I.

Background of the study

General Manufacturing is the USA based manufacturing of Saf-T-Lite hand-held and mounted work lights, serving the industrial,
military and automotive aftermarkets since 1962. They are manufacturer of lighting and power supply products. Lightning
products available include incandescent, confined space, electric, LED, fluorescent, portable, work, explosion proof,
rechargeable, cordless lights and more.

They are recognized as a leader in innovative product design and development. Despite of this recognition, they face a problem
regarding on their internal control. The consequences of a breakdown in internal controls can be wide-ranging and severe.
Internal controls protect the company against numerous possible problems that can affect the survival of the company in the
long run. Internal controls are intended to ensure the reliability of financial records. Internal control weakness in the system can
cause a dishonest employee to take advantage of the lack of oversight and commit fraud she wouldn’t even have attempted.
Controls also can break down if people work together to get around them.

This study would tackle about the problem of General Manufacturing Company who is facing internal control problems. Its
subsystems’ lapses are taken advantage by its employees to act for their own benefit. The General Manufacturing Incorporated
needs to modify its system to ensure that its operations are effective and efficient, that its financial reports are accurate and
complete, its employees to act according to their responsibilities, and that the company is doing business with all relevant
regulations and laws.

II. Statement of the problem

The GM has lapses in its subsystem which can cause its employees to act unethically.

III. Point of view

Management’s point of view

IV. Objectives
  Assess the condition of internal control systems of General Manufacturing
 To understand the significance of internal control system in the company
 Examine the effect of internal control system on behaviour of General Manufacturing Incorporated’s employees

V. Relevant facts
 Production
1. The work center supervisor does not watch employees closely enough making it easy to fabricate the amount
of time they spend working.
2. The lack of excess materials and materials return documents represents accounting record and access control
problems.
3. The storekeeping and inventory control shouldn’t be combined as this makes it easy for an employee to steal
finished goods and raw materials from General Manufacturing.
4. Inventory is not properly recorded because excess raw materials are left around the work center department.
 Cost Accounting
1. The cost accounting department has lack of excess material and material return documents.
2. The cost accounting and general ledger departments are combined.
3. No independent verification of the journal vouchers prepared by the cost accounting department occurs since
the same person reconciling those updates the general ledger.
 Effective internal control reduces the risk of asset loss, and helps ensure that plan information is complete and
accurate, financial statements are reliable, and the plan’s operations are conducted in accordance with the
provisions of applicable laws and regulations. It minimizes opportunities for unintentional errors or intentional fraud
that may harm he plan. It also discovers small errors before they become big problems.
VI. Alternative Course of Action
Data Flow Diagram
Marketing System
Sales Order System (Revenue Cycle)
Purchase System (Expenditure Cycle)
Purchase Requisition

Sales Orders
Bill of Materials Production Schedule, Work Order, Move Ticket, Materials Requisition

BOM Plan and Control Production Payroll Time Card

Perform Production Operations HR and Payroll System (Expenditu

RS
Work Order Mat’ls Req, Completed WO
Route Sheet Purchase Requisition

Inventory Level Raw Material Inventory

Maintain Inventory Control

Usage Levels
Cost Standards Journal Voucher
General Ledger System Production Level

Journal Voucher
OH, labor, material FG Inventory

Perform Cost Accounting

Material Requisition

Labor, materials, OH allocation

Work In Process Job Time Cards, Move Tickets

 System Flowchart
Work Centers
Production Planning and Control Inventory Needs
Marketing
Payroll Timecard C
Payroll
Engineering Specs
Sales Forecast Engineering

Job Time Tickets

Cost Acctg.
B Purchase Requisition D
BOM
O Assess inventory requirements
M
Initiate Production Activities upon Receipt of Control Documents, Prepare Timekeeping Documen

RS
R A
. BOM
Purchasing
S
. RS
Open W.O.
Production Schedule Mat’l Ret.
Prepare Production Control Documents

Production Schedule

Move Tickets
Cost Acctg.
Excess Mat’l
Op D
en C
W. Work Order
Mat’l Ret.
O
Production Schedule
Move Tickets
W.O.
B
W.O.
Mat. Req.

Close Out Open Work Order File

FG Warehouse
 Storekeeping
Inventory Control
RM Sub. Ledger
Review Records

Excess Mat’l
Excess Mat’l

Mat’l Ret.
Mat’l Ret. Inventory Needs
Mat’l Req
Update Inventory Records
RM Sub. Ledger
Mat’l Req

Issue Raw Materials to Work Centers in Exchange for Material Requisition

Journal Voucher

Mat’l Ret.

Excess Mat’l

Excess Mat’l
Mat’l Req
Mat’l Ret. A
Mat’l Req Cost Acctg.
Mat’l Req B

FG Inventory
Purchase Req.
Update Inventory Records
Excess Mat’l Journal Voucher

Mat’l Ret.
File Work Order

Gen. Ledger
 Cost Accounting General Ledger

Production Planning Work Order Initiate WIP Record Work Order Journal Voucher Update GL

WIP File
Move Tickets Journal Voucher General Ledger

Work Center Time Tickets Update WIP and Calculate Variances

Standard Cost File

Inventory Control
Journal Voucher File
Material Requisitions
Inventory Control
Excess Materials Journal Voucher

Material Returns
Journal Voucher

Labour Variances
Mgt. Reporting System

Material Variances
File
MOH Variances
Alternative Course of Action 1

Advantages:

1. Finished Goods and Raw Materials cannot be stolen because storekeeping and inventory control departments are
separated.
2. Independent Verification step exist because cost accounting department and general ledger department are separated which
prevents one person to control both of the departments.
3. Assesses inventory requirement before preparing documents for production schedule.

Disadvantages:

1. No assurance that the supervisor will watch the employees closely enough in the work center.
2. Move tickets, job tickets, material requisitions, excess material, material return documents are not stored in a file in cost
accounting.
3. No assurance that the supervisor will oversee the usage of raw materials in the production process.
 Data Flow Diagram
Marketing System
Sales Order System (Revenue Cycle)
Purchase System (Expenditure Cycle)
Purchase Requisition

Sales Orders
Bill of Materials
Production Schedule, Work Order, Move Ticket, Materials Requisition

BOM Plan and Control Production Payroll Time Card

Perform Production Operations HR and Payroll System (Expenditure Cycle)

RS
Route Sheet Work Order Mat’ls Req, Completed WO
Purchase Requisition
Raw Material Inventory
Inventory Level

Maintain Inventory Control

Cost Standards Usage Levels

Journal Voucher
General Ledger System Production Level

Journal Voucher FG Inventory

OH, labor, material

Perform Cost Accounting

Material Requisition

Labor, materials, OH allocation

Work In Process
Job Time Cards, Move Tickets
 System Flowchart Work Centers
Production Planning and Control Inventory Needs
Marketing
C
Payroll Timecard Payroll
Engineering Specs
Engineering
Sales Forecast

Job Time Tickets Cost Acctg.

D
BOM BOM Purchase Requisition
Assess inventory requirements

Initiate Production Activities upon Receipt of Control Documents, Prepare Timekeeping Documen

RS A
R.S.
BOM
Purchasing

RS
Open W.O.
Production Schedule Mat’l Ret.
Prepare Production Control Documents

Production Schedule

Cost Acctg. Move Tickets

Excess Mat’l
D
Open W.O
C
Work Order
Mat’l Ret.
Production Schedule
Move Tickets
W.O.
B
W.O.
Mat. Req.

Close Out Open Work Order File

FG Warehouse
 Storekeeping
Inventory Control
RM Sub. Ledger
Review Records

Excess Mat’l
Excess Mat’l

Mat’l Ret.
Mat’l Ret. Inventory Needs
Mat’l Req
Update Inventory Records
RM Sub. Ledger
Mat’l Req

sue Raw Materials to Work Centers in Exchange for Material Requisition

Journal Voucher

Mat’l Ret.

Excess Mat’l

Excess Mat’l
Mat’l Req
Mat’l Ret. A
Mat’l Req Cost Acctg.
Mat’l Req B

FG Inventory
Purchase Req.
Update Inventory Records
Excess Mat’l Journal Voucher

Mat’l Ret.
File Work Order

Gen. Ledger
 Cost Accounting General Ledger

Production Planning Work Order Initiate WIP Record Work Order Journal Voucher Update GL

WIP File
Move Tickets Journal Voucher General Ledger

Work Center Time Tickets Update WIP and Calculate Variances

Standard Cost File

Inventory Control
Journal Voucher File
Material Requisitions
Inventory Control
Excess Materials Journal Voucher

Material Returns
Journal Voucher

Labour Variances
Mgt. Reporting System

Material Variances
File
MOH Variances
Alternative Course of Action 2

Advantages:

1. The move ticket, time ticket, material requisition, excess material, and material return documents are stored in a file in the
cost accounting department.
2. The standards provided by the standard cost file, enable cost accounting department to update the affected work in process
accounts with the standard charges for direct labor, direct material, and manufacturing overhead. Deviations from standard
usage are recorded to produce variances.
3. The use of standard costs provides a type of access control. It limits unauthorized access to resources. To obtain excess
quantities requires special authorization and formal documentation.

Disadvantages:

1. No assessment of inventory requirements and immediately prepare documents in the production planning department.
2. No rotation of job assignments to discourage employees from engaging in long-term schemes to steal from them.
3. Even the departments and duties are segregated, employees may work together to commit fraud.
 Data Flow Diagram

Purchasing
Bill of materials

Route sheets

Sales forecast Purchase Requisition

Marketing
1 Levels
Production Planning and Control Inventory Status 2 RM Inventory

Engineering Specification Review and Update RM

Purchase Requisition Update
Engineering
Journal Voucher and Materials

Work Order, Move Tickets and Materials Requisition

Requisition
Work Order, Move Ticket

RM Materials Requisition
General Ledger and Materials Requisitions
3
Perform Cost Accounting
Update
4 Employees
Time Time Tickets
Perform Work
WIP Sub ledger
Tickets and Time Cards

Payroll

Time Cards
Production Planning and Control System Flowchart Work Center

Marketing
Engineering Employees

Sales Forecast
Engineering Specifications Time Cards
Time Ticket
C
Move Ticket
Prepare Documents Inventory Needs
E
Work Order Initiate Production, Prepare Timekeeping Do

Route Sheet N Material Requisition G

Bill of Materials

A Time Ticket Time Cards

Cost Acctg.

Purchasing Payroll
Purchase Requisition
Material Requisition

B H
F
Excess Material
Move Tickets Materials Requisition I
C G
Material Returns
J
D

Work Order E
 Inventory Control
Storekeeping
Determine Needs RM Subsidiary Ledger

Excess Materials I
Excess Material
Inventory Needs L

Material Returns
Material Requisition
N
J FG Inventory Material Return
M
General Ledger
Journal Voucher
Material Requisition
K
H
Update Inventory Records
RM Subsidiary Ledger

Issue Raw Materials to Work Centers in Exchange for Material Requisitions

Journal Voucher

Excess Material
Material Return
A
Material Return General Ledger
Material Requisition K

Material Requisition Excess Material

Excess Material L Purchase Requisition

Material Requisition

Material Return
M Cost Acctg.
 Cost Accounting
General Ledger
Inventory Control
B
Move Ticket
Journal Voucher
Work Order D Inventory Control
O
Material Requisition
F Material Requisition

Excess Material Journal Voucher Update General Ledger

Journal Voucher
Update WIP and Calculate Variances Material Return

General Ledger

Time Ticket Work Center

Variances Journal Voucher

Mgt. Reporting System

Journal Voucher
Work Order

WIP Subsidiary Ledger

Journal Voucher
O
Alternative Course of Action 3

Advantages:

1. The general ledger department is separate from departments keeping subsidiary accounts making it segregated from
inventory control and cost accounting.
2. Inventory is properly recorded because excess raw materials are not left around in the work center department.
3. In cost accounting department, it has excess material and material return documents to verify that the numbers they are
receiving are correct. Independent verification of work in process and finished goods inventory occurs since they have
documents to prove it.

Disadvantages:

1. There is no evidence that a stage of production is complete because a copy of the move ticket is not sent back to production
planning and control to update and close the work order file.
2. Standards cannot be provided because there is no standard cost file to enable the cost accounting to update the affected
work in process accounts.
3. There is no copy of work order to sent to inventory control to update the finished goods records.
VII. Conclusions

This case study seems to conclude that the General Manufacturing Inc. doesn’t have a well designed
computer-based system that enhances it’s internal control system. Each of control class in the conversion cycle controls
must be present in the system in order to promote a working environment that prevents fraud and unethical practices.
These internal control weaknesses must be known to the management in order to respond and improve the company’s
operation.

VIII. Recommnedations

We recommend to follow ACA no.2. It’s DFD and SFC answers the several internal control weaknesses of
General Manufacturing Inc. In the production, it has complete excess materials and materials return document that
represents accounting record and access control. Inventory is properly recorded because the excess raw material are not
left around the work center department. This will prevent employees to access the raw material and they will not be
tempted to steal the raw materials. This system also promotes segregation of duties because each of the department are
segregated that will prevent one person to control 2 or more departments which is also a cause of unethical practices.
Hiring skilled and competent employee would help to promote supervision by ensuring that they will oversee the ways of
Raw materials and to observe and review time keeping activities. Transaction authorization is present because it has a
complete work orders, move tickets, and materials requisitions that is used to authorize production activity, activities for
each batch and for the movement of products through the various work centers and to authorize storekeeper to release
materials to the work centers. Independent verification is present because cost accounting and general ledger
department are segregated so that one person reconciles journal voucher from cost accounting in the presence of excess
make it easy for the accounting department to verify that the number they’ve receive are correct. Independent verification
of the Work in Process and Finishes Goods inventory occurs since they have the document to price it.