CSI & Co.

Audit Firm
P. del Rosario St., Cebu City 6000
Audit Report
To:

Board of Directors
TNC & Co.

From:

Sarah Balisacan
Engagement Partner
CSI & Co. Audit Firm

Date:

March 27, 2015

Subject: Report on the Review of Purchasing and Warehousing Functions

Company Profile
TNC Co. is a rising global manufacturer of home furnishings and garden
accessories based in the Municipality of Compostela in Cebu, the furniture capital of
the Philippines. With its pioneering stonecast manufacturing process as its core
competency, TNC Co. has become one of the prime movers in the stone casting
industry.
The nature of its design policy is to incorporate local abundant raw materials
into its product design, using its natural aesthetic values, while ensuring that these
raw materials are responsibly sourced with careful consideration of the
environment. Indigenous materials such as local stone, dead shrubs, and fallen
twigs and branches are processed and combined with other mix media using fully
integrated manufacturing methods to produce original innovative designs which are
executed with superior quality craftsmanship that have been very well received in
the world market.
The Company continues to diversify its product lines to expand its business
through continuous improvement of its production process, responsible use of
natural materials, and product quality. Presently the Company is the registered
owner of 23 Philippine Patents, and an International Brand. Out of these patents the
company has developed more than 4,000 mix media designs. In recognition of its
revolutionary design approach, TNC & Co. was a recipient of the Golden Shell Award
for excellence in Design and Manufacturing in December 2004, which was
personally awarded by Her Excellency President Gloria Macapagal-Arroyo

Introduction
We have conducted a review of the Purchasing and Warehousing functions of TNC &
Co. for the year beginning January 1, 2014 to December 31, 2014, as agreed in the
engagement contract.
The Companys Purchasing Department based in Compostela, Cebu is responsible
for procuring, at the best possible price, materials and supplies adequate for
production. The Company presentely has two warehouses located in Mandaue City.
They are used to store raw materials, auxiliary supplies and other resources needed
for production as well as semi-finished products and finished goods .
This audit report is the final deliverable of the engagement and contains our
findings and recommendations as well as the Managements response during the
exit conference held on March 25, 2015.
Objectives
Our overall objective is to render a report on the present internal controls over the
Purchasing and Warehousing functions of the Company, if such controls are
adequate and are being implemented by the Management and if the controls are
effective. This undertaking was performed in accordance with Philippine Auditing
Standards.
Scope and Methodologies
As had been agreed with the Management, the review focused on the Purchasing
and Warehousing functions of TNC & Co. We made our review to determine whether:
1. Inventory perpetual records are periodically reconciled with the results of an
actual count.
2. Oversight responsibilities are assigned over areas with minimum internal
controls.
3. Warehouses are organized in a way that facilitates easy retrieval, minimizes
storage and maintenance costs and complies with safety and hazard policies.
4. Materials and supplies are adequate to meet production demands in any
given time.
5. The Purchasing Department has set appropriate inventory reorder points and
efficiently orders inventories.
The review procedures were limited primarily to observation, inspection and inquiry.
The key tasks associated with the review involved reviewing TNC & Co.s
documentation, systems and processes, and interviewing TNC & Co.s Management
team and staff.

Findings and Recommendations

OBSERVATIONS/COMM RISK EXPOSURES

ENTS
1. No periodic inventory count done

RECOMMENDATIONS

For over six years now,

there had been no periodic
count of inventory items
stored in Warehouse No. 15.

Inventory shortages and

overages
may
occur
without being detected.

A periodic count must be

made once a year to
ascertain the accuracy of
the perpetual records.

There
had
been
no
reconciliation
of
the
perpetual inventory records
with the companys general
ledger.

Inventory records
not be accurate.

The
count
can
be
scheduled in parts so that
it will have minimum
disruption
on
the
companys operations.

may

2. Oversight responsibility on warehouse operations has not been

reassigned.
Oversight responsibility on
warehouse operations has
not been reassigned since
the downsizing
of the
companys
inventory
control division.
Our count in Warehouse No.
1
showed
that
the
corresponding
inventory
records exceed the actual
inventory
by
about
$3250000.

Prone
to
error
and
inaccuracy on inventory
records due either of
failure
to
record
or
recording of an inventory
more than once and even
recording of an inventory
thats not even there

Prone
to
theft
and
misappropriation of the
companys assets since
there
is
no
proper
oversight
on
the
warehouse and inventory
control personnel

Before fully automating

the inventory system,
inventory records should
first be reconciled with an
actual count and the
difference be accounted
for

Personnel
from
Purchasing
Department
should be assigned to
supervise and monitor the
companys warehouse.

3. No established policies for addressing inventory obsolescence

There are a number of

obsolete items that occupy
around ten shelves in the
warehouse

Increase
of
inventory
storage and maintenance
costs

A large space of the

warehouse
has
been
occupied by printed forms
and materials that are no
longer
used
by
the
company

Reduce any recoveries

the company may obtain
when the items are
disposed of
Inefficient
warehouse

use

of

Sell and dispose the

obsolete items for a
considerable amount
Adopt
and
establish
policies and procedures
regarding
inventory
obsolescence
Periodically inspect the
warehouses for obsolete
items

4. Out-dated inventory reorder points.

The Companys inventory
reorder
points
were
established about 20 years
ago clearly disregarding to
consider the current market
and production demands.
Purchases
Department
often make emergency buys
to address shortages and is
missing
on
volume
discounts since it could
have purchased in larger
volumes.

Big
possibility
of
inventory shortages and
even, inventory overages

Update the companys

reorder points based on
the current market and
production demands

Failure to take advantage

of
volume
discounts,
hence
inefficient
inventory purchasing and
warehousing

5. Inventory Catalogs are not updated regularly.

Inventory catalogs are not
updated for four years now.

Incorrect requisitioning of
supplies

Update inventory catalogs

regularly to reflect current
information regarding the
companys supplies as
well
as
current
information about the
companys suppliers

In the inventory catalog, an Increase cost and time to

item is said to be supplied fill agency requests
by 5 different companies
when in fact it is currently
supplied
by
a
single
supplier.
6. Inventories are not labelled and are not well-organized in the

warehouse.

Inventories werent labelled

correctly
and
werent
arranged in a neat and
orderly manner that would
facilitate
their
efficient
retrieval

Searching and retrieving

inventories can be timeconsuming
Poses
some
serious
safety and fire hazards.

Reorganize
the
companys
warehouse
and
establish
proper
locations for the various
inventories
Place regularly retrieved
items in the front and at
the lower shelves while
those that are periodically
moved may be placed at
the back and at the
higher shelves
Implement the Kaizens
5S: sorting, arranging,
cleaning,
standardizing
and maintaining

Management Response

Comments

Actions Taken

No inventory count done

Issues

The Company has a lot of

inventories to manage. It
has difficulty in scheduling
inventory count since it
would
disrupt
the
companys operations

Management has finalized

the
schedule
of
the
periodic
count
and
established a policy that
periodic count be made at
least once a year.

Oversight responsibility on
warehouse operations has
not been reassigned.

The Company is currently

in the process of procuring
a
fully
automated
requisition system.

The Logistics Manager has

inspected the warehouse
and the Company is now
in
the
process
of
reconciling records with an
actual
count.
The
Company is appointing an
independent personnel to
oversee
the
inventory
control personnels work.

No established policies for

addressing
inventory
obsolescence.

The Warehouses still keep

inventories
which
the
Company has no use for.
These inventories are still
kept
for
the
remote
possibility that they will be
needed.

Out-dated
reorder points.

inventory

The
Purchasing
Department Manager has
confidence in the current
inventory reorder point of
the company.

Inventory catalogs are not

updated regularly.

The
Management
is
currently
implementing
the just-in-time system
but failed to address the
need
to
update
the
inventory catalogs.

Inventories
are
not
labelled and are not wellorganized
in
the
warehouse.

The Warehouses receive

and release items several
items a day so its
inevitable
that
the
warehouse can be quite
rowdy.
The
Company
doesnt have the luxury to
hire several warehouse
personnel to label and
arrange all the supplies .

The
Purchasing
Department manager has
inspected the warehouse
for obsolete items and has
established policies and
procedures for identifying
and disposing obsolete
items.
The Company has started
consulting the Sales and
Production
Departments
and other professionals to
establish reorder points
which consider the current
market and production
demands.
The Company has updated
the inventory catalogs to
reflect
the
current
information on particular
inventory
items
and
corresponding suppliers.
The warehouse personnel
of the Company have
undergone training for the
implementation of the
Kaizen system.

Conclusion
The review team concluded that TNC & Co.s Purchasing and Warehousing functions
have significant risk exposures owing to lack of internal controls which have
adversely affected TNC & Co. operations over the past years. During the exit
conference, the review team had thoroughly discussed with the Management the
review findings and recommendations. In response, the Management had expressed
their intention to carry out the said recommendations.

This report is intended solely for the use of TNC & Co.s Management as guide in
establishing policies and procedures and in implementing necessary changes in its
Purchasing and Warehousing functions. It is not to be used for any other purpose or
to be distributed to other parties.

CSI & Co. Audit Firm

Sarah Balisacan
Partner
CPA Certificate No. 12345
SEC Accreditation No. 0608-AR-1 (Group A)
April 6, 2012, valid until April 1, 2015
Tax Identification No. 892-011-121
BIR Accreditation No. 03-141512-17-2014
April 11, 2012, valid until April 10, 2015
PRT No. 4235300, January 2,2014 Cebu City
March 27, 2015