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Subject: Operations Management Course: BUSINESS D 1011

Mabuhay Company makes custom urns for the different funeral parlors in Metro Manila. With the pandemic in 2020 and
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continuing with a 2  and 3  wave in 2021, demand had spiked up. The manufacturing supervisor, Ms.Reyes interviews people
who have specialized manufacturing skills, and informs payroll when an employee is hired by submitting to them an interview
sheet with her signature on it. Payroll then prepares an appointment paper for the hired employees with a rate indicated by Ms.
Reyes on the interview sheet.  Once required documents for new hires are done and an ID is issued to the employee, the newly
hired employee shows the ID and requests for a blank time card from the security guard at the gate. The time card is then
punched in a bundy clock situated beside the water fountain in the cafeteria. The employees are also required to keep a record
of the time they spend working on each batch of urns assigned to them using a job ticket. 
 
          At the payroll cut off, time cards are submitted to Ms. Reyes who approves the time cards and job tickets of all 200
production workers. The general accountant analyzes the job tickets and prepares a labor distribution summary and records all
entries related to product costs.  
 
          Payroll department prepares the payroll register based on the time cards and the rates written on the appointment papers
per employee. The payroll register is submitted to Ms. Reyes for cross checking. If approved, a Payroll clerk prepares a
withdrawal slip which is given to the messenger who in turn withdraws the money from the bank. Payroll also prepares the
journal voucher to record the expense and liability arising from the payroll.
 
The withdrawn money is turned over by the messenger to the cashier, Mr. Cruz, who places the money in the company's cash
register and distributes the money based on a copy of the payroll register given to him. He tickmarks the employee's name on
the payroll register once an employee receives his pay. At the end of the day, Mr. Cruz creates a journal voucher using the total
amounts indicated in the payroll register. 
 
The general accountant receives both journal vouchers and records them in the general ledger. 
 
1. Identify at least five (5) internal control weaknesses and explain the reason why these are considered weaknesses

2. For each weakness identified, cite recommendations to remove such weakness. (15 pts.)

Answer from your tutor:

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vandanaupadhyay Answered 4 hours ago

As given in the case, Mabuhay Company is a small firm offering services related to funerals. It is provided that from hiring
employees to paying them salaries, the company used to conduct most of their operations through manual and outdated
methods. 
 
1. Five internal control weaknesses that can be identified from the given case are identified below along with the reasons:
 
i. Ineffective financial reporting- This is the primary weakness as the journal entries of payroll recorded by the accountant were
based on time cards and written rates only. The reason behind this was not using an updated financial system.
 
ii. Financial errors or fraud- Another weakness is the high possibility of errors and fraud while recording the entries manually.
The reason behind this is improper reporting of financial statements. 
 
iii. Inadequate analysis of working time- Here, the company never focused on using efficient monitoring options to evaluate the
working hours of the employees. The main reason behind this is the use of outdated methods to track the time.
 
iv. Resistance in adopting new technology- Here, the company did not implement any new technology in its business operations
and the reason behind this is the use of outdated technology, such as time cards and a Bundy clock.
 
v. Nonsystematic payroll transactions- Here, the company faced problems in recording a general ledger and maintaining
accounting books. The only reason behind this is not utilizing an efficient and technologically sound accounting system.
 
2. In order to eliminate each weakness, the recommendations are cited as follows:
 
i. In order to eliminate the weakness of ineffective financial reporting, the company is recommended to use IT systems for
getting information consistency. 
 
ii. To remove the chances of financial errors or fraud, it is recommended that the company should use appropriate auditing
systems.
 
iii. As the company is having a weakness in analyzing the working time of the employees inadequately, it is recommended to use
geofencing and biometric clock-in.
 
iv. For removing the weakness of resistance in adopting new technology, the company is recommended to use some
technological systems to make things work easier with accuracy.
 
v. To remove the weakness of non-systematic payroll transactions, it is recommended to use an online payroll system.

Explanation:
As given in the case, Mabuhay Company is a small firm in Metro Manila offering services related to burials and funerals. It is
provided that from hiring employees to paying them salaries, the company used to conduct most of the operations manually,
and therefore, various issues in the internal control may occur. From hiring to evaluating time to making entries in the payroll
register, the work used to be done and recorded through outdated methods. 
 
1. Five internal control weaknesses that can be identified from the given case of Mabuhay Company are identified as follows
along with the reason due to which they are considered as weaknesses:
 
i. Ineffective financial reporting- This is the primary weakness that is identified from the internal control of the company as the
journal entries of payroll recorded by the accountant were based on time cards and written rates only. The company never used
an updated financial system for making such entries and due to this reason, the financial reporting is inefficient.
 
ii. Financial errors or fraud- Another weakness is the high possibility of errors and fraud while recording the entries manually
without conducting any professional audit. The reason behind this weakness is improper reporting of financial statements as
any mistake in recording can cause issues in the accounting process of the company. 
 
iii. Inadequate analysis of working time- This is another internal control weakness that is identified because the company never
focused on using efficient monitoring options to evaluate and calculate the working hours of the employees. The main reason
behind this weakness is the use of job tickets, which is an outdated method to record the time spent by the employees in the
production department.
 
iv. Resistance in adopting new technology- Here, this control weakness is identified because the company did not implement
any new technology in its business operations. The reason behind this weakness is the use of outdated technology such as
time cards and a Bundy clock for tracking time and messenger for sending withdrawal slips. The use of such a technology does
not provide a reliable tracking of the time and therefore, the calculations would not be accurate.  
 
v. Non-systematic payroll transactions- This is another internal control weakness that can cause problems in recording general
ledger and maintaining accounting books. The only reason behind this weakness is not utilizing an efficient and technologically
sound accounting system while distributing money to the employees. The money is distributed based on the copy of a manually
written payroll register and that can cause serious issues in the transactions and journal vouchers. 
 
2. In order to eliminate the weaknesses, the recommendations for the above-identified weaknesses are cited as follows:
 
 i. In order to eliminate the weakness of ineffective financial reporting, the company is recommended to prepare financial reports
quarterly by abiding by the accounting standards and compliance. It should use IT systems for getting information consistency
while creating financial reports.
 
ii. To remove the chances of financial errors or fraud, it is recommended that the company should use appropriate auditing
systems and get the statements checked quarterly from a specialized and professional auditor. It will help the company to
prevent losses due to fraudulent entries. 
 
iii. As the company is having a weakness in analyzing the working time of the employees inadequately, it is recommended to use
efficient tracking systems such as GPS tracking, geofencing, biometric clock-in, URL tracking, and time-tracking browser plug-
ins.
 
iv. For removing the weakness of resistance in adopting new technology, the company is recommended to identify barriers to
implementation and use some technological systems to make things work easier with accuracy, proper security, and less cost.
Moreover, the adoption of innovation would help it to get a sense of stability in business operations.  
 
v. The weakness of non-systematic payroll transactions can be removed by using an online payroll system and investing in
refined security procedures so that the money can be distributed and cash disbursements can be made with regulatory
compliance without any corrections in the payroll books.

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