Internal controls are policies set out by management to ensure that processes are conducted in an effective, efficient, and accurate manner.
The aim of the controls is to manage activities and processes as undertaken by human force in such a way that they comply with accepted code of conduct in the organization.
This paper, in the form of a case study, discusses the weak-point of Alden Inc. and recommends strategies that can be adopted to improve the internal controls; it will focus on purchases, receipts, storage and issuance of raw materials.
Weaknesses of the controls adopted
In the control of raw material, the company has a weakness that production foremen/supervisors have the power of orally asking for the delivery of materials and the requested be accepted. When such a move happens, then Alden Inc lacks proper documentation thus the materials can be mishandled or misused.
The storeroom has no record management and stock movement sheets; they are not aware of the products that were brought into the store as well as those that have been used or ordered; this is likely to lead to accountability issues.
Despite making physical counts under a well-supervised environment, after the count, the company has no parameter to gauge the counts with; they are likely to give it a rough figure and likely to believe the outcome as the truth.
The process of reorder that the company has adopted is not an effective one; it seems to be working on guessing of the time that stocks may need to be ordered, since it only happens after there has been a count. This risks the company from having stock shortage and experiencing production difficulties.
After the reorder level has been sent to the accounts department, the department goes ahead and processes the order then sends it t the last supplier. In this, there is a likelihood that the company will buy substandard goods (if the supplier offers goods that are of low quality) and they are likely to buy goods at an expensive price if the buyer is such a seller.
The company does not look back on the previous purchases and see the rate at which they met the needs of the company; they go ahead and buys the product from the same trader.
Although at receiving there is verification of merchandise, the company only uses the deliver note to make physical counts; the company suffers the chances that they have received goods that they never ordered for in terms of quality, quantity and even composition. This will be aggravated since they do not have a document on their side to compare with.
Recommendations
To discuss the recommendations, this paper will handle every part on its own:
- Issuance of raw materials
Foremost, Alden Inc should ensure that there is proper documentation of all its processes, there should be nothing like an oral order from programs foremen/supervisors; on the other hand, when the stock has been offered from the store, the store men should authorize it.
It should not seem like an order from the production department should be express, on their part, there is need for proper documentation and appropriate records set.
- Receipt of raw materials
After the delivery of raw materials, the documents should be on the table to verify, them, they are delivery note or venders note of lading, and the order documents (quotation).
The store men under proper supervision should ensure that the documents match in the form of quality, quantity, size, and price. An assumption that the process is clean and transparency should not be made; if possible or any complication arises, there may be need to consult the production team to authenticate that the products delivered are the ones requested.
- Storage
The store managers should devise the best method of recording and accounting for their stocks at hand, some methods they can use include FIFO, LIFO and weighted stock accounting method. When suing either, they should ensure that the products from easily from the store that no one time there will be spoilage of stocks bought first. The use of FIFO method of delivery is crucial.
- Purchases
The first issue with purchases comes with when the purchase will be made, Alden Inc makes a purchase after considering the reorder level and the amount of material remaining; such a move should be revised and have a track down of the movement of products; this will allow them know at which moment they should be making a purchase.
Although the way it done with Alden Inc has not been elaborated, the best way of knowing the amount of products to order is through the analysis of the movement of a particular product, if the product is moving fast, then higher number of products should be ordered to be able to equate them with the next reorder level.
When ordering, there should be no assumption that the last supplier has the right commodities; the company should get into the market and look for a better deal; there are chances that some other companies are offering better terms, higher quality at better prices; this can only be known through suppliers’ survey.
A documentation of suppliers and the previous experiences that the company has had with them is also crucial. Before choosing the best supplier, it is crucial to consider the inputs of the production department; since they are the ones to use the products, they can offer some sound information that will assist the company to make better products.
As an overall recommendation, Alden Inc should adopt computerized internal control system; under this system, the company will have an integrated supply chain management. A supply chain management policy allows the company to after physical verification of materials delivered to input them in the computer database; every time the production department is making an order, then they do it through the system.
After receipt and confirmation by authorized store man, then the materials ordered are released and proper documentation made. Both the store and the receiving department should show their products receipt consent with the system and on paper.
An integrated/computerized inventory management system has a set reorder level that when reached, the system advises the store managers to make a purchases order. When having different stocks, the system can be planned to analyze individual stock movement and offer more informed advice to the store-manager to facilitate less often ordering.
The system can also keep a record of previous suppliers’ experiences to assist the accounts department choose the most appropriate supplier; it considers parameters like reliability, costs, and quality.