Try it now!

USD
10

Calculate your price

Number of pages:

Order Now
Table of Contents

Financial analysis of the “Competition Bikes Inc.” company – Part 4

600

A.2. Evaluating Internal Controls and purchasing

Internal controls consist of plans and coordinated measures and methods adopted by the organization with the objectives of verifying the reliability and accuracy of the company's accounting data, to promote efficiency in operation, to encourage adherence to the recommended administrative policies and protecting the organization's assets (Moorthy, Vijaya, n.d.). Competition Bikes Inc. presented their internal control plan on purchasing. To summarize it purchasing department will issue an order relative to the months allocated budget projections.

Looking for some really good hooks for argumentative essays? You'll be glad to find out our invaluable writing guide at Pro-Papers blog and choose the ones you'll like most.

There will be a selection from the supplier with the lowest bid and the order will be sent to the awarded supplier. Once the goods are delivered to the production line it will be brought straight for assembly. Then purchasing department will send the payment check after the month of order to the supplier. The remaining raw materials will be sent to the inventory house on the last day of the month. There are a few things that aren't clear in this proposed process and they have to be analyzed in order to ensure full internal control of the process before the company suffers the consequences of not seeing it through. First of all, internal control as mentioned earlier has two dimensions and they are administrative and accounting controls, the principles of internal control are just simple, it is for the company to recognize the reality that not all people working in the company are honest, not to emphasize a cynical view of the nature of human beings but more of the realistic assumptions.

In CBI's process that was stipulated in the plan is vague and very broad in nature. It was not concluded in the manner of detailing the process from start of the supplier selection up to the payment of invoices. These things have to be addressed in order to maintain honest business practices within the organization but not to be too skeptical about the individuals working inside the company, constant auditing is necessary in this process as it should be in all business operations. In this case the order was made ready before the selection takes place. It can be an opportunity for any purchasing employee who has a close business ties with a supplier of the same needed material to place the order right away and just before the bidding happens. This will not be appropriate as it bypasses the normal and ethical procedure of supplier selection.

The importance of establishing the criteria is to set a guideline in pooling in the right supplier, soliciting suppliers without a guideline would result to enlisting a non-competitive supplier who can just declare compliance to the quality standards and propose a lower bid, since budget is one of the determining factor in this case, the described supplier will have the chance of getting the order and the company would end up getting sub-standard materials that will compromise the quality of the product and ruining its reputation in the long run. Another factor that needs to be considered in selecting the right supplier is their capability to supply the needed quantity, meaning the criteria should include the supplier's volume capacity. Any supplier can declare that they can accommodate the ordered amount of materials but struggles in the end completing the order; it may result to production delays because of delivery delays of raw materials. The purchasing department needs to put those things into account to avoid jeopardizing production.

CBI's internal control plan only mentioned three sources for similar quality materials and selects the lowest bidder. A lot of things were missing on that part since the selection process was not described. How the supplier's will be selected aside from being the lowest bigger was not clear. Price is not always the case, there is quantity as mentioned earlier and delivery volume, can the supplier deliver the whole 1-month supply at one time? (considering the low bid from the winning supplier, they would find a way to lower their cost as well, i.e. logistics and probably decide to deliver the bulk to reduce delivery cost), does the supplier has enough inventory to fulfill the order and how soon can they deliver it?, what are the terms?, do they agree to CBI's 30 days after delivery payment?, or the supplier wants COD? (From CBI's balance sheet looks like they can).

These things have to be put on the table in order to select not only the lowest bidding supplier but also the most qualified. The reason why these things have to be a part of the criteria is because; people cannot be too perfect and may oversee these factors. So it has to be put in criteria before any decisions should be made. The next concern about the purchasing internal controls is sending the supplies directly to the production line without being audited first, not to be suspicious, but we cannot deny the possibilities that the supplied materials could lose significant quantities on its way to the production line.

People can't also be too careful handling the raw materials when they see that there's a lot of it to begin with, so mishandling of materials can happen and replacements of broken and damaged raw materials are inevitable if no control measures were in place. Lastly, spoilages could increase if the materials were not controlled from a certain point. This would result to shortage in materials causing shortage in product, delays because the materials are not enough and needs to reorder another batch and not to mention disrupted budget, because it is apparent that the materials are ordered only enough within the allocated budget. In terms of sending the unused materials to the inventory store, this could be an opportunity for the people in the inventory department to take advantage of the stocks to be traded outside of the company premises.


This kind of problem is common in manufacturing industries, where people from the inventory department are involved in falsification of inventory data, where the materials are not accounted accordingly and accurately on purpose so that the unrecorded materials can be shipped out of the factory and sold to third parties for personal profit. These things happen for real and the stealing operations were being done after business hours behind the company's back and these causes the company huge losses. In the proposed internal controls, there was no kind of procedure mentioned in the process, which is clearly a sign of weakness. The lack of record of items to accompany the surrendered materials to the inventory house suggests that the materials were just returned as it is without counting them prior to surrendering. This would not only slow down the process of inventory during audit due to lack of initial record count to compare which will also result to inaccuracy of all records produced after the audit. This is also the reason why there should be a receiving record to compare with the records of consumption and leftovers.

A.2.a. Weakness and Corrective Actions

Going back to cited possibilities that employees may act freely if internal control measures were not done accordingly from purchasing to inventory. At the start of the process, the administrative side of internal control should take place first. The purchasing department will issue a purchase order to the supplier after the deliberations of the monthly projected budgets. The problem here is that, in a normal business operation, there shouldn't be an order yet before the supplier has already been selected. Appointing the right person to nominate a suitable supplier, it was not mentioned in the process plan. Purchasing department have to delegate the nominations on a single person only, otherwise the same opportunity might come to other employees of the purchasing department to nominate a non-competitive supplier based solely on personal relationship.

The person appointed to pool in a list of suppliers must sign an agreement stipulating that the pooling of supplier nominees has to be done based on criteria set by the company in accordance to the standards of product quality requirement and not of personal considerations and influences. Upon signing in, an auditor would have to validate the criteria in selecting the supplier, it should be in cross-referenced to the quality standards sheet required by the product. In this process the product manager and quality assurance manager should be the one to audit the list of criteria in selecting the supplier. The person appointed to acquire nominees for bidding should be well informed of those criteria and be careful about it.

Once the criteria are set then the appointed person should start pooling in lists of suppliers, then the list should be submitted to the purchasing manager to start selecting the best three qualified suppliers. The importance of pooling in as many suppliers as possible on a list is to diversify the company's choice for the best source of materials. Aside from price quotations, the three nominated supplier will be required to do a product presentation. This presentation will be attended by a panel, consisting of the purchasing manager who will assess the price set in relation to budget set by the finance department and will be the one to haggle the price, quality assurance manager that will assess the quality of the materials and the swatches, the production manager to assess capability of the supplier the required volume capability and product manager to assess the materials offered by the supplier if they fit to the product components.

Once the panel have decided after due consideration to each of the manager’s assessments, it is then the purchasing manager's turn to write an order. Once the ordered materials arrived it should not go straight to the production area, the most important process here now is to put the order into beginning inventory. The invoice issued by the supplier should be entered into the inventory system to account the quantity of the ordered materials, in this way the accounting department will know how much were ordered and how much have been delivered. If the materials are to be delivered in staggered manner, the accounting department should not prepare a check yet even after the 30 days’ period is over unless the original ordered quantity has been completed.

The inventory department on the other hand should make a record of the actual materials received from the time it was unloaded from the delivery truck (actual received goods). The actual received goods tally sheet will also be entered into the system so that the accounting department knows the amount of actual goods delivered and the last delivered quantity should tally to the purchased ordered quantity. The first point of release should come from the inventory store and prevent all of the goods to be forwarded straight to the production line. This will constitute the manner of control, the production department are aware of their production output capacity in a day, what the inventory department should do is to release only the exact amount needed for that production day and releasing should be in a form of request. This will prevent any miscounting of released materials to go into production and eventually into spoilage.

The daily basis of releasing of materials using a request form would be easier to track down who requested and for how many. Accounting department will also have an easier job in tallying how much were used for the production and how many went to spoilage. This will also eliminate difficulties of transferring the leftover materials because obviously there is no need to transfer at all; the materials are with the inventory store to begin with. The ending inventory of excess materials will be made easy if there is a tally sheet entered into the system that will automatically deduct the requested quantity from the beginning inventory and any amount left in the tally sheet can already be considered as ending inventory after a month of production.

Does your assignment have to be accompanied by an illustrative materials and Power Point presentation? We offer comprehensive presentation services, from its start to finish.

During the end of month inventory, auditors would be able to account remaining materials in the inventory when a record of ending inventory is available. Beginning minus the number of requests tally sheets creates a value ready to be verified both by accounting and auditing at every end of the month, making the job easier for both departments. Using request forms limits unauthorized access the materials, anyone who doesn't have a signed request form will not have the materials released to them. Essentially this method enables the production manager to track down the number of materials issued to the production area and how much went into spoilage.

This information can be shared accordingly to the accounting department to pro-actively monitor if the production department is having too much spoilage giving justification to purchasing department whether to reorder another batch of materials or not. Lastly, this method is useful in ensuring that no individual in the company executive or laborer will have the opportunity to take advantage of the loop holes in the procedures that will cause the company of too much loses. Inaccuracy in any of those processes described earlier will post inaccurate financial statements especially during audit when inventories were accounted for efficiently.

Leave a Reply

Your email address will not be published / Required fields are marked *

USD
10

Calculate your price

Number of pages: