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BARONESSA METAL CORPORATION

We have completed an operational audit of Baronessa Metal Corporation. Our audit

disclosed the following:

Summary of Audit Findings

Operations

The audit team found that Baronessa is not effective and efficient in utilizing its foundry layout.

The arrangement of its operational processes and materials prohibited a systematic flow of

procedures. In addition, the company is not strict in implementing its operating, health, and

safety procedures. Employees are not seen wearing their safety gears nor following the measures

laid out before them. Baronessa is also inefficient in controlling its inventory levels because it

incurred excesses and shortages which were not accounted for and were only identified during

the inventory count. However, the materials used in production always undergo rigorous quality

testing. As a result, Baronessa provides excellent products that meet quality specifications.

Finance

Baronessa has no significant problems regarding its Finance and Accounting function but it has a

potential to improve the said function by properly utilizing its SAP® Software and Solutions.

Marketing

The company has no notable marketing strategy as it was originally founded to supply SAL

Fishing’s steel needs. It relies on its existing customers and its partnership with its sugar planter

clients for its sales and sales opportunities.

Human Resource

Baronessa particularly hires employees with TESDA Accreditation. They undergo continuous

training for them to be fit for the job. However, there are instances where the company lacks

manpower and the employees are asked to do overtime work just to meet the deadline.

Employees are provided with benefits and insurances to secure their health and welfare.

Security

With regard to the availability of security measures for Baronessa’s workers, the company’s

security function is well established. However, its workers are not in full cooperation with the

company as they neglect to wear their safety.

Executive Summary

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Existing for seventeen years now, Baronessa Metal Corporation is a domestic corporation

that was incorporated on April 14, 1997 and registered with the Securities and Exchange

Commission (SEC) on May 2, 1997 with SEC Registration Number E199700329. The company

has for its primary purpose the development, management, ownership, leasehold, operation, and

manufacture of metal products that will satisfy the needs of the metalworking industry.

The company crafts metal works out of (a) iron like gray, white, malleable, ductile, and

compacted graphite iron, (b) carbon steel and cast alloyed steel, and (c) such fundamental

components of other metals like copper, aluminum, magnesium, nickel, tin, and zinc based

alloys.

Baronessa Metal Corporation has been engaged in the design, sale, and distribution of

metal products to suit the needs of the cement, mining, shipping, sugar and transportation

industries. Additionally, the company undertakes or carries all kinds of studies, experiments,

storage and trading in all kinds of metal products and its by-products in the Philippines or

elsewhere.

The company was originally established to facilitate the owners’ fishing business. But

when they found out that the investment can be a principal source of profitability, they decided

to expand their market. The company employs a job order costing system. All their production

orders are initiated by a job request. That is to say, every metal product fabricated is tailored to

its exact design and technical specifications.

The company’s registered office, which is also its principal state of business, is situated at

Purok Paghidet, Alijis Road, Barangay Alijis, Bacolod City. It also has a plant at San Carlos City

Road, Barangay Tangub, Bacolod City.

The plant is divided into departments of administration, engineering, quality control,

personnel protection control, maintenance, fabrication, foundry shop, and machine shop. The

conversion process includes pattern making, molding, sand reclamation, melting, casting, setting,

coating, and fettling. Sixty to seventy percent of the raw materials used by the company are

imported from Japan, Australia and other foreign countries; the remaining thirty to forty percent

are purchased from local suppliers.

Introduction/Background

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The company believes in continuous improvement and is guided by the Japanese 5S (sort,

systematize, sweep, standardize, sustain). Currently, the management aims to acquire the ISO

certification.

To strengthen customer relationships, the company makes available a customer service

hotline, specifically (034) 432-2380. The company’s e-mail address is baron@globenet.com.ph.

In order to improve factory automation, instrumentation, and industrial controls, the

company’s accounting system is facilitated by SAP® Software and Solutions. Its first

implementation was on February 2003. Moreover, it runs a Programmable Logic Controller

(CPM1A Series) installed and completed by the Industrial Controls Corporation (ICC).

The overall objective was to: 1) review and assess the effectiveness and efficiency of the

company’s current operations; 2) isolate areas that necessitate attention; and 3) formulate logical

recommendations for management to address the areas of consideration.

Specifically, the audit focused on the following objectives:

1. Is the company maximizing its resources for production and are production processes

established and fully implemented?

2. Does the company have appropriate controls to prevent misstatements, fraud, or other

anomalies in the financial statements?

3. Does the company have an effective promotional campaign?

4. Does the company hire qualified persons fit for the job needed?

5. Are the employees protected from the risky areas and methods in the vicinity?

Audit criteria were established to assess each of the above objectives.

The operational audit covered select areas relating to the functions relating to operations,

finance, human resource, sales and marketing and security. The audit of the operations function

encompassed areas planning and production control, facilities, plant and equipment, personnel,

materials and energy, quality control, and maintenance. As regards the finance function, financial

Audit Objectives

Scope and Limitations of the Audit

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statement analyses were not included in the scope of this audit; audited areas include treasury,

payroll, accounts payable, accounts receivable, general ledger/ management accounts, fixed

assets, budgeting and monitoring, bank accounts and banking arrangements, taxation,

inventories, product cost accounting, petty cash expenses, and financial information and

reporting. The scope of the audit of the human resource function embraces staffing, recruitment

and training, performance evaluation, discipline, grievance administration, compensation,

incentives and benefits, termination and retirement, resignation, communication, environment,

and health and safety. Major risk and control areas of market research, promotion and

advertising, pricing and discount policies, sales management, sales performance and monitoring

were audited. Lastly, the audit of the security function involved significant areas concerning

health and safety, security, and insurance. Only significant and major issues relating to the

aforementioned areas have been studied.

The key tasks associated with the audit approach involved interviews, inspection, and

observation. In the course of this audit, we conducted face-to-face interviews with the managers

of the departments or supervisory personnel representing the different functions reviewed as well

as with the operations staff under their administration. Moreover, we looked through a selection

of pertinent and available records, reports, policy and procedure manuals, and documents to back

our findings. In order to familiarize with the processes, tailor the audit program and accumulate

substantial evidence, keen observations were conducted throughout the workstation units being

audited. The questionnaires administered were intently crafted to contain closed-ended questions

which may be elaborated by the interviewees during the interviews.

Audit Methodology

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Evaluation Criteria

1. Planning and Production Control

a. Are production instructions and requirements accurately defined and clearly

communicated?

b. Are all changes to customer orders promptly negotiated and communicated in order to

modify relevant production activities?

c. Does the layout of the plant for production maximizes efficiency and avoids

unnecessary movements or processes?

d. Are materials for production adequately protected from loss and damage in production

areas?

e. Does the management monitor employee productivity levels?

f. Is the management up to date with the relevant health and safety regulations?

g. Does the management have any disaster and/or contingency plans?

2. Facilities, Plant and Equipment

a. Are the production facility, plant and equipment requirements assessed regularly?

b. Are shortages or excesses of facilities and equipment easily prevented?

c. Are the Plant and Equipment regularly tested for safety and effectiveness?

d. Has management prepared and tested contingency arrangements in events of major

disruption to production facilities? (e.g. fire, earthquake, flood, etc.)

e. Does the layout of the production facility enable efficient and logical flow of goods?

f. Are facilities maintained in an orderly and clean manner, and have all potential dangers

been removed?

g. Do the facilities allow for a workable environment? (Do the lights and air- conditions

operate correctly and efficiently?)

h. Are productions staff appropriately and adequately trained to utilize the equipment?

3. Personnel

a. Are the skill requirements for production staff accurately determined?

b. Did they undergo training for their respective roles?

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c. Are all personnel aware of their respective responsibilities?

d. Would surplus or underused staff resources be promptly identified and redeployed?

e. Would failures to meet the quality of work and/or schedule be immediately identified?

f. Are the resources made available at the appropriate time so as to avoid/minimize non-

productivity?

4. Materials and Energy

a. Are supplies of materials coordinated to ensure that appropriate and adequate supplies

are maintained?

b. Are changes in production plans adequately communicated in order to ensure that the

appropriate inventory levels are maintained?

c. Are there any measures that prevent materials from being damaged or lost?

d. Would losses of materials be detected and effectively reacted to?

e. Are there any measures that ensure that energy and materials are efficiently consumed

and waste is avoided?

f. Are there any alternative sources of energy in case sudden energy loss?

g. Are measures in place to ensure that staff are adequately aware of and trained in the

efficient use of energy?

h. Are measures in place to ensure appropriate compliance with all the required statutory

obligations?

5. Quality Control

a. Are measures in place to confirm the quality specification of materials received from

suppliers?

b. Is prompt action taken to reject substandard supplies and materials?

c. Are there any quality specifications and have they been defined and documented?

d. Are there any regular material testing processes?

e. Are the testing and inspection staff adequately skilled and experienced to perform their

duties?

f. Is management kept regularly informed of detected defect rates and are there any action

taken to correct them?

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g. Maintenance

a. Are machine failures and operational problems promptly reported to the appropriate

staff to enable effective action to be taken?

b. Are there any maintenance requirements and are they properly documented and

communicated to the applicable staff?

c. Are there any measures that prevent unauthorized staff from tampering with or

servicing production equipment?

d. Is preventive maintenance conducted out of normal working hours in order to avoid any

undue disruption of production process?

e. Is the equipment performance subject to effective monitoring so that potentially

disruptive faults can be anticipated and countered?

f. Are effective and workable contingency arrangements in place in the event of the

failure of key piece of machinery?

g. Are maintenance staff suitable trained to deal with the range of production equipment

in place?

h. Are maintenance staff resources adequate to ensure appropriately skilled coverage

during holidays, etc.?

i. Are stocks of maintenance parts accounted for and regularly verified?

Findings and Recommendation

Finding No. 1: Planning and Production Control

1.1 Baronessa has a set of standard operating procedures but it can only be found on their

manuals. The company does not clearly communicate these processes to its employees as

evidenced by the lack of organization in the workplace. However, Baronessa puts up safety signs

and production monitoring reports around strategic locations in the foundry.

1.2 The company does not accept any change orders during the production process because client

specifications are clearly laid out during the negotiation phase.

1.3 Baronessa also does not maximize its plant layout. The processes for its operations are

disorganized since the 1st process is located at one end while its succeeding process is on the

other side. There are too much unnecessary movements and spaces when transferring the product

in process from one phase to another.

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The materials for production are not placed in an orderly fashion. At times, they hinder the

logical flow of the production process. As such, these materials are subject to a high risk .of

damages and/or losses.

1.4 Baronessa updates the production status and monitors the percentage of completion of each

project daily. They are posted in offices and in strategic locations in the foundry. Baronessa also

recently prepared a contingency plan in case of unforeseen or hazardous events as well as safety

procedures to be followed for high risk areas. In addition, the company has Personal Protective

Equipment that should be used by its employees all the time. However, they do not strictly

implement and communicate them.

Recommendation: Baronessa should post its standard operating procedures as well as its safety

and health regulations in places where employees usually frequent. The company should also

arrange its plant layout in such a way that it facilitates a logical flow of the production process.

Finding No. 2: Facilities, Plant and Equipment

2.1 Baronessa’s standard operating procedure during the production process is to check the

equipment and facility before starting its operations. However, presently the company has been

experiencing production delays due to heavy equipment malfunctions. The maintenance

department has not been regularly assessing the equipment’s conditions as evidenced by the lack

of any updates in its Maintenance Logs.

2.2 Baronessa has no contingency plan in case of fortuitous events. The company just recently

made a contingency plan due to the almost explosion of one of their major equipment. However,

it is still yet to be documented and communicated.

2.3 The company negotiates with CENECO for no power interruptions during their operations.

After passing the requirements CENECO grants them a clearance for continuous power supply.

However, only 90% of the time can the electric company provide them with no electricity

interruptions. As a result, Baronessa runs a back-up generator in case of these events but it can

only cater to small equipment.

The fire department also conducts a yearly inspection for the adequacy of the company’s fire

exits, alarms, fire extinguishers, etc. The company was recently awarded with a permit.

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2.4 The layout of the company is disorganized since it disallows the continuous flow of the

production process. Materials are also placed unsystematically preventing the workers from

transferring them materials from one place to another efficiently. The management thus, did not

efficiently utilize the provided space and equipment.

2.5 The employees are trained continuously for the operations of the business hence they are able

to operate the equipment efficiently. They also hire employees who have a background about the

equipment used or about the operations for easier training.

2.6 Baronessa implemented and provided safety procedures and gears for its employees.

However, they are not strictly followed. Their work environment is potentially hazardous if they

do not follow the safety precautions.

Recommendation: The company should allow an organized arrangement as well as process flow

in its facilities. Furthermore, there should be monthly check reports regarding the condition of

the machineries. Contingency plans should also be implemented in case of fortuitous events (e.g.

equipment malfunction, low voltage, etc.)

Finding No. 3: Personnel

3.1 The company requires that the production staff should have a background on how to use the

equipment and about the process needed. Baronessa may accept high school graduate applicants

but they need to have studied under a TESDA Accredited vocational school. All employees

undergo continuous training regarding the processes of the company. However, the company

fails to communicate the proper work attitude that its employees should maintain.

3.2 The company is able to identify any failure to meet the quality of work and schedule since

they have a quality control department responsible for assessing that the materials meet the

required specifications. They also have a production monitoring or status posted in the foundry

shop so they may be able to see the progress of their work and if they are on schedule. If the job

is in delay, employees are requested to work overtime and are equitably compensated.

3.3 The foreign suppliers forecast the availability of its products. In order to minimize non-

productivity, the suppliers communicate their inventory levels to Baronessa so that the

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management can order while the supplies are still available. Thus, employees are able to do their

work without any interruptions.

Recommendation: Baronessa should formally train its employees regarding its production

process. The company should also emphasize proper work decorum that its staff should follow.

Finding No. 4: Materials and Energy

4.1 Baronessa frequently experiences excess and shortage in supplies due to the lack of controls

in its acquisition as well as storage. Materials that are not even part of production were bought

and supplies that are urgently needed were not available. These variances have not been

accounted for and were only identified during the inventory count. This may be attributed to the

fact that the warehouse controller mostly has the sole control over the flow of inventories. He

transacts directly with the supplier without first consulting the overseer which is the “end user”.

The management has no preventive measures and change in production plans regarding this

issue.

4.2 The company has high cost of electricity due to many lag times. This means that Baronessa is

not efficient with regard to power consumption. In case of energy loss, a generator is its only

alternative source of but it cannot provide for the whole production, only for small equipment.

4.3 Baronessa however, ensures that fire extinguishers, alarms and fire exits are placed on

strategic locations inside the facility. The company is also trying to reach for ISO accreditation

yet it is still struggling to incorporate the 5s (Sort, Systematize, Sweep, Standardize, and

Sustain).

Recommendation: Baronessa should be stricter regarding its purchasing as well as monitoring in

order to promptly detect any variances or frauds. Any employee going beyond his authority

should be immediately and properly sanctioned. Also, the company should document its

variances and take measures on how to minimize them.

Finding No. 5: Quality Control

Baronessa uses a materials quality checklist to inspect the materials received from suppliers in

order to guarantee that quality specifications are met. The company immediately rejects and

returns the substandard ones received from suppliers. Baronessa’s quality specifications are

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defined and documented well. They are posted in some offices in order to constantly remind its

employees. In addition, the management practices materials testing to ensure that production

requirements are met and there are no defects in the materials purchased.

Recommendation: Baronessa has a systematic quality control procedure regarding the accounted

and authorized purchases. It should therefore maintain these procedures.

Finding No. 6: Maintenance

The maintenance department is in charge with the upkeep of the company’s equipment

especially the heavy-duty ones. Recently, the company experienced a momentary halt on its

operations due to a malfunction on one of its biggest equipment. This caused approximately 8

out of 10 project delays which the company must compensate by operating 24 hours. It was later

found out that the maintenance personnel were negligent in checking if the machines are

operating efficiently. Operational problems and equipment failures were not promptly reported

and the management did not even have any contingency plans regarding heavy equipment

failures. Baronessa had to buy a new equipment immediately and only on its arrival did they

resume operations.

Recommendation: Management should implement and communicate clearly any contingency

plans in order to avoid production delays. Maintenance personnel who are not doing their

responsibilities should be immediately sanctioned.

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Evaluation Criteria

1. Treasury

a. Are the Treasury Policy and operational procedures regularly reviewed, maintained,

and kept up to date?

b. Are security and financial documents securely stored and adequately protected from

loss, damage, or misuse?

c. Has management provided the treasury staff with suitable training and necessary

resources?

2. Payroll

a. Are payroll salary rates correct in relation to agreed pay scales/ national rates?

b. Are all the necessary/ statutory payroll outputs and forms accurately produced and

distributed in accordance with the required timetables?

c. Have specific payroll responsibilities for the payroll function been suitably defined and

allocated?

d. How does management obtain assurance that only valid employees are being paid via

the payroll?

e. How does management obtain assurance that the payroll system accurately calculates

net salary and accounts for all disbursements?

3. Accounts Payable

a. Are all invoices identified, recorded, trailed, and accounted for?

b. How does management ensure that the goods and services being charged for have been

received?

c. Are invoice payments only made to valid and approved suppliers?

d. Is there adequate segregation applied between those originating purchase orders and

those authorizing the relevant invoice for payment?

e. Are all transactions adequately trailed and supported by the relevant documentation?

f. Are discounts correctly applied whenever relevant?

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g. Are invoice payments made at the appropriate time (i.e. avoiding premature or overdue

payment)?

4. Accounts Receivable

a. Are all invoices and credit notes identified and accounted for and correctly posted to

the individual customer accounts?

b. Are potential customers appraised for creditworthiness and financial stability prior to

trading relations being established?

c. Are there adequate procedures for the authorization and setting of realistic customer

credit limits?

d. What other measures are undertaken to prevent bad debt situations?

e. Are all overdue accounts (and those approaching being overdue) highlighted for action?

f. Are customer remittances banked as soon as possible?

5. General Ledger/ Management Accounts

a. Has the chart of accounts been approved by senior management and does it suitably

reflect the

b. Would posting errors be identified and corrected?

c. Are the accounting records maintained in accordance with the prevailing laws and

regulations?

d. Are all source departments aware of the general ledger processing timetable and their

specific data submission deadlines?

6. Fixed Assets

a. Are documented procedures available governing all aspects of asset acquisition,

accounting treatment, and disposal?

b. Is the existence of fixed assets regularly verified?

c. Are assets adequately identified and protected from theft, loss, damage and the like?

d. Are key assets adequately insured and does management ensure that insurance cover is

maintained and at the appropriate level?

7. Budgeting and Monitoring

a. Does line management have sufficient input into the process of determining accurate

and realistic budgets?

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b. Have specific responsibilities been allocated for the monitoring and follow-up of

budget versus actual data?

c. Are all potential budget revisions identified and approved prior to update of the

budgeting system?

8. Bank Accounts and Banking Arrangements

a. Are all borrowing terms adequately documented?

b. Are all customer payments processed directly into a corporate bank promptly identified

and allocated to the appropriate debtor account?

c. Are bank accounts regularly reconciled and how is this evidenced?

9. Taxation

a. What prevents the late submission of a taxation return?

b. What prevents the submission of an incorrect taxation return?

c. Are complex taxation situations referred to independent taxation specialists for advice?

10. Inventories

a. Are inventories properly accounted for?

b. Are inventory values adequately and regularly verified?

c. How does the company deal with scrap, defects and spoilage?

11. Product Cost Accounting

a. Has the most relevant and appropriate costing method been applied?

b. Is the impact of standard cost variances considered in relation to the inventory and cost

of sales?

c. How does management ensure that it has accurately identified all direct and indirect

costs associated with the product?

d. How does management ensure that it has accurately and realistically determined the

profit level for the product?

12. Petty Cash and Expenses

b. Are expenses, claims, and petty cash returns supported by the relevant receipts?

c. Has management established clear policies for recording, authorizing, and processing

petty cash and expense claims?

13. Financial Information and Reporting

a. Are all economic transactions properly reflected in the financial statements?

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b. Does the company prepares its own financial statements or pays for a bookkeeping

service?

c. Are the financial statements accurate and timely reported?

Findings and Recommendation

Finding No. 1: Treasury

The company’s Treasury Policies remain unchanged since its incorporation. Same holds true for

the operational procedures. The treasurer claims there is no need of updating them because the

policies and processes are already functioning properly and with little to no hassle. Security and

financial documents are put in safekeeping in such a manner that only the authorized personnel

can view them. Highly confidential documents are kept in a safety deposit box. The treasury staff

from the top to the bottom of the hierarchy are provided with adequate training for them to

deeply familiarize their work and improve their performance.

Recommendation: The Treasury Policies should still be reviewed for possible amendments

despite the perception that they are working properly.

Finding No. 2: Payroll

Employees are paid with the minimum wage rate applicable for employees in the Western

Visayas, every 15th and 30th of the month. Payroll forms and reports are prepared by the

accountant as prompted by the accounting system. The functions of the payroll staff are

specifically communicated to them through pre-service orientations and their understanding of

their responsibilities is probed whenever they are already on the job. The accounting system aids

the payroll manager in ascertaining that no ghost employees are remunerated. The developed

system running SAP® Software and Solutions is also the one computing the employees’ salaries

and the corresponding deduction. At year end, internal audit participation reconciles the payroll

system to the manual payroll records of the company.

Recommendation: For manual laborers, weekly salary payment is recommended since the

workers, as interviewed, need immediate cash.

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Finding No. 3: Accounts Payable

The Foundry Manager also acts as the purchasing officer as regards the raw materials purchase.

Raw materials are purchased only from the approved supplier listed in the Vendor Master File.

There is a receiving personnel in the warehouse who takes delivery of incoming raw materials

and supplies and writes the quantity and description of particulars to the blank purchase order.

The accounts payable clerk then matches the amount of goods received to the supporting

documents. All purchase invoices are numbered and are filed chronologically. Supporting

documents are attached to them for ease of tracing and verification. The accounts payable clerk

facilitates the automated recording of the purchasing transactions. Prompt payments allow the

company to avail purchase discounts. Since a large fraction of its suppliers is abroad, the

company usually pays on time.

Recommendation: Role definition must be made stronger because employees assume tasks

outside their job description. Although the Foundry Manager best knows what materials are in

need, a purchasing officer must be hired to address risk and control issues.

Finding No. 4: Accounts Receivable

The accounts receivable clerk responsibly accounts for all sales invoices via the accounting

system. He also commands the automatic posting of transactions to the respective customer

accounts. A one-time credit investigation is done on potential customers. All of BMC’s

customers are highly-esteemed companies from different industries so the risk of bad debts is not

threatening. Customer credit limits set by management are subject to certain criteria such as total

assets and length of trading relationship. Currently, management has not laid out measures to

prevent bad debt occurrences because they have not had any experience of not recovering

accounts receivable. Cash is deposited to the bank several days after they have been received,

usually at the end of every week. In most cases, customer remittances are done through

electronic fund transfer system or direct deposit.

Recommendation: Even if the risk of uncollectible accounts is low and the company has not had

any bad debt experience, it should set an allowance for bad debts and prepare an aging schedule.

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Finding No. 5: General Ledger/ Management Accounts

The company’s chart of accounts are approved by the management. The codes are also

understandable and the accounts are reflective of the different company operations except for the

cash account which does not separate the individual bank accounts. Posting errors are identified

every year-end through the operations performed by the internal auditor. The company’s

accounting records are prepared in accordance with Philippine Financial Reporting Standards for

Small and Medium-Sized Entities (PFRS for SMEs) and other applicable laws. The department

managers are duly informed of the dates when they should submit the information required of

them. The company calendar is regularly updated to include the approaching deadlines.

Recommendation: The company must be able to setup separate account titles for each cash in

bank account (i.e. Cash in Bank-BDO, Cash in Bank-BPI, etc.) and not lump all the bank

accounts in the Cash in Bank account.

Finding No. 6: Fixed Assets

Asset acquisition and disposal procedures are not properly documented. As a result, when one

heavy equipment recently broke down and cannot be repaired, they did not have any choice but

to stop the production. Only the accounting treatment is specified in the company policies. Year-

end procedures are done to confirm the existence of the fixed assets but a maintenance and usage

log is not maintained by the company. The fixed assets are tagged with identification stickers and

the threat of theft and/or loss is low because the equipment used in the foundry are very large in

size. All heavy equipment are insured but the tools and other small properties are not covered by

the insurance premiums paid. Insurance coverage is proportional to the cost of the fixed assets.

Recommendation: Policies for asset acquisition and disposal must be defined and documented.

Also, a maintenance log must be maintained and usage of heavy equipment must be recorded

using the number of operating hours incurred for proper depreciation charges.

Finding No. 7: Budgeting and Monitoring

The budgeting process of the company is not based on any statistical information. The owner-

president develops the budget arbitrarily, producing an output without any input but self-

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experience. No employee is responsible for the monitoring and follow-up of budgeted and actual

data. Upon job completion, the budget is neither compared to the actual nor further analyzed. In

this sense, the core value for which it was developed is extinguished.

Recommendation: A master budget must be developed integrating information from past years

and estimated expenditures for the period. More importantly, once the projects are completed or

at year end, the actual costs must be compared with the figures projected in the budget and

analyzed for possible implications.

Finding No. 8: Bank Accounts and Banking Arrangements

All bank loans are supported by documents containing the amount of loan, interest rate, maturity

date, and other borrowing terms. Proper appropriation of customer payments through bank

account transfers is ensured via the accounting system triggered by a notification from the bank.

Bank reconciliations are done monthly and at the end of every year to agree the book balance to

the bank balance of the cash account. Close contact with the bank is preserved by the

management.

Recommendation: Since the company is empowered by a well-received accounting software, it is

recommended that the reconciliation distribution process be performed after the funds are

deposited.

Finding No. 9: Taxation

Tax returns are timely submitted to the Bureau of Internal Revenue on or before the due date

because of the company’s updated calendar system and system reminders. No measure is

provided to prevent the submission of an incorrect tax return. The burden of responsibility is

assigned to the internal auditor alone. However, in cases where he cannot handle the taxation

situations, a taxation specialist is consulted for guidance.

Recommendation: The company should hire another internal auditor who will serve as an

assistant or reviewer of the tax treatments applied by the other. If two persons are working, one

may detect the other’s lapses. Although this does not provide absolute assurance of correctness,

this measure prevents the occurrence of incorrect tax return submission.

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Finding No. 10: Inventories

Although the inventory account consists of unused raw materials, work-in-process inventory,

finished goods and factory supplies, the valuation of the work-in-process and finished goods is

questionable since overhead relating to these accounts are not properly accounted for. Spoiled

goods are treated as an outright expense. Scrap and defective goods are remelted, remolded and

recast into a new product. However, accounting for scrap and defects is not practiced.

Recommendation: In order for the inventories to be properly valued, it is recommended that

product costs be correctly identified first. A cost accountant should be hired to account for the

costs, whether direct or indirect, attributable to the metal yields. Accounting for spoilage, scrap

and defects must be assessed by the cost accountant whether to charge it to the cost of the goods

or as an outright expense.

Finding No. 11: Product Cost Accounting

Since BMS employs a job order costing system, costs are assigned per job. The company has no

cost accountant. All the costing processes are solely performed by the president who is directly

involved in almost all of the family-owned company’s functions. Quotations are developed by

the engineering department but the final say is dependent to the president. Although the company

has standard cost manuals in estimating the cost of the product, variances are not analyzed.

Direct and indirect costs are all identified by the president, being knowledgeable of the costing

process very well. He is also the one determining the profit margin for every job order accepted.

Recommendation: Consistent with the recommendation in Finding No. 10, a cost accountant is

what the company needs right now. The president’s exclusive determination of the product cost

and arbitrary imposition of the profit margin may not be reliable, notwithstanding the fact that he

is very familiar with the company operations. Proper cost accounting should be employed.

Additionally, variances must also be analyzed to help the company improve its performance with

regard to materials cost, direct labor cost, and factory overhead cost, among others.

Finding No. 12: Petty Cash and Expenses

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Expense authority levels are maintained for petty cash disbursements. Petty cash fund is

maintained at Php10,000. For liquidation purposes, all requests for reimbursement are required

to be supported by official receipts and approved by the department supervisor. Employee

requests must be embodied in the petty cash slip which are then processed for payment.

Recommendation: Aside from reimbursement, it is recommended for BMC to give cash in

advance from the petty cash fund. Since most of the manual workers do not have extra money to

fund emergency expenses, cash advance is more practical than reimbursements as long as

reasonable justification is provided.

Finding No. 13: Financial Information and Reporting

All economic transactions are captured by the company’s automated accounting system which

generates the financial statements. However, these are just for internal purposes and it is the

internal auditor who prepares the official financial statements. The internal auditor appointed by

the Board of Directors. Financial statements are prepared semi-annually, annually, and in special

cases, upon presidential request. As per inspection, we found out that the internal auditor has

erroneously classified the activities in the cash flow statement (i.e. purchase of equipment was

recorded under the heading “operating activities” instead of “financing activities”).

Recommendation: The internal auditor’s performance must be assessed by the Board of

Directors since they are not provided with proper analysis when it comes to the cash flows of the

business. Operating activities must be clearly identified from financing activities and investing

activities. These may be considered as petty errors but their correction very valuable for

personnel making managerial decisions.

21

Evaluation Criteria

1. Market Research

a. What steps are taken to ensure that customer requirements are identified and effectively

addressed?

b. What measures ensure that products continue to match the required performance,

quality and price criteria?

c. Are customer complaints and comments recorded, assessed and used to define the

necessary corrective action?

2. Promotion and Advertising

a. Has a planned approach to advertising and promotion been agreed, authorized and

implemented?

b. Does management measure and monitor the effectiveness of advertising and

promotional activities?

3. Pricing and Discount Policies

a. What steps are taken to ensure that prices remain competitive, profitable and

sustainable?

b. What parameters govern the eligibility for discounts, and what mechanisms ensure that

they are correctly applied?

4. Sales Management

a. What mechanisms prevent the establishment of unauthorized, unlawful, or uneconomic

trading terms with a customer?

b. How does management ensure that all sales staff is suitably experienced and

demonstrates an accurate knowledge of company products and trading term?

c. How does management measure and monitor performance?

d. What measures are applied to ensure that customers are financially stable and reliable?

5. Sales Performance and Monitoring

a. Does management maintain adequate records of historical sales trends, volumes, etc. as

the basis for sales planning?

3.0 Audit of the Marketing Function

22

b. Is management provided with accurate and up-to-date sales performance statistics?

c. How does management ensure that sales returns, cancelled orders, rejected orders,

discounts and allowances are all correctly and accurately reflected in the sales

performance statistics?

Findings and Recommendation

Finding No. 1: Market Research

All staff undergoes training and employees are hired with specified qualifications for the job

needed. Products undergo quality control before they are transferred to the machine shop for

further process. Materials and supplies are inspected before they are accepted to ensure good

quality of materials and supplies. The engineering department is responsible for drawing the job

order of the customer. Before production is started, the company shows the drawing to the

customer and finalizes everything, matching it what the customer requires or needs. After the

plan is finalized with the requirements of the customer, production is started.

Recommendation: BMC is not very aggressive with their marketing research as they rely on the

job requests of its customers. However, this effort might already be sufficient as the company is

very flexible in supplying the specific demands and needs of its customers.

Finding No. 2: Promotion and Advertising

The company’s promotion and advertising is not very strong. They do not have posters or

tarpaulins posted in the streets. However, BMC is found in the yellow pages of the telephone

directory. Since Baronessa was primarily created for the purpose of self-producing the steel

works needed for the SAL Fishing business of the president, the management sees to it that it

could also bring profit to the business by catering to the orders of its customers, but still

prioritizing the SAL Fishing business. Most of its customers are sugar planters who order steel

items and equipment needed for their business.

Recommendation: The company should increase its advertising efforts by making use of referrals

from their existing customers and by at least making noise in the market by giving out flyers in

the downtown area which costs a minimum fee.

23

Finding No. 3: Pricing and Discount Policies

The engineering department is the one responsible for the quotation of the project upon the

request of the customer asking for the price quotation of a job order. Stated in the quotation is the

price of the whole project. The price stated in the quotation is still subject for the final decision

of the president. The price may either increase due to profit concerns or decrease due to the

availability of a discount, depending on the decision of the president. The president is also the

only person who knows how much is the percentage of the profit received for every project. No

employee know this information.

Recommendation: BMC’s pricing strategy is very weak as only its company president decides

for the prices of the company’s products which do not have any accounting basis. The company

must establish its costing procedures so that its prices become competitive, profitable and

objective.

Finding No. 4: Sales Management

The company receives order from its customer and the president of the company has the final say

to all the decisions with regards to accepting the order which relies on certain factors such as the

cost of the job. Everything is consulted to him before final action is taken. All employees are

trained for their job responsibilities and the company hires employees with experience and those

who meet the specific job qualifications. The company has production status/monitoring posted

around the vicinity which depicts the work status of the production needed to be done. The

percentage of completion of the project can be located on the post. The company doesn’t have a

measure to see if the customers are financially stable and reliable but they receive orders and

everything depends on the president’s judgment.

Recommendation: BMC should have requirements to ensure that customers are reliably able to

pay for the sales order. Since the president has the final say, there won’t be any unauthorized

discounts or price increase with regards to the said project. The company should also keep track

of its clients so that accepting and processing job orders will be easy.

24

Finding No. 5: Sales Performance and Monitoring

The company keeps records of all its sales. The list of orders is posted to update the workers of

the time of delivery of the product and the current status of the job, however, these are not

updated sometimes. All orders are finalized before the project is started and no changes happen

during the production process. All prices and discounts are subject to the decision of the

president of the company. The sales data of the company are all stored and filed by one person.

He/she is responsible of updating and preparing the sales reports.

Recommendation: The company should always update the production status of the project to be

able to determine what projects are still needed to be done so that all deadlines will be met. The

company should continue keeping track of its sales performance to assess its profit making

ability. Also, unauthorized access of these data must be prevented.

25

Evaluation Criteria

1. Staffing

a. Is the number of employees enough to the serve the customers and satisfy them?

b. Are there instances where deadlines are not met because of insufficient human

resources?

c. Is the company outsourcing employees?

2. Recruitment and Training

a. Does the business set specific standards in hiring?

b. Are there adequate training for newly hired employee?

3. Performance Evaluation

a. Does the employee use their skills effectively?

b. Is the responsibility of each employee well defined or clearly stated?

c. Are the employees informed when performance is below standard?

d. Are their preventive measures in place to ensure a good performance?

4. Discipline

a. Does the company employ disciplinary action used to correct employee performance

and behavior?

5. Grievance Administration

a. Are the undesirable acts of the employees being dealt immediately?

6. Compensation, Incentives and Benefits

a. Is the workload of each employee equitable with its salary?

b. Are the employees being rewarded for good performance?

c. Are all mandatory requirements like 13month pay, SSS, Philhealth, and Pag-IBIG

contributions being paid by the business?

7. Termination and Retirement

a. Is there a concise policy manual?

b. Are the legal matters being followed before an employee are laid off?

c. Does the business follow the maximum 60 years old age limit?

4.0 Audit of the Human Resource Function

26

8. Resignation

a. Is the employee turnover rate alarming to the business?

d. Is there an existing contract for the employee to remain in the business for a minimum

time?

9. Communication

a. Are the employees encouraged to give ideas/feedback?

b. Are regular meetings being conducted?

c. Are agenda for the meeting given to employees prior to the meeting?

10. Environment

a. Is there a positive working atmosphere present in the workplace?

b. Are the employees having fun with their work?

11. Health and Safety

a. Are there safety measures in place to reduce accidents in the operation?

b. Are the employees adequately being protected when they are at work?

Findings and Recommendation

Finding No. 1: Staffing

Customer satisfaction is preserved by the company’s 74 employees, both regular and casual.

However, human resource is insufficient and thus becomes one of the factors delaying the

deadlines of the company. During busy production periods, employees are enforced to work for

24 hours just so to meet project deadlines.

No job staffing is let to outsourcing agencies, but the company is partnering with TESDA,

selected colleges and universities with regard to on-the-job training and apprenticeship. If the

trainees’ and apprentices’ performance are satisfactory, the company may absorb them and hire

them as employees.

Recommendation: BMC has an ineffective staffing procedure as it does not employ a sufficient

number of employees, and as there are many cases of unmet deadlines. Due to shortage in human

resources, BMC can instead consider outsourcing employees especially during busy production

periods so as to not have its employees exceedingly work overtime.

27

Finding No. 2: Recruitment and Training

Yes, the company has specified the requirements in hiring employees. These requirements are

documented in the “Hiring Manual” that the Human Resource Manager maintains. The primary

standard is that the applicant should have completed at least a vocational degree, for manual

workers and a bachelor’s degree for white-collar positions. As regards the manual workers, they

should present a certification issued by TESDA. High school graduates cannot be hired.

Proper and sufficient training is provided to newly-hired personnel. For administrative positions,

especially when the employee is experienced, training is not that extensive but is, in essence,

focused in job introduction. On the other hand, extensive training is arranged for blue-collared

job such as factory workers. For factory workers, a manual of procedures is given to each. The

manual is available in two languages: English and Ilonggo. The Ilonggo version was produced in

order to ensure the workers’ understanding of every procedure, given that the English version’s

terms are highly technical. The day after the manuals are given, the workers are introduced to the

actual operations. Based on specified criteria, the production manager evaluates the workers. The

results are then forwarded to the Human Resource Manager. He/ she will then determine whether

or not the worker still needs training.

Recommendation: The training and recruitment process engaged by BMC is committed to high

quality control as high school graduates are not given any employment opportunity to ensure that

BMC’s employees and staff are competent and able to deliver superior performance through

their technical knowledge acquired from either a vocational degree for blue-collared jobs or from

a bachelor’s degree for white-collared positions. Furthermore, training is given high regard in

BMC especially to blue-collared employees as the company’s productivity depends significantly

on their technical understanding and ability to perform their work. BMC must maintain this

effective training and recruitment procedures.

Finding No. 3: Performance Evaluation

Well-defined responsibilities are assigned to every employee. No overlapping of work is

allowed. Moreover, inherent to their responsibilities, the employees are duly discerned of the

Code of Discipline that they should observe.

28

Skills matching is safeguarded by the Human Resource Manager. That is to say, no one works

for jobs in which he/ she is overqualified or underqualified. The department managers make

certain that the employees’ skills are well-utilized.

Performance evaluation is done twice a year or once every semester. When an employee receives

a poor rating from his/her superior, he/she is given an immediate memorandum by the Human

Resource Manager for him/her to increase productivity. Subject to the provisions stated in the

policy manual, excessively low performance ratings of an employee may lead to his/her

termination, thereby suggesting skill deficiency.

CCTV cameras are stationed at strategic areas in the workplace to spot the employees’ working

environment and detect any misconduct.

Recommendation: The HR department is creditable for their skill matching procedure as it

makes the company’s performance evaluation easy, well-suited and effective because employees

are given responsibilities that match their skills and are distinct from other employees. However,

it can rather be recommended that if an employee receives a poor rating from his/her superior,

the HR manager, aside from his/her issuance of a memorandum, deploys such employee to a

“refresher” training course together with the new employees in training.

Finding No. 4: Discipline

The company utilizes progressive discipline in order to inform the employee of inadequacies in

performance or instances of improper behavior; clarify what constitutes satisfactory performance

or behavior; instruct the employee on what action must be taken to correct the performance or

behavior problem; and inform the employee of what action will be taken in the future if the

expectations are not met. The levels of action may include oral warning, written warning,

suspension, and ultimately discharge. In worst instances, the company imposes a summary

discharge to an employee. This includes, but not limited to, theft, intoxication on the job,

violence or threat of violence, attempt on the life of a co-employee, conviction of a felony, and

negligent, careless or intentional performance that results in damage to property or individuals or

the risk thereof. These causes are deemed just.

Recommendation: Due to BMC’s methodical Code of Discipline, each employee must be fully

aware, mindful and vigilant of every consequence to their misbehaviour or poor performance. It

29

is their responsibility to faithfully abide by the code to drive them to work efficiently to avoid

suffering penalties.

Finding No. 5: Grievance Administration

Yes, work-related acts that impose unethical behavior such as acts of lasciviousness, drug habits,

and other indecorous acts that impede his/her work and/or the work of others are right away

given concern. The company abides by the legal stipulations and management policies relating to

these matters. If such events would happen, the employees are well-discerned that the Human

Resource office could properly address these issues.

Recommendation: These procedures must be maintained so as to uphold discipline and respect

within the company. Furthermore, this must produce disciplined employees with more valued

and productive hours of work and less (unproductive) time spent on settling disputes.

Finding No. 6: Compensation, Incentives and Benefits

The management sees to it that the remuneration of employees is in accordance with their skill

adeptness and workload. Performance-based compensation is allowed only to sales personnel in

the form of commissions. 13th month pay, SSS, Philhealth, and Pag-IBIG contributions are duly

paid by the company. More importantly, aside from these mandatory benefits, the company

provides a free bus ride (back and forth) for employees residing in Northern Negros, Victorias

City at most. Each employee is also given 10 days leave with pay which is convertible to cash.

Aside from this, if an employee has no tardy marks in the attendance records for the whole

month, he/she is given a bonus of Php 300-500 per month, depending on the job.

Recommendation: Employees in BMC enjoy a good compensation and benefits package.

Therefore, BMC must maintain this procedure to develop employee loyalty and productivity,

sustain its employees and lessen its employee turnover.

Finding No. 7: Termination and Retirement

The company maintains a policy manual. Aside from the orientation, the employees are provided

with a policy handbook embodying the various company policies and the corresponding

consequences and penalties.

30

Proper employee termination policies are followed in accordance with the law. In fact, there is an

internal legal officer who is a regular company employee and there is also a legal retainer who is

employed only in the event that the legal officer cannot handle the case/s alone. However, in

certain cases, the employee to be terminated is offered a graceful exit for him/her to protect

his/her record.

The 60-year old maximum age limit policy is observed by the company. However, currently, two

employees who have reached the 60 year-old age limit are working for the company as

consultants.

Recommendation: BMC making the “graceful exit” option available to its employees show its

concern to protect its employees’ job records, and this constitutes a positive image to the

company. However, the 60-year old age limit policy must be strictly implemented to all

employees without exceptions so as to establish fairness and equality among the BMC

employees.

Finding No. 8: Resignation

Manual workers usually leave the company after 3 months of employment. This is not alarming

since for the past years since its inception, this has been the average stay period of employees.

The Human Resource Manager understands that the workers also seek better employment

opportunities.

The workers are not provided with a minimum length of employment every time they sign their

contracts. They are free to leave the company anytime they want, subject to the 30-day notice

legal rule. However, if their work is of an intricate and critical nature such that leaving the

company without adequately training the successor would result to unfavorable circumstances,

the employee filing a request for resignation is asked to remain until such time that his/her

successor shall be knowledgeable of the work.

Recommendation: BMC must make an effort to reduce its employee turnover so as to make its

human resource investment highly valued as its employees are encouraged to stay in the

company probably due to a better compensation package compared with other competitors, or a

healthy working environment with the values of trust, confidence, respect and loyalty.

31

Finding No. 9: Communication

Employees are greatly encouraged by the supervisory personnel to voice out their concerns

during meetings. Regular meetings are steered weekly for the production department and

monthly for the other departments. Employees are informed of the agenda via their department

heads.

Recommendation: To cater to employees’ involvement in improving certain company procedures

that would contribute to the success of BMC, an open communication must be established in all

levels of the company such as effecting an open door office policy to supervisors so that low-

level employees will feel that their thoughts are welcome in the company. This recommendation

must be convenient to implement since the employees’ population is not very large.

Finding No. 10: Environment

The employees work in an atmosphere of positivity. Good relationships among the workers are

maintained. When asked, the employees retorted they’re having fun. One of them even said,

“We’re having fun. It’s not work when you enjoy your work, it is sheer enjoyment.” Christmas

Parties and Summer Outing are the company’s way of keeping the working environment of its

employees encouraging.

Recommendation: Because BMC’s population is limited to less than 75 employees, it could be

able to foster strong employee relationships through good and active communication with each

other. The company must maintain their rest and recreation activities to keep its employees in

composure despite their heavy workload.

Finding No. 11: Health and Safety

Although safety policies are posted in tactical areas throughout the workstation as a constant

reminder for the employees to consider safety first at all undertakings, there are some notable

employees during the observation procedures that violate these safety precautions. There are

available safety hats and goggles for manual workers but some of them neglect to wear such.

However, aside from the readily available physical support and maintenance, the workers are

also insured via Malayan Health Insurance.

Recommendation: No matter how BMC strives to abide by safety legislations, if such rules are

not being faithfully followed by its workers, the foundry portion of the company premises will

32

still be very vulnerable to accidents. The supervisors and overseers of the foundry must be more

strict in implementing these safety procedures to their staff so as to avoid any untoward

accidents. However, offering health insurance for its employees is a good assurance that its

employees are a very important resource for the company by taking care of them, and thus, this

must be maintained.

33

Evaluation Criteria

1. Security

a. Are authorized and documented security policies in place, and how is management

assured that the procedures are adhered to?

b. Are there operative security, intruder and fire alarm systems in the company premises?

c. Are emergency drill, building evacuation and contingency arrangement procedures

being followed in the company?

2. Health and Safety

a. Are there sufficient and effective fire prevention and protection system in the

company?

b. Are safety equipment provided conveniently and adequately?

c. In cases of incidents and accidents, how are victims dealt with?

3. Insurance

a. Is there a maintained adequate and appropriate insurance cover for its employees?

b. Do all insurance privileges only cover authorized and legitimate employees?

Findings and Recommendation

Finding No. 1: Security

The company premise has only one entrance and one exit location with one security guard

controlling the people entering the company. There are CCTVs around the establishment to

monitor the different operations and tasks inside the site. Also, the company has adhered to the

Bacolod City LGU’s required security policies and legislations through the existence of

automated and manual alarm systems and a public announcement (PA) system installed within

the site. Furthermore, an annual fire inspection is being accomplished by BMC conducted by the

Bacolod City Fire Department so as to acquire its permit to operate. The company additionally

has a contingency plan in the event of an untoward emergency; however, it is not properly

established for the company.

5.0 Audit of the Security Function

34

Recommendation: BMC has an adequate security policy, but their contingency plan must be

properly executed so as to make the continuing operations smooth and efficient, without delay.

Finding No. 2: Health and Safety

Yes, there is sufficient and effective fire prevention and protection system in the company

evidenced by the fire alarms and fire extinguishers in the working vicinity. Additionally, each

employee is provided with personal protective equipment (PPE) to prevent accidents in their

work. In case of incidents and accidents, the casualty is immediately catered to by rushing him to

the nearest hospital or health center. However, BMC has no available first aid for minor injuries.

Recommendation: It is very important to have a first aid kit situated nearest to the employees’

working area to accommodate minor injuries, also, so as not to halt or delay operations.

Finding No. 3: Insurance

Yes, BMC workers are insured with Malayan Health Insurance. And yes, only authorized and

legitimate employees are covered by the said insurance. The insurance cover is updated regularly

as Previous and non-existent employees are excluded from the insurance the moment they resign

or quit from the company. Also, the health insurance is being paid for regularly, both for regular

and casual employees.

Recommendation: BMC must continue its insurance policies as they are adequate for the

protection and welfare of its employees.

35

Subject to the scope performed by the operations audit conducted, the team concluded

that the Baronessa Metal Corporation has a poor operating performance. Unfavorable

circumstances are not foreseen such that if they occur, the company finds itself in a state of

anxiety. Contingency plans are not shaped until misfortunes happen.

Generally, Baronessa Metal Corporation has sufficient resources to stimulate its growth

in the industry, may they pertain to financial or human resources. Moreover, it also welcomes

modern technology and is responsive to changes in them. Production processes are also well-

defined. However, the ineffectiveness lies in the lenient implementation of those policies.

Valuable principles are upheld by the top management. However, for it not to stagnate and

propel forward to advancement, the operations department must be vigorous enough to

implement the policies and procedures.

Financial reports do not reflect or are not close to the actual performance of the company,

in aspects defined by the Conceptual Framework, as BMC does not have proper cost accounting

procedures. As a result, accuracy in the determination of net income and other revenue and

expense items is impaired as costs are not accounted for and tracked properly and sales prices are

determined arbitrarily. In line with this, performance evaluation represents a key area for

improvement.

Efforts on promotional campaigns are not exerted by the company at all. The company

must adopt a well-crafted strategy to serve as a platform for its marketing schemes. If all these

would be considered by management, it is not remote that Baronessa Metal Corporation will

reign supreme in the metal fabrication industry.

Qualified persons are recruited by the company, with their roles and responsibilities

clearly distinguished. The company’s commitment to produce quality products significantly

depends on the quality of their human resources.

Employee protection and security is ensured by the company. It makes certain that

employees are not just working in a positive environment but also in an atmosphere where their

health and safety and security is preserved.

Conclusion

36

Overall, Baronessa Metal Corporation is endowed with a green light in its business

prospects. However, wise changes must be implemented in its operations coupled with the wise

decisions that management must make. This will enable BMC to experience longevity, good

standing, efficiency and effectiveness as it continues to thrive in the future.

37

Baronessa’s Production Process

Pattern Making

Molding

Appendix

38

Melting and Settling

Coating and Casting

Finished Product to be forwarded to the Machine Shop

Workforce – Attendance Monitoring

Production Monitoring Schedule

Production Status

Bulletin Board

Safety Signs and Reminders

Safety Signs and Reminders (Continued)

Safety Signs and Reminders (Continued)

Raw Materials

Raw Materials (Continued)

Raw Materials (Continued)