CHAPTER III Audit of the Finance and Administrative Department A.

Evaluation Criteria We use the following criteria to evaluate the Finance and Administrative Department:
1. Do the raw materials being purchased in different countries affect the

production of the company's products?

2. Are inventories are being managed properly? 3. Are locally purchased raw materials are actually being properly quoted? 4. Does VTC's accounts receivables turnover high or low? 5. Are the goods ordered by the customers are being delivered within the

acceptable time frame? B. Findings and Conclusions The actual profit realized by the company of 12 million this year is lower than the forecasted profit of 15 million. The 3 million variance is a significant amount and it needs investigation. Also, the company's net profit before tax is lower than the industry average where the range is from 15 million-20 million. This presents an unfavorable outcome on the company's performance since their net income falls below the industry average. Another problem is identified in the accounting/cashiering function of the finance department. The cash advances of the employees seemed to be so high and the fact that the said advances to the employees were not properly liquidated is very unfavorable for the company. The cash advances provided to the President and Vicepresident amounting to PhP305,000 three years ago were still not liquidated up to the present. This presents a problem in handling and reconciling the cash of the company

and this can lead to a very serious problem for the company if it will persist considering that cash is one of the most liquid assets. Another problem discovered by the auditors is the PhP100,000 excess in the general ledger as compared to the subsidiary ledger. Again, this indicates inefficiency of managing and keeping tracks of the records of the company. The average number of days that the company's receivables are outstanding is high and thus, making the turnover low. This is not a good result for the company because converting credit sales into cash takes a long time to be accomplished. Though the credit sales of the company are relatively high, they must take into consideration how long they will be able to convert the said credit sales into cash. The new IBM computer that has been ordered by the company to replace the old one seems so costly. Aside from the cost incurred for the procurement of the said facility, there are still installation fees that will be paid by the company and the time it takes to install the new system (6-9 months) is too long. Along with the installation of the new system, the company must also hire new employees that are more knowledgeable in using the new system installed. Therefore, it is an additional cost for the company. Another flaw in that decision is that, not all employees are open and flexible to a sudden change in the system and in result, they will have a hard time adapting the new system and their performance might be affected. Raw materials stock out is a serious problem that VTC is facing right now. The lead time for the materials ordered to arrive is really long. It takes 6-12 months. This can greatly affect the production of the company since the materials needed to produce the product are not available by the time they are actually needed. In turn, the company

can't cope with the growing demands for the product in the market due to stock out of materials. If this continues, the company will have a high percentage on the lost opportunity because they will not be able to respond to efficiently to customer orders. This has a negative effect on the total sales of the company and also, the perception of the customers, whose orders were not responded to immediately, for the company will be greatly affected. There will be a high probability that they will look for another company that can respond to their needs more efficiently. Considering the tight competition in the market, this is not good for the company. Another problem of purchasing the raw materials abroad is the very volatile exchange rate between two different currencies. Considering that the exchange rate is rapidly fluctuating, investing in raw materials from abroad presents a great risk. If the peso appreciates, then it's favorable for the company. But what if the peso suddenly depreciates? The company will surely increase their selling price because they purchased the raw materials at a higher cost. Considering that they are not the only company who supplies tobacco in the market, the company will have a hard time selling their products. Obsolescence and deterioration of the raw materials ordered are also possibilities that are unfavorable to the company. Due to the long lead time, the materials ordered may deteriorate along the way. Responsiveness to customer orders is low since there are a large number of backorders due to inventory stock-out. This has something to do with the lead time for imported materials to arrive. Since the company can't effectively produce its products due to raw materials stock out, the finished goods inventory would be low and thus, the quantity demanded for the company's products exceeds the available supply and

therefore, backorders are relatively high. As mentioned above, this will affect the perception of the customers towards the company's performance. In addition, due to backorders, the company incurred more cost since there are clerks who handle the backorders and a supervisor to monitor it. Additional employees would mean additional cost. The time of delivery of products to different places which demands the products is very long. It takes 30-45 days to deliver the products to specific customers. There is something wrong with the system of delivering orders. This should be given attention because normally, customers do not like to wait that long. It will cost them a lot by doing so. Also, quality service is not being observed by the company if this situation continues. For every business, the main goal is to provide customers the satisfaction with the quality products you are offering and quality service you are providing. The system of receiving the inventories is good. Inventories undergo a series of inspection before it is officially accepted by the company. It is necessary that inventories are checked in order to prevent defective materials in the production process. It is also good that the company is employing the quality checking of materials that they purchased to ensure that the materials that will be used passed the standard set by the management in terms of quality. It is good that a company is requiring a price quotation for canvassing materials that will be purchased before deciding where and when to buy it. However, the company should require a proper quotation from the supplier itself and should not rely on written quotation provided by the canvassers only. the quotation must come from the suppliers company itself to ensure the accuracy of the amount being presented.

C. Recommendations For the company to improve the problems identified during the audit of the Finance and Administrative Division, here are some of the recommendations:

For the unliquidated cash advances, the company should employ a strict policy on the said activity. The company should develop a ceiling on cash advances and should strictly set a deadline for the liquidation of the said cash advances. In that way, the company can better manage and track the movement of their cash. This should be taken attended to by the management immediately because managing cash flows of the company is very risky considering that cash is a very liquid asset.

As for the turnover of the company's accounts receivables, the company should find ways to make it high. The company can promote incentives on those debtors who can pay their accounts within a specified term. For example, the company can provide a 5 percent discount for those who can pay their accounts within 10 or 15 days. In that way, debtors will be encouraged to pay their bills within the provided term in order to avail the discount provided by the company.

For the new system that was installed, the company needs not to invest in additional employees since it will boost the company's expenses. Instead, the company should conduct proper training for existing employees on how to properly use the new system for more efficient work performance. The company should ensure that the existing employees have adapted to the new system installed before fully using it in the company's operation.

The company should try to look for other suppliers abroad that can deliver imported goods in a shorter lead time to prevent inventory stock-out. In this way, the production will not be delayed in converting raw materials into finished products. In turn, the company can accommodate the increase in demand for the products and it will minimize backorders and eventually, there will be none. So the company will have a savings if that happens because the cost of monitoring the backorders can be avoided. Also, the company can avoid lost opportunity due to finished goods inventory stock-outs and it will contribute positively to the companys revenue.

The number of days that the goods ordered by the customers to be delivered should be reduced. The company can invest in warehouses in places where demand for the product is great so that when the customers ordered a specific product, it will be easier to process the request and delivery will be faster. The company should employ a strict standard in relation to the maximum number of days that the orders are delivered to the customers.

For the canvassing of locally purchased materials, the company should not accept any price quotation made by the canvassers only. The price quotation of the materials to be purchased should be directly from the prospective suppliers in order to ensure the accuracy of the figures.