University of San Carlos

School of Business and Economics

Department of Accountancy


Submitted by:
GROUP 1 (AC521 3:00-4:30 PM MW)
Cuevas, Rieland
De Castro, Charlene
Largo, Edsa Mae
Pullos, Richelle
Roda, Mary Ann
Suson, Angelyn
Tajor, Ma. Ephrem
Taveros, Maxine
Ventura, Cleo


Submitted to:
Mrs. Nilda Restificar

INTRODUCTION
Background

TNC Co. was registered with the Securities and Exchange Commission on
December 19, 1985 and was incorporated in the Philippines as a stock corporation with
SEC Registration No. CEO-0525 for the primary purpose of engaging in exporting and
importing, buying, acquiring, holding, selling on whole sale basis, or otherwise disposing
and dealing in any goods, wares, merchandise and commodities of all kinds and
products, natural or artificial, of the Philippines or other countries, which are or may
become articles of commerce, as may be permitted by law. The Company also
manufactures, improves, amalgamates or joins various goods to form one product,
merchantable goods, or wares, whether of local or Philippine materials, imported
materials or contribution of both, most especially handicrafts and the like products. The
registered office of the Company is located at Kagudoy Road, Basak, Lapu-Lapu City,
Cebu, Philippines.

On November 26, 1999, the Company became a member of the Board of
Investments as an export producer of garden and home products made of fiberglass on
a non-pioneer status under Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987.

Findings and Recommendations
Finding #1: There was no periodic inventory count for the last six years.
Consolidation of purchases into 2 warehouses.
Discontinuation of inventory counting and reconciling stock counts of
the companys perpetual inventory records and general ledger
Analysis
Condition Periodic inventory counts in warehouse No. 15 were not
routinely performed.
Cause Since the past six years, the company hasnt
periodically done an inventory count and reconciliation
of amounts.
Effect As a result, inventory shortages and overages could
occur and remain understated. Inventory reorder points
might be inappropriate.

Recommendation
Even though the company has a perpetual inventory system, we recommend that
the management must perform a periodic count for its inventory items in both
warehouses and reconcile the physical inventory stock with the stock records. We also
recommend that the Purchases Dept. should make a well-defined list of inventory count
procedures including the treatment of special kinds of inventory items (consigned,
obsolete, and damaged inventory items). We will also examine the past years financial
statements and records to determine whether there are any material misstatements
attributed to the absence of a periodic count. We will also test the reasonableness of the
companys beginning inventory so that any material misstatement on the companys
reported profit will be adjusted.

Finding #2: No clearly defined inventory monitoring responsibility over the
warehouse inventory
The current system is capable of ensuring that all receipts and
withdrawals are recorded but is prone to errors because of the
combination of manual and automated processes.
Purchasing Department recognizes the need for a fully automated
system and is in the process of procuring an automated requisitioning
system.
Analysis
Condition 1.) Purchasing Department did not adequately monitor
the warehouse inventory activities.

2.) The current Accounting Information Systems is
capable of ensuring that all receipts and withdrawals
are recorded.
Cause 1.) Purchasing Department did not reassign oversight
responsibility.

2.) The system is not fully automated, and thus is prone
to errors.

Effect 1.) The warehouse and inventory control personnel are
operating independently. As a result, after the initial
inventory count, there was a difference of roughly a
million dollars in the recorded and actual inventory
amounts.

2.) There might be unrecognized errors which could
materially misstate the GL amounts

Recommendation
We recommend that the management should establish a system for responsible
employees to verify delivery, receipt, and storage of inventory. Create a paper trail of
internal documentation and cross-check to ensure items received and those on invoice
are identical. Confirm that a system of signing items out of inventory and into sales
exists, that it requires signature authorization and compliance is enforced as policy.
Confirm that all shipments of products are identical to invoiced sales documents. Adopt
measures to ensure that inventory is not reduced in company records until
documentation is checked and items are shipped. Make sure that shipping records are
verified and costs for shipping are accounted for in costs of goods sold. And to further
ensure a strong inventory tracking and monitoring system, we also recommend that the
Purchases Dept. continue its effort to fully automate the entire inventory system. This
will enable the management to have a real-time view of the flow of the inventory items in
the company. But this system must be fully integrated with the Accounting Information
System of the company and it must also be accessed by only a limited number of
authorized company personnel.


Finding #3: Purchases did not have established policies and procedures for
identifying and disposing of obsolete inventory items.

Analysis


Recommendation
The Purchasing Department must establish its own Inventory Obsolescence
Policy through a Material Review Board that would guide the company with regards to
the timely recognition of obsolete inventory, the necessary inventory adjustments, and
its subsequent dispositions. This policy shall also establish the departments
responsibilities for the strict conformance of these policies.


Finding #4: Purchases did not perform periodic reviews of its reorder points to
determine whether inventory levels were adequate.

Analysis
Condition The inventory stock level reorder points established 20
years ago remained unadjusted and unevaluated
Cause Purchases did not perform periodic reviews of
inventory-reorder points
Effect When the inventory supply is insufficient to meet the
Company demands, Purchases must make emergency
buys or agencies may purchase the items themselves
without the benefit of volume discounts.

Condition Purchases did not have established policies and procedures for
addressing inventory obsolescence. On January 31, 2012, a
number of items appeared to be obsolete. There were printed forms
and material that were no longer used by the company.
Cause The company has not done its physical inventory count in the past
six years.
Effect The lack of policies and procedures for identifying and disposing
obsolete inventory increases the costs for storage and
maintenance. It also ultimately reduces the recoveries the company
may obtain when these obsolete items are disposed.
Recommendation
We recommend that evaluation of the inventory stock level reorder points should
be done annually to prevent excess or shortages of inventory supply which may lead
either to an additional non-value added cost or loss of sale due to customer
dissatisfactions. These procedures must comprise of assessment of lead time demand,
safety stock, and required inventory stock level. The Purchase Department must
consider the causes for the shortages and adjust reorder points.

Finding #5: Purchases did not maintain an up to date inventory catalog
The last printing of the Companys inventory warehouse catalog was
approximately 6 years ago.
Since that time, the Company has implemented just in time purchasing from a
vendor, and many of the supplies that agencies previously obtained from the
warehouse are now supplied by a vendor.

Analysis
Condition The inventory catalog was not maintained on a current
basis.
Cause The last printing of the Companys inventory warehouse
catalog was approximately 6 years ago.
Effect Use of the outdated catalog causes requisitions to be
completed incorrectly, increasing the time and cost
required to fill agency requests.

Recommendation
We recommend that Purchases update its warehouse catalog. Besides, there
must be an implementation and development of management policy requiring an annual
update of inventory catalogs.




Finding #6: The inventory warehouse area was not clean and organized.

Analysis
Condition Purchases did not maintain a neat, clean and organized
warehouse. Inventory items were not always consistently labeled
with inventory numbers nor were they stored in an organized
manner that would facilitate an efficient retrieval. The facility lacks
painting and has poor lighting. Surplus property that appeared to be
damaged or obsolete were situated in at the center of the first floor.
Cause The company has not done its physical inventory count in the past
six years.
Effect The poor organization of the inventory and the lack of proper
lighting and storage of inventory items could lead to safety and fire
hazards and hinder the efficient operation of the warehouse.

Recommendation
The Purchasing department should find a way to store inventory items in an
organized manner and maintain the cleanliness of the warehouse, which must be
documented in an inventory layout plan for future reference. In addition, the facility has
to be painted and the lights replaced or improved. These, if implemented, shall promote
efficiency and smoothness of flow in retrieving the inventory, as well as the safe use of
the warehouse.










Executive Summary
This report was commissioned to examine whether the companys inventory
management is reliable, and to determine what impact it could have on the companys
profitability. Procedures such as observation, inquiries, and sampling were performed to
obtain the needed information.
The report draws attention to the following findings: There was no periodic
inventory count for the last six years which could result to undetected inventory
shortages and overages; No clearly defined inventory monitoring responsibility over the
warehouse inventory which makes the company prone to unidentified errors which
could materially misstate accounts; Purchases did not have established policies and
procedures for identifying and disposing of obsolete inventory items, increasing the
costs for storage and maintenance and reducing the recoveries the company may
obtain when these obsolete items are disposed; Purchases did not perform periodic
reviews of its reorder points to determine whether inventory levels were adequate,
making the company prone to emergency buying, thus possibly losing the benefit of
volume discounts; Purchases did not maintain an up to date inventory catalog,
increasing the time and cost required to fill agency requests; The inventory warehouse
area was not clean and organized, resulting to safety and fire hazards that may hinder
the efficient operation of the warehouse.
Therefore the following recommendations are made: periodic count for its
inventory items in both warehouses and reconciliation of the physical inventory stock
with the stock records; management should establish a system for responsible
employees to verify delivery, receipt, and storage of inventory; The Purchasing
Department must establish its own Inventory Obsolescence Policy through a Material
Review Board; evaluation of the inventory stock level reorder points should be done
annually to prevent excess or shortages of inventory supply; Purchases update its
warehouse catalog; Purchasing department should find a way to store inventory items in
an organized manner and maintain the cleanliness of the warehouse (ex. Inventory
layout plan). These recommendations can minimize the problems mentioned above,
thus aiding the company in terms of adequate controls and proper financial statement
account balances.

(Cuevas and Co.)

Date : March 10, 2014
To : Management
From : Rieland J. Cuevas, Partner
Subject : Audit of the Inventory Department

Attached herewith is a draft of the report we plan to issue based on our findings
on the recent audit of TNC Company. The draft is issued in order to provide you the
opportunity to discuss the findings of our audit, present any additional documentation,
and for you to suggest changes, if any. The exit conference is available as an option
prior to the issuance of the final Audit Report.

If you would like to schedule an exit conference to discuss the contents of the
draft prior to distribution of the final report, please notify me. Otherwise, please provide
a written response by March 17, 2014 to the address provided below, or send it via
email at cuevasri_cpa@yahoo.com. The response should take the form of specific
action taken with respect to each finding and recommendation. If a response is not
received, the final report will be issued with the management responses detailed in the
draft report. A copy of the draft report is being forwarded to the applicable manager
requesting acknowledgement and review of the report.

Upon receipt of the Exit Conference Memorandum, the management may submit
a request for an exit conference.

Mailing Address:

Cuevas and Co.
Affinity Plaza Condominium,
143 Jun Avenue, Suite 777
Gorordo Avenue, Cebu City


Attachment

Request for an Exit Conference

Date: ______________________

Management Representative(s):
Name: ________________________________________________________________
Phone: _______________________________________________________________
Fax: __________________________________________________________________
Email: ________________________________________________________________

Name: ________________________________________________________________
Phone: _______________________________________________________________
Fax: __________________________________________________________________
Email: ________________________________________________________________

Name: ________________________________________________________________
Phone: _______________________________________________________________
Fax: __________________________________________________________________
Email: ________________________________________________________________

Name: ________________________________________________________________
Phone: _______________________________________________________________
Fax: __________________________________________________________________
Email: ________________________________________________________________

Name: ________________________________________________________________
Phone: _______________________________________________________________
Fax: __________________________________________________________________
Email: ________________________________________________________________

Signature: _________________________________ Date:____________________

Printed Name: __________________________________________________________