of independent verifications. This department is needed in this company as it bears an important independent verification function by checking the total movement of products from work-in-progress(WIP) to finish goods(FG).
Besides, there are a few weaknesses that could be detected under the cost accounting system. It is to be found that the management reporting system does not involve the computation of labor variances, material variances, and also the manufacture overhead. With the deficiency of these convinced calculations, the company will have trouble in computing the real profit for the company and hence will result in making the incorrect financial decision as well. Another weaknesses that could be detected in this conversion cycle is that the lacking in progress file under this particular system. Generally, the goods are divided into two different categories which is the work in progress (WIP) and the finish goods (FG). Though, the problem that arises is that we could hardly detect the real amount of the goods which are classified under the work in progress (WIP) due to the absence of in progress file. Hence, under this situation, the profit is known as the difference between the sales and cost.
In conclusion, there are some internal control weaknesses existed in this company where it will affects the operation. The company should come out with solutions for this weaknesses to ensure that they can operates in a better way.
Recommendation for internal control weaknesses
Basically, the conversion cycle in this company is operating well and everything went off competently. However, there are still some internal controls that need to be recommended in this cycle so that the conversion cycle will become more efficient and effective. Internal controls are detached into a few classifications which includes transaction authorization, segregation of duties, supervision, access, accounting records, and lastly independent verification. All the stated internal controls are significant for a cycle to be operated under a fair and efficient condition.
The first internal control that we would like to propose is under the classification of segregation of duties. From the control objective stated which the segregation of duties, the objective of this control is to split the record keeping activities from asset custody. Therefore, the storekeeping and the inventory control department in this cycle should be separated instead of performing them under the same department or the same person. The separation states that inventory control is responsible to maintain accounting records for raw materials and finished goods inventories .The record keeping activities is then kept separate from the resources storeroom and also from the finished goods warehouse functions, which has the custody of asset. If the storekeeping and inventories control department is performed by the same department or person, the person who performs the inventory control can easily changes the amount of inventories if there is a theft of assets in the warehouse or storeroom.
The next recommended internal control will falls under the classification of supervision. In the conversion cycle, the absence or lacking of supervisions in the work center will have a major effect in the production process particularly. It is essential to have strict supervisions in the work centers because the supervisors should oversee the usage of raw materials in the production process. This is to make sure that there will be no wastage exists and also to ensure that all the materials released from stores are used in production process to produce the goods for the company instead of producing something else which are no relevant and will cause wastage to the company.
Besides supervision in the production process, the employees who are performing their job need to be under supervision too. Supervisors do have the responsibility to observe and review the timekeeping activities of the employees. In this cycle, the job ticket and time card is used to record the working hour of each employee to allocate their salaries. Without properly supervision, employees will tend to record more working hours by using the traditional time machine which is punching in the card because they wish to get higher pay than what they are supposed to get. Therefore, to solve this problem, the company should have some high tech time machine for employees to check in their working hours. For example, by using the fingerprint detecting machine, employees are then allowed to cheat or check in for their friends anymore since every human beings fingerprint are different from one another.
Independent verification will be next internal control needed in this conversion cycle. In this cycle, there is a weakness of absence of the general ledger department. The general ledger department does play a very significant role in this conversion cycle because their responsibility is to reconciles the overall system of this conversion cycle. The general ledger department accomplishes an essential authentication task by inspection the total movement of products from work in progress (WIP) to finished goods (FG).To do the verification job, the general department is requires to reconcile the journal vouchers which presents the financial information relating to assets and liabilities from cost accounting and also summaries of the inventory subsidiary ledger obtained from the inventory control.
Moreover, as what has been recommended, the management reporting structure should eventually comprise of labor variance, material variance, and also the manufacture overhead. When the definite expenses related with a labor action varies from the predictable quantity, labor variance then occurs. In addition, one great thing about labor variance is that it can be applied in whichever component of a business, on condition that there are various compensation expenses to be evaluated to a typical amount. Meanwhile, material variance is generally defined as the distinction between the real cost incurred intended for direct resources and the estimated cost of those resources. It is practical for verifying the capability of a business to acquire materials costs close to the points at which it had intended to incur them.
In conclusion, these few recommendations provided will definitely enable the conversion cycle to operate in a more effective and efficient way as compared to before when the company is facing the problems of insufficient internal control.