Identify at least five (5) internal control weaknesses and explain the reason why these are considered weaknesses and for each weakness identified, give recommendations to remove such weakness.

Lunas Corp. manufactures medical equipment. This is a capital-intensive industry and investments in fixed assets exceed P20 million a year. The minimum cost for production equipment is P500,000. When supervisors want new production machinery, they contact the plant manager. The plant manager, regardless of amount, approves or denies solely the request based on discussions with the production supervisor, the repair and maintenance supervisor, and the quality control supervisor. The production supervisor can present his proposal in any matter he sees fit and which will convince the plant manager of the need for the equipment.

Once a proposal is approved, the production supervisor will submit the approved proposal to purchasing who in turn prepares a purchase order. The purchase order is sent to one of the three major suppliers of production machinery for medical equipment. The equipment is delivered immediately to the production floor and put into service. At the end of the month, the production supervisor informs the general ledger clerk about the receipt of the machinery and forwards the supplier’s invoice to them. The general ledger clerk establishes liability for the purchase and an asset record is created for the machine. At the end of the year, the general ledger clerk computes straight-line depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded as a direct reduction of the asset cost.

The repair department performs routine maintenance on all of the production equipment. Occasionally the repair department rebuilds a machine to extend its useful life. All of the costs associated with the repair department are charged to manufacturing overhead. When a machine becomes obsolete, production employees move it to a corner of the factory floor and break it down so that parts can be used in other machines.

The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed assets can be located and identified. Other assets have serial numbers that are inaccessible, so the item cannot be matched to a fixed asset record. For unmatched assets or machinery that cannot be located, the production supervisors are consulted as to the status of that unaccounted equipment. Reasons given are noted in the asset record and the depreciation recording for such assets continues. At the last inventory, the general ledger clerk did not make any adjustments to the fixed asset records explaining that 75 percent accuracy in the fixed asset physical inventory was acceptable.