University of San Carlos

School of Business and Economics

Department of Accountancy

AC 528 Assignment

Submitted to:
Mrs. Grace Socorro Larcena Yomo

Submitted by:
Balisacan, Sarah M.
Dadang, Pamela Gay
Luzano, Mary Claire D.
Melendres, Karen Joy M.
Oracoy, Blesilda

July 2015

Revenue

Customer Order
1. Are policies and procedures for accepting and approving customer
orders clearly defined?

The sales process begins when a customer contacts the companys

sales/ customer order department typically through telephone, mail, a
report by the firms sales representative or if the customer is also a
business entity, a copy of their purchase order. Since most of these
orders do not come in standardized forms recognized by the company,
the auditor must ensure that albeit unstandardized, the orders come
from valid existing and potential customers detailing the description

and quantity of product intended to be bought.

In practice some companies already employ the use of EDI where
customer sales are automatically received and entered into the seller's
accounting information system and if it complies with company
policies, a sales order will automatically be processed. The auditor
must test the effectiveness of the EDI system to make sure customer
orders are not arbitrarily accepted and processed.

2. Are prenumbered sales orders prepared for all approved customer

orders?

Once customer orders are appropriately approved, a sales order must

immediately be prepared. The standardized sales order must contain
updated and correct information on the customers number, name, and
address; and the name, number and description of items sold; the
quantities and unit prices of each item sold (as well as their total sales
value); and other financial information such as taxes, discounts and
freight charges. Prenumbering sales orders allows transactions to be
identified uniquely which facilitates verifying financial data and tracing
transactions. It helps locate missing documents which have the
possibility of not being accounted for. It should be noted that
prenumbering must be supplemented by its preprinting. Sales Invoice
numbers must be preprinted on the source document itself and not
included in the items to be manually filled up.

Credit checking must be assigned to a department independent of the

sales processing in order to ensure that only valid orders are approved
and processed.

3. Is current information regarding prices, policies on discounts, sales,

taxes, warranties, and returned goods available and communicated
to Customer Order personnel?

Updated information on quantity and description of items on hand

must periodically be transmitted by the warehouse, production and
purchases department (as applicable) to the Customer Order function
in order to assign a reliable initial estimate of the amounts related to
the accounts affected by the sales transactions. In particular, sales
discounts must be clearly delineated in the sales order and invoice to
prevent the Billing department from billing amounts in excess of actual
receivable to further prevent any misappropriation of a portion of the
amount actually paid by the customer.

4. Are copies of sales orders forwarded to Credit, Shipping, and Billing?

Forwarding copies of sales orders to Credit, Shipping and Billing

provides for the integration and reconciliation of information therein
and actions taken by each department. This also ensures that the
particular sales order has been appropriately authorized because of the
approval of the credit department, that the order has been shipped
and delivered (thereby effectively transferring ownership thereof) and

that what has been shipped has already been billed.

In particular, the shipping department, upon receipt of goods from the
warehouse but before loading the goods for shipping must reconcile
the physical items with the packing slip, shipping notice and stock
release. The Billing department must only initiate the billing process
upon receipt of shipping notice to ensure all billed goods have actually

been previously shipped.

In practice, especially in an EDI environment, Advance Shipping Notice
is sent to a customer to inform of delivery well in advance. This must
be compared against actual deliveries to note any undelivered goods.

Credit

1. Are

policies

for

approving

credit

established

and

clearly

communicated to Credit Collections personnel?

The credit department should understand that Credit Authorization

process must be independent and physically segregated from the sales
function. Otherwise, existing and fictitious customer orders will
arbitrarily processed. Most importantly, firms credit policies must
always be taken into consideration in performing such functions so its
important that all the credit personnel is familiar with established
firms credit policies.

2. Is credit investigated before approval?

No customer order should be processed without and before the

approval of credit department.

An important policy for accepting and processing customer orders is to
conduct Credit Check. The extent of the check should consider the
terms & conditions of the sale. A generated sales invoice must be
supported with appropriate documents so as to prevent the Sales
Processing personnel from processing fictitious orders. For instance,
upon receipt of a raw customer order, it must be forwarded first to the
Credit department for purposes of checking credit limit (for an existing
customer)

by

examining

the

database

containing

the

desired

information & investigation of credit standing and performance (for

first-time customers) by soliciting external financial and credit reports
and generating own credit analysis. Once an approved sales order is
produced by the credit department, it is important to verify that the
signature of the authorized personnel is contained in the said
document, that the approval was in accordance with the appropriate
credit policy and that these policies as embodied in the credit policy

handbook is checked for effectiveness and current applicability.

By performing analytical procedures such as computation

and

examining past and current financial and other ratios, the auditor must
watch for new, unusual or large new customers that appear to have
not gone through the customer-approval process. Moreover, if accounts
receivable appears to be too high or is increasing at a fast rate, this
may signal that customer accounts are easily approved thus leaving

the less creditable customers names on the list of outstanding

accounts receivable.
3. As Credit personnel independent of Billing, Cash Collection, and
Accounting personnel?

In the process of approving credit for initiation of the sale transaction

and approving maximum allowable sale return, the Credit function
must be segregated from the Billing (which is in direct contact with the
customers), Cash Collection (to avoid appropriating amounts that
should have been considered reductions in receivables) and AR
subsidiary from inappropriately recording cash receipts as discounts).

4. Is information about past due accounts communicated to Credit

personnel?

Credit personnel must always update itself from changes in financial

condition and capacity of existing and potential customers so that only
customers

with

good

current

financial

standing

are

approved

purchases on account. If credit department does not timely adjust

customer information, account sales may increase without any
potential increases in cash inflow and possibly unusually high amounts
of Bad Debts Expense.
Shipping
1. Are goods shipped only in accordance with approved sales orders?

The shipping department ultimately travels the goods to customers

thus goods shipped must always correspond to the exact specifications
of the customers as delineated in the approved sales order. They must
ship goods only upon receipt and verification of packing slip, shipping
notice and approved sales order from receive order function. The
inspection of items and documents before actual shipment is a very
important control point because errors have the opportunity of being

detected.
The shipping department must also prepare and keep a copy of a bill of
lading to establish its accountability regarding goods shipped.

2. Are shipping documents prepared for all shipments?

Shipments represent the establishment of the rights of the company to

bill and collect payments from customers. Thus copies of shipping
notice and bill of lading must be prepared and kept to provide proof of
actual shipment. Otherwise claims against customers may not be
honored. But together with these documents, the stock release copy of
the sales order coming from the warehouse must be examined for
correspondence with the information contained in the shipping notice
which serves as proof of actual outflow and delivery of products.

3. Is access to Inventory Control restricted so that goods are released

only in accordance with approved sales orders?

The shipping and inventory control functions must be separated so that

all shipped goods are guaranteed to be in accordance with approved
sales orders. Moreover, the warehouse personnel must only pick goods
after receipt of a stock release from the receive order function. The
order must be verified for accuracy and goods and verified stock
release forwarded to the shipping department.

4. Are Shipping personnel independent of billing, cash collection, and

recording?

To avoid shipping to fictitious customers and appropriation of cash

receipts, the shipping department must be physically segregated from
the billing, cash collection and recording functions.

Billing and Recording

1. Are prenumbered sales invoices prepared for all shipped goods?

Sales invoices must be prenumbered in order to identify each customer

order as a separate transaction. These prenumbered invoices must be
matched and reconciled to its corresponding prenumbered shipping
notice. Otherwise complaints for unreceived but billed goods by the
customers and disagreement with accounting records will be very
difficult to track.

2. Are sales invoices matched with approved sales orders and shipping
documents, and are they checked for clerical accuracy?

Shipment of goods signals the consummation of the sale transaction.

Revenue can now be appropriately recognized, measured and claimed
from the customers. The Billing department must see to it that sales
invoices are only prepared upon verification of the details in the
supporting documents (i.e. approved sales order and shipping notice).
Particularly, upon receipt of initial approved sales order after credit is
approved, the Billing department keeps records of specifications of the
customer orders such as the quantity, description and expected price
of the product along with related freight, taxes, handling and other
costs. Once shipping notice is received from the shipping department,
the actual unit prices, unit quantities and desciption of the items must
be verified and added to the approved sales order which serves as the
basis for preparing the sales invoice.

3. Are prenumbered credit memos matched with receiving reports, and

are they recorded promptly?

When items are returned, the receiving department verifies the details
of the return, prepares a return slip and generally prepares the credit
memo (assuming amounts are still within his authority). These
documents are sent to the Billing department in order to reverse the
transaction. It is worth noting that both the credit memo and return slip
must be prenumbered to ensure proper and authorized recording of

reductions in customer account balances and sales amounts.

The return of items must immediately be recorded in order to update
affected general ledger accounts and to better serve customers by
promptly informing them of any changes in their outstanding account
balances.

4. Is the accounts receivable subsidiary ledger reconciled periodically

with the general ledger?

Periodically, individual account balances are summarized in a report

and sent to the general ledger. Any additions (i.e. increase in sales) to
and reductions ( i.e. sales returns) from customer balances must be
verified and promptly recorded in the AR subsidiary ledger to be
communicated directly to the GL department.

5. Are

monthly

statements

reviewed

and

mailed

by

personnel

independent of Accounts Receivable and Cash Receipts?

Preferably, an independent Mail Room clerk must be hired to perform

mailing functions regarding customer billings and remittances. Since
Accounts Receivable and Cash Receipts handle two incompatible
functions (i.e. record keeping and asset custody), these two must
strictly be segregated hence the employment of a separate Mail Room
function. Otherwise, a fraud scheme called lapping could exist. If the
personnel who handles cash (cashier) and the personnel who records
cash

collections

and

accounts

receivable

subsidiary

ledger

(bookkeeper) are one and the same person, chances are greater that
payment from customers may be intercepted and recording be delayed
until payment from another customer is received. This process
continues indefinitely. However this can be minimized if not eliminated

by (2) forcing rotation of duties and (2) forced taking of vacation.

To prevent The AR subsidiary personnel from recording cash receipts as
sales returns, the mail room clerk must review and note cash receipts
and remittances advices as against the related billing statements. But
in no case shall the mail room clerk handle the cash received. Checks
must be immediately sent to cash receipts department.

Purchasing
1. Are policies and procedures for reviewing and processing purchase
requisition clearly defined?
Policies like authorization before the processing of the purchase
requisition should be clearly defined. The Inventory Control should give
this authorization only when necessary like when the inventory levels

drop below the predetermined reorder points. The authorization is

evidenced by the signature of the authorized personnel of the
Inventory Control on the purchase requisition. Without these policies,
there is a high risk of excess or shortage of inventories because
purchasing agents could purchase whenever they want. Purchase
requisition is very important because it provides evidence that the
purchasing department was authorized to initiate a purchase. It
indicates the requester, describes the items and specifies the quantity
needed. It is a prenumbered document originating from an operating
department or the inventory stockroom which indicates to the
2. Are

purchasing department that goods should be ordered.

prenumbered purchase orders prepared for

all

approved

purchase requisitions?
For all the approved purchase requisitions, purchase orders should be
prepared. They must be prenumbered as a proof to the completeness
assertion and they contain the description, quantity and related
information for the goods and services the company intends to
purchase. The purchase order is used to determine if the goods or
services procured have been authorized. The purchase order should
contain the signature of the employee from the Purchasing who
authorized the purchase from a vendor. The use of purchase orders for
the recording of the acquisitions precludes the employees to order
goods for their personal use. Furthermore, it will be used as basis for
the correctness of the quantity, type, etc. of the goods to be received.
3. Are competitive bids or price quotation obtained for purchases
goods and services?
Obtaining the price quotations and competitive bids ascertain that the
products or services acquired are fairly valued. The Purchasing
personnel should acquire this information from bidding contracts or
from price offerings of various vendors. It avoids the risk of purchasing
items with unjustifiable prices. Vendors may charge unreasonable price
for the goods without the company noticing it.
4. Are price lists maintained for repetitive transactions that do not
require competitive bids or price quotations?

The Purchasing should maintain an updated price list. By maintaining

price lists for items in a repetitive transaction, the Accounts Payable
can already estimate the obligation for year-end reporting purposes. In
addition, when the amount in the suppliers invoice varies materially
with that of the estimation through the price list, the discrepancy will
easily be detected and investigated. This will prevent the vendors from

overpricing.
5. Are purchases transactions reviewed periodically by personnel
independent of Purchasing?
Personnel independent of Purchasing should be the one to review
purchases transactions by periodically checking the purchase orders
and comparing them to the purchase requisitions. This should be done
to ensure that the items purchased are the ones being requisitioned
and are accurate. It also detects if there are purchases that are not for
the companys use but rather for personal use.
6. Are copies of purchase orders forwarded to the requisitioning
department and to the Receiving and Accounts Payable?
A copy of the purchase order should be sent from the Purchasing to the
requisitioning department to ascertain that the items ordered are the
ones being requisitioned. In addition, a copy is sent to the Accounts
Payable for filing temporarily in the AP pending file and a copy is sent
to the Receiving, where it is held until the inventory arrives to be used
7. Are

for the comparison of the items in the PO to the goods received.

lists of previously authorized vendors maintained

by

Purchasing?

Purchasing should maintain a list of valid vendors to reduce certain

vendor fraud schemes. Unauthorized suppliers may overbill or provide
lower quantity or fewer goods than agreed. In addition, this will
prevent the ordering and paying to the non-existing suppliers.

Receiving
1. Are prenumbered receiving reports prepared for all goods received?
Prenumbered receiving reports should be prepared every time
inventories are received. It is prepared by the Receiving personnel with
the supervision of the Receiving supervisor. It should indicate the

description of goods, the quantity received, the date the goods were
received and other relevant data and it should be signed by the
personnel who received the goods. These should be used and
accounted for to determine that a liability is recorded for all goods
received. If the obligations are not properly accounted, there is a
possibility that payment will be delayed and credit standing will suffer
resulting to a lower credit limit and low priority of supplies when there
is scarcity. These receiving reports will also be used as key source
documents for the review and comparison before the firm recognizes
an obligation.
2. Is a receiving log maintained for all receiving reports processed?
A log should be maintained by Receiving personnel for all receiving
reports processed to create an audit trail. The log will help in
determining the completeness of the transactions processed. Without
it, missing receiving reports or double processing of the documents will
be hardly detected.
3. Are all received goods inspected, counted and compared with copies
of purchase orders?
Shipments that are short or contain damaged or incorrect items must
be detected before the firm accepts and places the goods in inventory.
This may be due to the vendors negligence or fraud schemes. There
are sometimes shipping inconveniences or theft which results to the
delivery of fewer or damaged goods. Some companies even send to
the Receiving a blind copy of the PO to force the receiving clerk to
4. Are

count and inspect inventories.

Receiving personnel independent

of

Purchasing,

Accounts

Payable and Cash Disbursements?

Receiving, Purchasing, Accounts Payable and Cash Disbursement are

incompatible functions. If these functions are not independent to each
other, the Receiving personnel can purchase to non-existing vendor
creating a purchase order, without receiving reports indicating that
inventories have been received, he can establish a liability and issue
check for his own benefit.

Cash Disbursements and Recording

1. Are voucher packages reviewed before being approved for payment?

A voucher is a prenumbered document to establish a formal means of
recording and controlling acquisitions prepared by a payables clerk for
each payment. Voucher packages should be reviewed and one way is
the three way matching the reconciliation of the suppliers invoice
(indicates the description and quantity of goods received, price,
including freight, cash discount terms and date of billing), the receiving
report and the purchase order. This verifies that what was ordered was
received

and

is

fairly

priced.

Moreover,

it

prevents

the

misappropriation of goods purchased. Ineffective controls of matching

may result to the payment of goods which are ordered but not received
due to shipping disruptions perhaps or theft.
2. Are steps taken to assure that unfamiliar payees (vendors) are bona
fide?
The suppliers whom the company orders should be only the authorized
ones. Unfamiliar payees are suspicious and therefore should be verified
by a Cash Disbursement personnel in coordination with the Purchasing
who has the list of the valid vendors before authorizing payment.
These vendors might just be dummies for fraudulent undertakings. The
Purchasing should acquire the vendors information like their profile,
Articles of Incorporation and the like, annual reports, the general
information sheet or etc.
3. Are voucher packages and checks reviews by signatories before they
sign checks (or before submitting vouchers for check preparation)?
The clerk who receives the voucher packets should review the
documents for completeness and clerical accuracy. This will mitigate
the threat of payment of incorrect amount. An inaccurate payment
may lead to a purchase discount loss if the payment is short and an
opportunity cost for the excess payment that should have been used
for generation of more profits.
4. Are voucher packages canceled when or immediately after checks
are signed?
When an invoice is received, the purchase is recorded. Sometimes, the
vendor sends a duplicate invoice. To prevent the recording again of
this invoice as a purchase and the double payment of the accounts
payable, voucher packages should be properly reviewed and cancelled

after checks are signed through marking them paid or writing the
date and number of the check on the documents. This is done by the
check signer. All checks are recorded in the companys check
disbursement journal when they are issued. This journal is a list of the
checks paid to the various suppliers and other creditors and individuals
doing business in the company.
5. Are signed checks delivered directly to the mail room without
intervention by other personnel?
Checks/cash are the most liquid assets. It has a very high risk of theft.
With this regard, signed checks should be delivered directly by the
Treasury personnel to the mail room without intervention by other
personnel. The asset misappropriation type of fraud (generally
perpetrated by employees) is almost always associated with the cash
coming in and going out of the business. Therefore, the positions that
the employees hold along the trail of cash are key positions and critical
control points to prevent and detect fraud. That is why it is important
that before putting a person in these positions, the Human Resource
personnel should consider running a background check or other means
of ensuring the integrity of that person on the cash path.
6. Are Cash Disbursements personnel (e.g. Treasury department)
independent of Purchasing, Receiving and Accounts Payable)?
Treasury, Purchasing, Receiving and Accounts payable are also
incompatible functions. CARE Custody, Authorization, Recording, and
Execution should be performed by different individuals.

Cash

Disbursement personnel should never get involved with these other

functions to prevent inappropriate recording of a purchase or
disbursement. Without proper segregation of duties, he can prepare
purchase orders to non-existing vendors, prepare receiving reports,
records liabilities and prepares checks as if goods have been received.
Thus, independence reduces the threat of preparing checks for the
Treasury personnel himself and recording it as if it is paid to the
supplier.
7. Is account distribution indicated on the purchase requisition by the
requisitioning department?

The personnel from the operating departments or other departments

that initiate the requisition of items should clearly identify in the
purchase requisition the department where the requisition comes from.
This

promotes

accountability

among

the

departments

of

the

organization because requests can be properly traced. The use of

supplies can be easily monitored and a more accurate allocation of
costs is enhanced.
8. Are vouchers prepared from requisitions and purchase orders
received from Purchasing, from receiving reports received from
Receiving and from invoices received from the mail room?
Vouchers from source documents (purchase orders, receiving reports,
and suppliers invoice) must be prepared all the time by the Payables
clerk for proper documentation and enhanced audit trail. These will
also be used to for reviewing before the payment to the suppliers.
Without these, there might be incorrect or inaccuracy of the amount of
payment.
9. Are daily summaries of processed vouchers forwarded by Accounts
Payable to General Accounting for summary entries?
General Ledger should always be updated by the General Ledger clerk.
Thus, Accounts Payable should send summaries of processed vouchers
on a daily basis. For decision-making processes, financial information
should be timely. If the general ledger is outdated, this may mislead
the users of information. Moreover, it should always be updated for the
reconciliation of amounts. The General Ledger plays a very critical role
in producing statements and other reports, entries to the general
ledger present a significant fraud risk. From an internal perspective,
inspection of the journal entries should be strong and firmly in place.
From the fraud audit objective, inspection of the journal entries can be
an effective technique for detecting frauds.

Personnel and Payroll

1. Are

all

employee

changes

---

hiring,

promotions,

transfers,

terminations --- approved by operating department supervisors and

by the Personnel department?
Operations supervisors and Personnel department officials should
authorize employee changes, particularly the addition of an employee
to the payroll or any changes in employees status such as promotion,
termination and pay rates.

Authorizations for employment provide

evidence that employees work for the entity and authorizations for pay

or pay changes provide evidence that pay rate is approved.

This control is to prevent fraudulent updates on personnel records such
as the insertion of a non-existing employee so that the perpetrator
may later on receive the pay for such fictitious employee or the

unauthorized change in an employees status so that he or she may

receive a higher pay rate.
2. Are all employee changes documented in personnel records?
The Personnel department should update personnel records with
changes in status and pay rates. Personnel records should contain
employees data such as the date of employment, rates of pay,
authorized deductions, performance appraisal and termination of

employment, etc.
Without updating the personnel records, there can be misappropriation
of assets through the continued recognition of a terminated employee

for whom a paycheck is subsequently issued.

3. Are all employee changes communicated promptly to the Payroll
department?
For every employee change, the Personnel department should update
the current listing of employees and pay rates which, together with the
time cards, compose the basis of the Payroll department in preparing
the payroll.
employee personnel

4. Do

records

include

authorizations

for

all

deductions and withholdings?

Employees should sign a deduction authorization form to authorize
their employer to withhold taxes and various optional payments from
their paycheck. There should be authorization so that there may be no
improper deductions and withholdings from the employees wages and
salaries, depriving them of their right to a fare amount of salaries and
wages.
5. Are guidelines established for determining account distribution for
labor charges?
A chart of account should be used in assigning codes for labor charges
to be reflected in the labor distribution journal. Salaries and wages
should be allocated to particular accounts such as Work-in-Process

account for direct labor and Factory Overhead for indirect labor.
Misclassification and allocation of labor cost may lead to a material
misstatement of net income. Labor charges that should be classified as
periodic costs should be recorded under an expense account and not
included in the inventory since that would be tantamount to fraud

when done with the intention to boost net income by forestalling the
recognition of expenses.
6. Are employees who prepare or process payroll independent of hiring
and terminations and excluded from distributing paychecks to
employees?
There should be segregation of duties between these three functions
so as to prevent the fraudulent preparation of payroll and the
subsequent embezzlement of company funds based on such fraudulent

payroll.
The Operations and Personnel departments should be the one
responsible for hiring and terminations, the Payroll department for
preparing and processing the payroll and the Treasurer for distributing

paychecks to employees.
7. Is payroll approved by a responsible official independent of payroll
preparation and processing?
Typically, from the Payroll department, the payroll summary and
paychecks are forwarded to the Treasurer who should review the
details of the payroll. Once the payroll is ascertained to be accurate
and reasonable, the Treasurer signs the checks and another employee
distributes them. Otherwise, the Treasurer should address questions
regarding the payroll to the Payroll department and further investigate
matters. This control serves as a check on the Payroll department in
order to prevent the misappropriation of assets based on a fraudulent
preparation of payroll.
8. Is the preparation of employee time records supervised to assure
that hours reported are accurate?
Supervisors should approve time records prepared by employees to
ensure that the hours reported reflect the actual hours that the
employees spent on working. This is to prevent employees from

overstating their hours in order to receive a higher pay.

Nowadays, many entities use a time clock or biometrics that
automatically records an employees time in and time out.

Cash Disbursement
1. Are

paychecks

distributed

by

personnel

Personnel and Payroll departments?

independent

of

the

The Treasury department should distribute the paychecks. There

should be segregation of duties between the Personnel, Payroll and
Treasury departments because otherwise, embezzling company funds
will be very easy. All the perpetrators need to do is prepare a
fraudulent payroll based on a fraudulent listing of employees and pay

rates and then distribute the paychecks to themselves.

2. Is the payroll bank account reconciled monthly by an employee
independent of payroll preparation, processing, and distribution?
Payroll bank account reconciliation involves comparing the the general
ledger payroll account balance to the bank statement. This should be
done by any responsible and competent employee not taking part in

the payroll cycle.

The difference between the bank and book balances may be due to
outstanding checks, timing differences between the accounting month
and the bank statement ending date, errors on the part of either

parties, or fraud.
A possible fraud that can be uncovered by the payroll bank account
reconciliation is the issuance of paychecks which are not supported by
the payroll. This fraud may be done by an employee who has both the

responsibilities of preparing paychecks and signing them.

3. Are employees required to provide identification before receiving a
paycheck?
In distributing checks, the Treasury department should require
employees to present their company I.D.s or other means of
identification in order to prevent handing checks to persons who are
not entitled to receive them. The employee distributing the checks
should also compare the amount of the paycheck with the payroll
journal and should require employees to sign the receipt.
4. Are unclaimed paychecks returned to an employee independent of
payroll preparation, processing and distribution?
Unclaimed paychecks should not be retained by employees involved in
the payroll preparation, processing and distribution since these
unclaimed paychecks may be the result of anomalies in these
functions.

Production/Conversion
Executing
1. Are production orders prenumbered and the numerical sequence
checked for missing document?
Production should only be initiated upon receipt of authorized
prenumbered production orders to keep track of the commencement of

the production process and to ensure that no inventories are not

unnecessarily produced and stored for a long period of time.

Production orders are generated and entered into the production
process in the order in which production activities are forecasted and
integrated into the production master schedule. Production Planning
and Control Department must create the production schedule by
adequately considering the Sales Forecast Report from Marketing
Department, Bill of Materials (specifying the type and quantity of raw
materials and subassemblies required to produce a single finished
product)

from

the

Engineering

department

and

the

Production

department's internally generated Inventory Status Report.

It is important that production orders be prenumbered so that goods
that should have been produced first will already be available for sale
so that any abnormal delays and interruptions during the production

process can be detected and taken corrective action of.

2. Are production orders prepared by authorized persons?
Since production employs numerous company assets, production
orders must only originate from authorized persons. These persons
must be the qualified, competent and honest personnel of the
Production Planning & Control Department or if the company is large,

this must refer to the Head or Manager of the said department.

If production orders do not originate from authorized persons, thus no
production should be expected for the relevant time period, and yet
work centers have been busy producing for the unauthorized work
orders, storage and other costs of inventories will unnecessarily go up
tying up company's cash. Also, since production orders integrate sales
forecast, inventory status report and bill of materials, unauthorized
commencement of production might cause disintegration and lack of
coordination between work centers due to inappropriate or lacking

reports.
3. Are bills of materials and manpower needs forms prepared by
authorized persons?
Bills of materials and manpower needs must come from the
Engineering department who is in the best position to know the
configuration of a product and the time and labor demanded for the
completion of a single product. These are very important documents to

consider

before

Production

Planning

&

Control

generates

the

production schedule for a particular period. Considering this, the said

reports must only come from authorized and competent personnel
otherwise inefficiencies, suboptimal product quality and abnormal
losses might be sustained by the company during the production
process.
4. Are bills of materials and manpower needs forms prenumbered and
the numerical sequence checked for missing document?
For a company producing homogeneous products, whose sales are
relatively stable, and who employs process costing, bills of materials
and manpower needs for each month or each batch of product do not
differ significantly from that of the others. But for purposes of
monitoring

the

progress

of

production,

these

documents

must

nevertheless be prenumbered.
A problem arises when heterogeneous products are created for a
period and job-order costing is employed. These source documents
become more crucial in the completion of the production process and

product costing.
For instance, when a customer orders a number of products,
production must be started as soon as possible. The types and quantity
of raw materials and labor hours and costs required to complete one
product must guide the production of goods. If these were not
prenumbered, chances are work centers will work on the recent sales
orders and neglect the earlier ones or just arbitrarily start any work
they deem proper for them without any regard on customer waiting
time. Work may thus be done without any supporting reports and

documents because anyway these are not prenumbered.

5. Are issue slips prenumbered and the numerical sequence checked
for missing document?
If there are missing issue slips, it may imply that some of the materials
issued were not used for production. Employees may have embezzled
some of the materials. Checking for missing issue slips is for the
assurance that all raw materials issued are put into production.
6. Are material requisition and job time tickets reviewed by the
production supervisor after the foreman prepares them?

Material requisition must be authorized by the supervisor before it is

sent to the warehouse to ensure that the items requisitioned are
accurate as to their quality and quantity. If the materials are incorrect
or lacking, it will delay and disrupt the production which might result to
customer dissatisfaction and lost sales. The job time tickets as well
bearing signatures to indicate that work was actually performed have
to be reviewed because these will be the basis for recording labor. The

foreman might have prepared overstated job time tickets.

7. Are the weekly materials-used reports and direct labor reviewed by
the production supervisor after preparation for the foreman?
The supervisor has to review reports for the materials used and direct
labor

prepared

weekly

for

accuracy.

If

these

are

materially

understated, the cost of goods sold is understated which results to the

overstatement of net income and vice versa. Moreover, when the
company is implementing cost-based pricing when the cost of goods
sold are understated creating to unreasonable prices, the customers
might be discouraged to buy the products.
8. Are completed production reports prepared?
Production reports are needed for the costing and pricing of products.
If these are not prepared, finished goods may not be properly
accounted and will be seen as an opportunity for the employees to
commit fraud through stealing or embezzlement of goods. It will not be
easily detected if there are no reports to show the quantity and cost of
the goods manufactured.
9. Is a quality control report issued on finished work?
Quality inspections should be conducted on finished work before
proceeding to the next step in the production process.

Without a

quality inspection, defective outputs or outputs of inferior quality will

be forwarded to the next workstation. Until the inferiority in quality is
detected, significant resources will be wasted on units which in the
10.

end, may have no value at all due to their defects.

Do routing tickets accompany the transfer of goods?
Routing tickets contain an ordered list of tasks to be completed thus
they serve as a map as to where the goods should be transferred next
for further processing. Routing tickets should accompany goods as they

are being transferred so that transferees may know which tasks have
been completed and which tasks are yet to be done.
Is receipt obtained from transferee when

11.

goods

are

transferred?

Receipt should be obtained from the transferee in order to establish

accountability on the goods should they become impaired or lost.
Receipt from the transferee serve as evidence that the goods have
reached him or her and that he or she is responsible for them.

Recording
1. Are standard costs used? If so, are they reviewed and revised
periodically?
Standard costs require continuous review and should be changed to
reflect any changes in underlying conditions such as the material and
labor types, quantities, prices and organizational overhead. Standard
costs should be reviewed and revised to ensure that they are
appropriate, attainable and in accordance with the companys cost

objective.
Standard costs are typically established by a group of experts
composed of engineers, CPAs and other representatives from cost
accounting, marketing and management experts, etc.

2. Does

the

accounting

manual

give

instructions

for

proper

classification of cost accounting transactions?

The accounting manual should indicate what account should be used in

recording the different costs incurred in the production in order to
avoid capitalizing the cost that should be expense and recording in the
expense account the amount that should be capitalized.

3. Are summary entries for direct materials and direct labor reviewed
and approved by the cost accounting supervisor?

The amount of direct material and direct labor in the summary of

entries should reconcile in that of the cost sheet, so the accounting
supervisor upon reviewing and approving of the summary should see
to it that the amount matches. This is to ensure that there is no over or
under application of direct labor and direct materials.

4. Is there verification of correct application of overhead job cost

sheet?

The overhead assigned costs should match with the underlying

schedules to verify the correctness of overhead job cost sheet. This will
avoid over or under valuation of overhead.

5. Is there segregation of functions between general accounting and

cost accounting?

Segregation of functions between general and cost accounting should

be done in order to have a reconciliation of the account balances
recorded by the cost accounting and general accounting otherwise
there might be a possibility of disagreement of subsidiary inventory
and overhead ledgers to controlling accounts on regular basis.

Custody
1. Is work in process tagged during production?
This is to prevent the loss of the work-in-process inventories while they
are on the process of converting to finished goods.
2. Are finished goods in locked warehouses?
Since the goods here in this stage are already marketable, theres a
greater chance for theft. Storing the goods in locked warehouses
prevents this untoward incident from happening.
3. Are perpetual finished goods records periodically compared with
goods on hand?
This is done to ascertain that the finished goods recorded actually
exists and in a good and saleable condition.

Investing
1. Are detailed records maintained for each class of fixed assets (e.g.,
land, buildings, machinery, and equipment)?
Detailed records should be maintained by the company for each class
of fixed assets in order to identify what are the fixed assets of the
company and whether those fixed assets really exists.
2. Is responsibility for maintaining fixed asset records segregated from
general accounting?
It would be prone to theft and misappropriation if the two tasks are
given to the same person.
3. Are detailed records reconciled periodically with general ledger
control accounts?
This is to verify whether there are certain transactions that have been
recorded or omitted in the book of records or general ledger.
4. Are procedures followed to determine whether recorded fixed assets
actually exist?
It would detect whether the company is overstating their fixed assets
and also identification of those that have already been exhausted by
the company but still recorded as fixed asset.
5. Is access to and the use of fixed assets restricted to authorized
personnel?
This is to prevent misuse of the fixed assets and to ensure that they
are being used in accordance with the organizations policies and
business practices.
6. Is insurance coverage maintained and reviewed for all fixed assets?
To monitor the correctness of the amount being recognized for the
insurance coverage in order to prevent overstatement of insurance
expense.
7. Are fixed assets physically safeguarded from deterioration and
theft?
This is to prevent theft from occurring because if the assets that are
deteriorated already are not segregated from those that are not,
mistake or unintentional removing of fixed assets that have not been
deteriorated would be possible.

Additions
1. Do procedures require authorization by the board of directors or
senior management for fixed asset addition?
Since big amounts are concerned in purchasing

fixed

assets,

authorization is a good control so that the money will not be easily

used for fraud or will not be squandered.
2. Are actual expenditures for fixed assets compared with amounts
authorized?
Here, an officer will be identified whether he is following the rules of
the company and it would prevent invalid or fraudulent transactions. It
will also, ensure that the amounts used for purchased are the
authorized amounts.
3. Are procedures established to assure that fixed assets purchased
are delivered in accordance with orders placed?
This is to ensure that what have been delivered are the ones being
ordered to avoid making payments for the unneeded fixed assets.
4. Are fixed asset additions promptly recorded in fixed asset records?
In order, to account for all additions in the fixed asset, records should
be check to make sure those additions has been recorded and also to
avoid misclassification of asset.
5. Are fixed asset additions promptly recorded to General Accounting?
This is to make sure that the General Accounting is updated.
6. Are insurance companies notified of fixed asset additions in order to
increase insurance coverage?
This is to assure that the additions are being covered also in the
insurance policy so that the records of those in the insurance company
7. Is

and the company itself would match.

construction in progress---whether

internally

or

externally

contracted---authorized and periodically inspected?

This is to ensure recognition of cost and revenue of the project and to
avoid fraudulent transaction through manipulation of amounts being
recognized.
Disposals and Retirements
1. Do procedures require authorization by the board of directors or
senior management for fixed asset disposals and retirements?

To ensure that only assets with value equal to its salvage value or
those assets that has been fully depreciated through the years has

been disposed, authorization from the BODs is necessary.

2. Are procedures established to assure that the proceeds from fixed
asset disposals are recorded properly and deposited?
To avoid theft and misappropriation of assets procedures should be
established to assure the recordings of proceeds from fixed assets
disposals.
3. Are fixed asset disposals and retirements promptly recorded in fixed
asset records?
Promptly recording of fixed assets disposals and retirements is
important so that records are updated and disposals and retirements
are accounted for.
4. Are fixed asset disposals and retirements promptly reported to
General Accounting for recording gains or losses?
It should be noted that gains or losses should be promptly and properly
recorded and accounted for as gains or losses and not put into other
account to assure that they are properly accounted for.
5. Are insurance companies notified of disposals and retirements to
assure that insurance coverage is altered accordingly?
Insurance companies should be notified of disposals and retirements so
as to stop those assets from being insured and also so that insurance
companies will not alleged that they have no knowledge about the
matter and therefore they are not at fault.
Depreciation
1. Are procedures established to assure that additions are added to
depreciation records and that disposals/retirements are deleted?
To avoid improper accounting for the depreciation of the additions and
deletions

of

disposal/retirement

proper

procedures

should

be

established.
2. Are procedures established to assure that assets actually in service
during the period?
This is to ensure assets that have been recorded at the time being
exist during the actual period in service.
3. Are procedures established for determining depreciation methods,
estimated useful lives, and salvage value?

To properly account for depreciation, estimated useful lives and

salvage value, procedures are established. This is also to make sure
that the depreciation method the company is using is appropriate and
that there is proper valuation of salvage value.

Financing
INVESTMENTS
Custody, Recording and Valuation
1 Are securities and other negotiable instruments in the custody of
an independent custodian? If not, are they adequately secured
(e.g. locked in a safe)?
This is done to safeguard the documents evidencing equity
securities from loss due fires, flood and other fortuitous events as
well as loss due to theft and employee fraud.
2 Are at least two officials responsible for internally held securities?
This is to provide for balance and checks for the custody of
internally held securities. This provides for added supervision and

control against misappropriation or fraud.

Control Point:
o Access to safe-deposit box requires the presence of more

than one employee

3 Is a detailed record of securities maintained by an official
independent of officials responsible for custody?
This is in accordance with the segregation of duties principle of
internal control, wherein recording should be separate from the
custody

of

assets.

This

is

to

prevent

the

manipulation/misappropriation or loss of the securities and the

subsequent concealment of the fraud through the tampering of the

records.
Control Point:
o Inspection of the actual securities on hand
o Matching of the physical assets (i.e. share certificates) to
records

4 Is

the

listing

of

investments

periodically

reconciled

with

investment records?
This is to ensure that the transactions that have occurred match
those that are recorded. This is also done to ensure that recorded

investments are properly valued.

Control Point:
o Matching of the listing of investments and the investment

subsidiary ledger.
o Any discrepancy should merit further investigation.
5 Are securities in the name of the client (or restrictively endorsed
in the name of the client)?
This is to ascertain that the client is the rightful owner of the

securities.
Control Point:
o Verify if the name registered in the stock register books and

transfer books is of the clients.

6 Are independent officials responsible for reviewing and reporting
changing securities values?
This is to confirm that the values reported are accurate and are

objectively recorded.
Control Points:
o Timely communication of need for estimate or change of
o
o

estimates
Sufficient amount of data to support estimates or change
The official designated should be a qualified and experienced

personnel
Review and approval of proposed change of accoutnign

estimates regarding securities values

o Comparison to actual market price
o Compare with plans and financial forecasts
7 Are adequately detailed investment records and general ledger
control

accounts

maintained

for

the

various

investment

classifications?
This is done to closely monitor the transactions involving the

different classes of investments.

Control Point:
o Ascertain that each major classification

of

investment

warrants a separate subsidiary ledger where transactions of

the same and recurring nature are regularly recorded.

Foot and cross-foot to check for accuracy and match with

their respective general ledger control accounts.

Acquisitions, Sales and Income

1 Are acquisitions and sales of investment securities authorized by

the

board

of

directors

or

duly

authorized

investment

committee?
This is to confirm the validity of the corporate act (i.e. acquisition

and sale).
Control Point:
o Trace every corporate act to the Minutes of Board of

Directors meetings.
2 Are brokers, custodians, or other intermediaries authorized or
designated by the board of directors?
This is to validate that the persons involved and who has control,
custody or possession over the securities have the necessary
qualifications and are worthy enough for the assumption of certain

significant responsibilities for the company.

Control Point:
o Conduct a background check on
qualifications

3 Are

of

the

appointed

the

broker,

intermediary.
o Trace authorizations to BODs meetings
brokers advices promptly compared with

professional
custodian

or

documented

acquisition and sales authorizations?

This is accomplished to check that the broker only did what were
stated in the acquisition and sales authorizations. This is also done
to check the reasonableness of the prices of securities bought

through the broker.

Control Points:
o Purchases of investments:
Examine BOARD MINUTES for authorization
VOUCH to BROKER'S ADVICE (Statement)
o Sales of investments
VOUCH to BROKER'S ADVICE, CASH

RECORDS, and BOARD MINUTES

Recalculate gain or loss on sale

RECEIPTS

Read minutes for sales of Investments and trace to

recording
4 Is an independent check made to determine whether acquisition
or sales prices are fair and objective?
This is to verify if the securities are bought or sold at a price which

is not disadvantageous to the company.

Control Point:
o Refer prices to prices of similar securities traded in an active
o
o

market (i.e. Philippine Stock Exchange)

Consult securities appraisers
Inquire management for large differences in sale prices on

sales of securities
Trace proceeds of sale of securities to the cash receipts

o
o

journal and to deposit slips.

Make sure that cash receipts from
Obtain confirmation from financial

intermediaries

underwriters regarding the amount of proceeds realized from

the sale.
5 Is

investment

income

(e.g.

interest,

dividends)

periodically

recalculated and verified?

This is to verify the correctness of the amount recorded as
investment income. In practice, certain miscalculations may happen
due to mistake/error or mere incompetence of the accounting staff
which would necessitate recalculation of the recorded investment

income.
Control Points:
o Recalculate investment income and compare with the clients
o

general ledger control account.

Trace cash receipts to cash receipts journal and to deposit

slips.
Cash receipts must be deposited intact.

DEBT
1 Are all long-term debt and other borrowings authorized by the
board of directors?
This is to confirm the validity of the corporate act (i.e. long-term
borrowings and other borrowings). This is also done to ascertain the

rights and obligations of the client pertaining to those debt

covenants.
Control Points:
o Vouch authorizations to minutes of BODs meeting.
an officer responsible for determining whether all

2 Is

debt

covenants are complied with?

This is done to enforce accountability for the compliance of debt

covenants.
Control Points:
o Calculate ratios and balances required by debt covenants
o Inspect loan agreements
o Consider GOING CONCERN implications if not met.
o Ensure proper presentation and disclosure.

3 Are unissued bonds and notes pre-numbered consecutively and

controlled by an official independent of recording?
This is to objectively account for the sequence and completeness of

unissued bonds and notes.

Control Point:
o Account for the numerical sequence of unissued bonds and
o

notes
Consult the person accountable for the bond or note and

inquire on the missing bonds or notes.

Are all retired debt instruments cancelled or destroyed?
This is to prevent unauthorized reissuance of cancelled debt

instruments by unauthorized parties.

Control Points:
o Cancellation of debt instruments separate from accounting
5 Are adequately detailed bond and note registers and general
ledger accounts maintained for the various debt classifications?
This is done to closely monitor the transactions involving the
different classes of bonds and notes and to provide for an audit
trail.
Control Points:
o Examination of due dates to ensure proper classification
6 Are interest payments and accruals periodically recalculated?
This is to verify the correctness of the amount recorded as interest

expense

and

miscalculations

accrued
may

interest

happen

payable.

due

to

In

practice,

mistake/error

certain

or

mere

incompetence of the accounting staff which would necessitate

recalculation of interest expense and accrued interest payable.

Control Point:
o Unusual amounts of interest expense
o

Large outflow of cash during the year

EQUITY
1 Are

all

capital

stock

issuances,

retirements,

and

dividend

distributions authorized by the board of directors?

This is done to ascertain the existence and validity of capital stock

issuances, retirements, and dividend distributions.

Control Points:
o Transactions must be consistent with the client's ARTICLES

OF INCORPORATION
Source Documents:
o articles of incorporation
o by-laws
o minutes for provisions relating to capital stock
2 Are capital stock transactions authorized by stockholder vote,

where required by state law?

This is done to ascertain the existence and validity of capital stock

issuances, retirements, and dividend distributions.

Control Point:
o Approval of stock and dividend transaction only if in

compliance w/ corporate charter/by-laws

3 Are unissued stock certificates pre-numbered consecutively and
safeguarded?
This is to objectively account for the sequence and completeness of
unissued bonds and notes as well as to secure the certificated from

unauthorized transfers.
Control Point:
o Account for the numerical sequence of unissued stock
o

certificates.
Consult the person accountable for the unissued stock

certificates and inquire on the missing ones.

4 Are independent registrars and transfers agents authorized by
the board of directors?
This is to determine the degree of involvement and accountability
as well as the validity of the act done by those independent

registrars and transfers agents with regards to the securities that

they hold on behalf of the company.

Control Point:
o Confirmation of certificates issued and outstanding with the

registrar/agent
o Confirmation of activities and balances
5 Are detailed capital stock records such as a stockholders ledger,
transfer journal, certificate control records, and general ledger
control

accounts

maintained

for

the

various

capital

stock

classifications?
This is done to closely monitor the transactions involving the

6 Are

different classes of investments and to provide for an audit trail.

Control Point:
o Detailed shareholder records separate from G/L and cash
handling
detailed capital

stock

records

maintained

by

officials

independent of the custody of the securities?

This is in accordance with the segregation of duties principle of
internal control, wherein recording should be separate from the
custody

of

assets.

This

is

to

prevent

the

manipulation/misappropriation or loss of the securities and the

subsequent concealment of the fraud through the tampering of the
capital stock records.
7 Are treasury shares adequately controlled and accounted for?
This is done to ascertain the completeness and the proper valuation

of these treasury stocks.

Control Point:
o Ascertain that disbursements for acquisitions of treasury
o

shares are duly recorded in the disbursement journals.

Consult
the
independent
security
custodian/person

accountable for the shareholder accounts.

8 Are procedures established to assure that the entity is complying
with stock exchange and securities law?
This is in accordance with the segregation of duties principle of
internal control, wherein recording should be separate from the
custody

of

assets.

This

is

to

prevent

the

manipulation/misappropriation or loss of the securities and the

subsequent concealment of the fraud through the tampering of the

records.
Control Point:
o Inquire if the client has legal cases or disputes with

regulatory bodies (i.e SEC, PSE)

9 Are dividend payments and accruals periodically recalculated?
This is to verify the correctness of the amount recorded as accrued
dividends

and

miscalculations

dividend
may

happen

payables.
due

to

In

practice,

mistake/error

certain
or

mere

incompetence of the accounting staff which would necessitate

recalculation of dividend payments and accruals.

Control Points:
o Recalculate dividend payments and accruals with the clients
o
o
o

general ledger control account.

Trace cash disbursements to cash disbursements journal.
Cash receipts must be deposited intact.
Dividend transactions must be authorized by the Board of

Directors
Vouch for disclosures regarding restrictions on retained
earnings and dividends