2015 Management Controls Project BackJe Philippines Inc

8/18/2019 2015 Management Controls Project BackJe Philippines Inc

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De La Salle University – DasmariñasCollege of Business Administration

Accountancy Department

MGAC306 Management Controls

Management Controls

Business Project for MGAC 306

Barney and Friends Members:Bagang, Jemely

Boquiren, Kristine DianneGallarin, Micah Danielle

Maratas, LyndonReyes, Ariane

Rusia, Jamella

Date Submitted:November 6, 2015 Group Grade: ____________________


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Table of Contents

I. Background…………………………………………………………………… 3

II. Executive Summary…………………………………………………………… 4

III. General Company Description………………………………………………… 5

IV. Management Controls………………………………………….……………… 9

V. Process Flowchart “As-Is”………………………………………………..….. 15

VI. Assessment and Recommendations…………………………………………… 22

VII Appendices…………………………………………………………………… 24


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I.

Background

As you hear the term Management Controls, the first thing that will come up in your mind is the internal

controls being applied by an organization in addressing daily business operations. Management control is

broader than that. Management controls pertains to the system which gathers and uses information to

evaluate the performance of different organizational resources like human, physical, financial and also the

organization as a whole in light of the organizational strategies pursued.

We, students enrolled in this course, expect to learn not only about the internal controls of the organization

but about how an organization will make sure that its operations are running smoothly by implementing

strategies and procedures. We students also expect that we are able to understand the organization in the

point of view of a management accountant. For a period of five months equivalent to a semester, theseexpectations were achieved. We learned about the factors to be considered in understanding an organization

especially the importance of it. We are also able to scrutinize the processes of an organization because of the

discussions being learned inside the classroom. The different activities provided by our professor also helped

us to further analyze the procedures, strategies, plans, processes, and controls of an organization. Moreover,

this course helped us not only to understand the system of a company but also to be an ethical person

especially in the field of business and finance.

Management controls plays a critical function in each organization, whether the organization is big or small.

The success of an organization does not just rely on its profitability and financial operations but also to the

effectiveness and efficiency of its management. It is the key driver that makes most of companies becomesuccessful. The typical problems in management controls that an organization is facing can be fraud, theft,

abuse of authority, malpractices, unintentional errors, and lack of cultural responsibility. The three main

causes of these problems are lack of motivation of employees, lack of direction, and personal limitations.

Thus, a well-structured management control system is a must to prevent the susceptibility of these problems

to happen. It is also important that its management control system be known to its constituents in order that

the operations are aligned to their controls. An organized management control system will contribute a lot to

the efficiency and effectiveness of the organization within in the industry it belongs to.

To apply what we have learned in this course, the group conducted a business/company analysis on Backje

Philippines Inc. Backje Philippines Inc is a trading company which is engaged in the sales of mechanical parts.

This paper discusses our analysis and evaluation of the chosen company’s internal controls, management

strategies and corporate governance. Basically, this paper is a written application of what we have learned

throughout this course.


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II.

Executive Summary

Backje Philippines Inc. is a specialized company in the field of EDM Supplies, Lapping Tools, Metal Working

Machinery, and other specialized industrial items and equipment. It was established in 2002 and was fully

registered in Security and Exchange Commission (SEC) in 2003. Pursuing to keep pace with the rapidly

changing world situations, Backje strives to supply best quality items and excellent services, as well as develop

new products with reasonable price and continuous innovations. Backje’s customers are composed of 40%

industrial companies and 60% local companies. The company exclusively distributes materials to its clients

giving it a competitive advantage to strengthen and grow its market share over competitors.

Backje – company name actually derived from Back to Jesus doesn’t only focus on striving excellent business

performances but also ensures that everything that they do is always lift up to God’s name. Being Christ-centered, nationality differences within the organization do not become a barrier for them to have

harmonious working relationships and deliver strategic goals. Mr. Hee Chun Yoo, a Korean native Chief

Executive Officer of Backje Philippines, fulfills the duty of overseeing and driving the company’s

performance by providing leadership and direction to senior manager. The senior manager, Ms. Ki Sun

Chung, in turn is the one who assigns responsibility for establishment of more specific internal control

policies and procedures to personnel.

In the Accounting Department, Backje is using a computer-based accounting system and processes

transactions in a real-time system. After the team’s analysis of the company’s current practices and controls,

specific areas or activities that need to be improved were identified. One is the integrity and reliability of theircomputer programs with which the team recommends that Backje should pay more attention to, since the

quality of their financial reports lies on the accuracy of accounting system they are using. In line with this, it is

of high recommendation for the company to invest in IT functions within the organization to address the

high risks associated with the heavy reliance on computer programs used in all its transactions. Currently, they

just purchase a particular system that is appropriate for a specific transaction, and if malfunctions happened,

the repair of the system will be outsourced. Having an IT function improves quality of general controls over

duties related to design, maintenance, and operation of computer programs thus delivering accuracy and

reliability of their recorded and reported transactions. Another weakness pertains to the delivery of unpaid

goods to customers with unpaid balances which can be addressed through implementing a strict regulation

regarding payment of customers. Lastly, lack of physical backups of important files due to computer-based

processing system can also be a red flag to the firm to have inadequate accounting records if unexpected

destruction of computer files happens, thus physical backups of important documents must be kept.

The team believes that applying these recommendations would address the aforementioned weaknesses and

would contribute to the company’s commitment to strengthen business presence in the industry it belongs to.


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III.

General Company Description

Backje Philippines Inc. is a specialized company in supplying EDM supplies, cutting tools, lapping tools,

measuring tools, machine tool accessories, lubricants, CNC machines and other industrial tools and

equipment. It is located at 2/F CAP Pension Bldg., Governor’s Drive, Brgy . Mabuhay, Carmona, Cavite. In

January 2003, Backje Philippines Inc. was fully registered in Security and Exchange Commission (SEC).

Its Mother Company, Backje Co. Ltd and sister companies Backje TS Co., Ltd and Backje EMT Co., Ltd are

all located at Seoul, South Korea. These companies export EDM wear parts, brass & copper tubes, filters, ion

exchange resin, diamond guides, EDM drill machine guides ceramic parts, rust remove liquid, brass wire, and

copper tungsten. Also, these companies are exporting and importing work from Backje Philippines Inc.

Company Vision

Committed to do all of our best to establish highest quality items, good services, fast quotation with the most

reasonable price, and learn more to suite our clients by providing them Quality Products.

Products

Wirecut Consumables

Includes items such as EDM spare parts, ceramic guides, TS guide set for Sodick K1c, Tapping Electrodes

for EDM, Brass/Copper tube Electrodes for EDM, Copper Tungsten, Finecut EDM Brass wire, Ion

Exchange resin, EDM filters, rust and carbon removers.

Doosan Infracore

A brand of Computer Numerical Control (CNC) machines that control the feed rate coordination, location

and speeds of other machines in the manufacturing sector. It is used in jobs that need a high level of

precision or very repetitive tasks. Other than normal CNC machines, Doosan Infracore also offers CNC

Turning Centers, CNC Multi-Axis Turning Centers, CNC Multi-Tasking Turning Centers, CNC vertical

Machining Centers, CNC horizontal Machining Centers and CNC Horizontal Boring & Milling Machines.

Conventional Machines

Includes items such as mini lathe machines and universal milling machines (WMI), super drilling EDM

Machines (ENTERTECHNOLOGY) and oil mist cleaners (YHB)

Korloy

A brand of Carbide Inserts and cutting tools.

Dinox

A brand of Tool holders, chucks and Collet


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Sang-A

A brand of Pneumatics such as air gun, polyurethane tubes, coiled tubes, one-touch fittings, couplers and

speed controllers.

Widin

A brand of cutting tools specialized in end mills, drills and reamers.

Vertex

A brand of machine accessories such as band saw machine, punch former, ER collets, Lathe centers, touch

point sensors and magnetic V-Blocks.

Daiwa Rabin

A brand of rubber abrasives such as mounted points, wheel types and square bars.

In-size

A brand of measuring instruments such as Vernier/electronic caliper, Vernier/electronic micrometer, profile

projector, dial test indicator, and digital indicator.

Jw-Chemicals

A brand of industrial chemicals such as Mold Releasers, rust preventive, multi-purpose ease oil, electrical

contact cleaner, rust remover, mold carbon cleaner, and degreaser cleaner.

SK Lubricants

A brand of bearing oil, EDM oil, engine oil, coolant, forming oil, grease oil, gear oil, hydraulic oil, industrial

gear oil, neat cutting oil, quenching oil, rust preventive oil, soluble oil, spindle oil and way oil.

Oh-Sung Midas

A brand of tool cabinets, tool pick-up, and clamping tools such as flange nut, plain clamp, flat washers, T-slot

bolt and stud bolt.

Shinhan Diamond

A brand of diamond & CBN wheels, carbide plates and carbide rodes.

Eight

A brand of hexagon wrench


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Organizational Chart


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IV.

Management Controls

Executive and General Administration Department

Executive and General Administration is the responsible department in managing all departments of thecompany. It has an overview of all the transactions happening in the company. Most of the time, theexecutive and general administration verifies the business operations. It is also responsible in planning andcontrolling as well as fixing disputes among the department. Furthermore, it also have the authority to know

who are the outside parties involved in the business operations. The following pertains to the areas ofresponsibility of executive and general administration department.

Suppliers and CustomersBackje Philippines only accepts company clients not individual clients in supplying materials. Its clients arecomposed of 40% industrial companies and the remaining 60% is composed of local companies. BackjePhilippines does not export materials to other countries but it imports 98% of materials from its suppliersabroad. The remaining 2% are from local suppliers.

Backje Philippines has short/long term supplier contracts with fixed amount of cost per certain volume ofitem that can be renewed or changed monthly or yearly. The delivery of items from abroad to its warehousedepends on both parties’ agreement whether the supplier or Backje will pay for the shipping fees. The partnershipping company of Backje in Manila will make the delivery to Cavite if ever the supplier’s shipping point isonly up to Manila. Local suppliers are paid in check while foreign suppliers are paid through bank to banktransfers.

On the other hand, customers of Backje only have purchase orders. The customers will give purchase orders with quantity and negotiated price. In collection of payments, the terms given to the customers depend on

their credibility to pay. New clients are required to pay cash on delivery. In order to avail credit to Backje, itsclients need to comply with its requirements in credit policy. First, the client needs to submit customerinformation sheet to Backje in order to analyze its capacity to pay. Then the client needs to submit therequired documents by Backje such as business permits, certificate of registration in SEC, mayor’s permit,bank reference, and financial statements. The client will be assessed of its capacity to pay by analyzing itsfinancial statements, whether it is profitable or not and by computing its return of investment to thecompany. Upon completion and approval of required documents, Backje will grant its client standard term of30 days.

These outside parties are known to executive and general administration because before these parties have atransaction with the company, it should undergo proper authorization process.

Management The head of each department in Backje Philippines is responsible for the processes made in theirdepartments. If ever there will be a problem, the head must handle it first and try to solve it by her/him.

Then if the head cannot solve the problem, the administration will handle it and try to solve it. If the problemcannot solved by the admin, the top management will involve themselves to solve the problem. Thecompany’s rule about solving problems is if the problem can be solved among themselves without involvingthe administration and the top management, then they must solve it without exaggerating the matter.


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Value of the businessBackje Philippines shows its growth potential by continuously expanding its offered products by acquiringcontracts and rights from foreign suppliers. Its product expansion helps the company to increase its revenue

and be known to other industrial companies. It also increases the demand for the company’s products. BackjePhilippines also focuses on providing high quality products by securing the company’s standards throughphysical inspections.

Human resource requirementBackje Philippines needs people that have soft skills aside from technical skills especially in HR, marketingand sales department. Soft skills are skills that characterize relationships with people. Human resourcesrequire people with communication, collaboration, adaptability, and problem solving skills since the companydeals with different clients in supplying industrial materials and equipment.

Finance and General Accounting Department

Part of the General Accounting responsibilities is reviewing, analyzing and recording the financial data for theBackje Philippines, Inc. The accountants are responsible for monthly and year-end closing of accountingrecords and preparing this information to the head management of the company.

The following are the tasks under General Accounting and Finance Department:

1. General Ledger

The company’s transaction on sale is always following the accrual basis, therefore they onlyrecord the costs

One of the company’s credit policies is to know first the financial capability of theirclient/customer to pay debts or liabilities. The clients will be required to give any of thesecustomer information sheets, business permits, and financial statements because this willserve as the company’s basis whether to allow a client to make a liability out of the company.

2.

Billings and Receivables

For the billing, the accounting department is the one who will record the account that isappropriate when a sale transaction happened; also the approval in the accountingdepartment should be done in order to verify the billing accounts with accounts receivableledger so to ensure that all payments are accounted for and properly posted.

Updating the Generate financial statements and reports detailing accounts receivable status isalso done as part of verifying the accounts receivables ledger of the company.

The accounting collections are updated weekly, since 80% of the clients are releasingpayments every Friday. Sales department is the one who picks up the collections.

3.

Disbursements

Whenever the company purchases a material, the accounting department will recheck if theinvoices are properly accounted and also the actual checks must be approved for the actualamounts to be paid. They are the one who will prepare for the amounts needed whether be iton cash or check, and then it will be remitted to the supplier.


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4. Financial Statements

In the accounting department, the cash flow management will be prioritized since it involvesthe daily cash flows of the company therefore, it is monitored every day. The trial balance,

balance sheet, and income statements are done every quarter since it couldn’t be done in justa small span of time.

The reconciliation is always done in a monthly basis, the sales account is reconciled to knowif the amounts are properly recorded and adjusted, also some other reconciliation accountslike those that are just typographical errors. As part of the BIR’s requirement, the company’sobjective is that the sales account should tally with the amount that was recorded by the BIRin order to know the correct taxes to be imposed.

Sales and Marketing Department

Backje’s Sales and Marketing Department consists of 14 salesmen, 5 after-salesmen, and 5 marketing

personnel. Since the main business of the company is trading, sales is very critical in its operations. Throughtheir salesmen, Backje establishes a close relationship with their customers in order to build confidence andloyalty in each other. The after-salesmen are tasked to aid in and address any item defects that the customermight experience during the course of the useful life of the item. The department is in charge of maintainingprior customers and seeking new ones for the growth of the company.

Sales and Marketing Department are in charge of the following tasks.

1. The sales and marketing personnel are the initial and succeeding contact of the customers.Consistency is the key in order to show customers that they are valued and being well attended to.

2.

The department is in charge of drafting strategic plans and reviews, implementing customer-servicestandards, and preparing action plans.

3.

The department shall meet marketing and sales financial objectives established by forecastingrequirements and prepared budgets. Variances, if any, are to be analyzed and sought with correctiveactions.

Manufacturing and Logistics Department

Backje’s logistics department is entrusted with the responsibilities of ensuring that the entire process oflogistics is maintained and developed in accordance with the goals of the company in economic cost. Thetasks of the logistics department involve storage, distribution, warehousing, movement of goods from oneplace to another (internally or externally), tracking and delivery of goods as efficiently as possible. Generally,Backje Company includes a complete process of planning, managing, controlling and coordination to make

sure that the goods reach the right place, at the right time, for the right cost and in a right condition.

Logistics Department performs major tasks.

1.

The department ensures that the goods are reached on time, in a safe condition and at the right place.It also serves as a middleman between organization, vendors and carriers for tracking down thegeographical location of the goods and thereby provides customer support.

A. 2 terminologies used in delivery:


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a. Inbound The supplier will be the one who will ship the goods and touchdown the dock nextto or alongside the vessel located in Manila. When the goods has been landed,

there’s an agency, in partnership with Backje, who will take the materials and send itoff to the company.

b. OutboundBackje’s assigned salesman is responsible of sending materials or goods directly tothe customer. When in the sense of urgency and there’s no salesman in the area, thecustomers themselves will pick up the goods from the warehouse of the company.

2.

The department is also responsible for coordination with suppliers with regard to scheduling,hedging and timely delivery.

Internal Controls

I.

Accounting and Reporting Process

AuthorizationBackje Phils. Inc. is using a computer-based accounting system. They do recording and journalizingof transactions in a real-time processing system. The transaction authorization in such system is anautomated task. The accounting team leader sees to it that the transactions being recorded andentered into the system are those that are valid, existed, have occurred and approved transactions.

Segregation of dutiesIndividuals having an access to cash of the company are separated from the ones responsible forupdating accounts receivable records or approving write-offs or adjustments. Responsibilities for the

approval of journal vouchers and correcting or adjusting entries are also segregated from preparation.In Backje, Sales Function handles all cash transactions, while Accounting Function performs therecording, summarizing and reporting of those.

Accounting recordsSpecial journals, ledgers, and other accounting records of Backje Phils. Inc. are digital. These digitalrecords are the basis for their financial reporting, thus the accounting team leader meticulouslyreviews every transaction before having it entered into the system. Even the hard-copy printouts ofthese digital records are being reviewed, since employees, aside from the accounting team leader,manually enters the figures into the system and there might be a possibility that amounts are recordedinaccurately, or not even recorded at all.

Independent verification The company performs daily cash flow management monitoring, thus day-to-day transactions arebeing reviewed and variances are daily recorded. Bank reconciliation is being done monthly.Reconciliation for other accounts such as sales, VAT, and company assets are also being conducted.

Actual sales figures are being reconciled with sales in BIR system on a monthly basis, as well as thetransactions that are subject to either zero-VAT or 12%-VAT. The reconciliation of assets, on theother hand, is being done every end of accounting period.


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II. Order-to-Cash Process

Transaction authorization

Backje Philippines ensure changes to customer data are valid and properly authorized. It also ensuresthe credits are authorized and adhere to company policies. Backje conducts credit checking beforeaccepting the orders of the client. It should be within credit limits and terms before the order isprocessed. Also before the products are being dispatched, the warehouse department authorizes thedelivery by first approving the sales invoice prepared by marketing department. In this way, alltransactions are known and are properly authorized to prevent anomalies in processing the salesorder of the clients.

Segregation of dutiesBackje Ph practices segregation of duties in processing orders from clients. Once the order reachedthe accounting, accounting will check if the material is available through the automated record beingupdated by the warehouse department. If the order is complete, it is forwarded to marketing to

prepare the sales invoice. Simultaneously, the warehouse department will prepare the delivery receiptindicating that the material is ready for delivery. Right then, the accounting will update the accountsreceivable ledger. This emphasizes the segregation of duties in receivables and invoices.

Accounting recordsBackje’s accountants make sure that all involved departments have copies of the sales order and theaccounting has a copy of sales invoice coming from marketing and delivery receipt coming from

warehouse. These documents will serve as the source in tracing the transaction once problem arises. Also, it is good that Backje have automated records for safekeeping so that retrieval of these sourcedocuments will be easy in times of emergency.

Safeguarding of assetsBackje’s way of safeguarding the assets especially the cash payments of clients is by maintaining a

bank account wherein all payments of clients are being deposited. In this way theft of cash will beprevented because authorized personnel only have the access to this bank account. Also, by assigningpersonnel in warehouse apart from other departments is a way of safeguarding their productsbecause the functions are not being handle by same person or department. Moreover, Backje is verystrict in showing the actual product; they provide product catalogs instead of actual products toprevent the possible theft of these materials since it may serve as an excuse for clients and warehousepersonnel in getting products from the storage.

Independent verificationBackje verifies its transactions by updating accounting records and reconciling source documents.Real time recording of transactions also helps the company to verify transactions because if an erroror discrepancy occurred, it can be determined instantly. Lastly, there is comparison made in the

source documents provided by marketing, warehouse, and accounting to see if the orders have beenmatched.


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III. Purchase-to-Pay Process

Transaction authorization

Backje Company maintains accountability in terms of authorizing, reviewing, and approvingprocurements based on signed agreements, terms and conditions, and purchase orders in compliance

with the ethical buying practices and policy.

The owners are the ones who review and update signature authorizations periodically. Anyof them (3) could sign the check for payment of purchases for the supplier.

The Purchasing obtains final approval of purchase order to be sent to the

The authorized personnel in the warehouse, accounting, and purchasing, respectively, verifypurchase order and invoice information.

Accounting is authorized to reconcile ledgers for accuracy of recording buying transactions

Segregation of dutiesBackje Company ensures proper segregation of duties, and assigns related buying functions to

different authorized personnel. With proper segregation, no single person has complete control overall buying activities.

Current PracticesPurchasing

Checks inventory level

Approves purchases

Has the direct contact to supplier

Warehouse

Receive orders

Performs inventory counts

Ensure the security of materials

Accounting

Monitors the buying transactions to ensure that invoices are paid in a timely manner.

Reviews and reconciles financial records

Approves invoices for payment

Accounting recordsBackje Company practices timely review of supplier’s invoice, packing slips, and purchase orders. Since their mode of payment is in the accrual basis, they ensure the accuracy of theinformation for prior payment, correct quantity ordered, and price charged. Moreover, accountingdepartment executes monthly ledger reconciliation to find improper charges and validate appropriatefinancial transactions.

Reviews supplier invoices for accuracy by comparing charges to purchase orders.

Verify that the materials acquired from the supplier have been received and record buyingtransactions in a timely manner.

Perform monthly reconciliations of operating ledgers to ensure accuracy and timeliness ofexpenses.


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V. Process Flowchart “As-Is”


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VI.

Assessment and Recommendations

Accounting and Recording Process

The group recommends the management and accountants of Backje Philippines to pay more

attention about the integrity of the computer programs that perform their day-to-day tasks and

operations. Quality of general controls over segregation of duties related to design, maintenance and

operation of computer programs must be of great concern since the quality of their operations lies

on the accuracy of accounting system they are using.

Controls that restrict unauthorized access to the computerized system must be implemented such as

passwords given only to those responsible levels of management, since digital accounting records are

vulnerable to unauthorized and undetected access.

Physical source documents must also be developed for backup, because destruction of computer files

can leave a firm with inadequate accounting records.

An independent committee must be established to perform control activities of ensuring that

financial statements are reliably reported in compliance with the company’s reporting standards and

policies and in accordance with the adjusting and closing journal entries.

Aside from the recommendations for Accounting and Recording process, the following are the weaknesses

with corresponding recommendations for Backje Philippines Inc.

Weakness: Delivering unpaid goods to customers who still have credit balance

Since Backje Philippines Inc. supply goods to customers, there are some instances that the company will allow to deliver the goods even if the customers still have a credit balance. The customers mighttake advantage of the situation by not paying it at all due to unexpected insolvency. In effect, there

will have a large amount of pending balances from these customers that will affect the cash flowmanagement of the company.

Recommendation: There should be a regulation in the company regarding the payment of

customers. Before the customer can claim the goods, the company must have the copy of the officialreceipt verifying the payment. However, if a partial payment has made the customer should pay atleast 50% down payment. Another way is to automatically notify the customer about the pendingbalances.


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Weakness: No physical backups of important files and documents due to computer-file based processing system.

Backje Philippines Inc. uses a computer-file based processing system in all of its transactions that led

to some of documented files being not prioritized at all. Using this kind of system has also its

limitations such as data redundancy, data inconsistency and data dependency.

Recommendation: The company should have at least physical backups of their important

documents, and it is better if these documents are segregated properly according to its transactions

especially the company’s expenses as these will serve as their basis in verification and recording of

amounts.

Weakness: Having no IT functions in the company.

Backje Philippines Inc. does not avail an IT function inside the company; instead they just purchase a

particular system that is appropriate for a specific transaction, so if some malfunctions happened, therepair of the system will be outsourced.

Recommendation: As a company which have transactions from suppliers abroad and with clients

locally, IT function is essential and must be implemented in the company since large transactions are

being addressed. Having an IT function implements systems and services, drives projects and tasks to

completion and actively seeks solutions to any and all obstacles and analyzes major system

applications to identify and document complex business and technical requirements to solve

customer business needs in a cost-effective manner.


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VII.

Appendices

Products offered by the Company


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After the interview with accounting head Mr. John Michael Cosme and owner Mr. Timothy Yoo last

October 16, 2015.

Documents

2015 Management Controls Project BackJe Philippines Inc