UNITOM LTD. is a company specializing in the manufacturing of Fast Moving Consumer Goods (FMCG). It supplies its products to leading departmental stores in Dhaka and Chittagong. The company has a paid up capital of Tk. 100 Million. The company's shareholders happy with its overall performance and have recommended a substantial dividend for the last three years. The company also has an Audit Committee and an Independent Director, who have pointed out certain areas, which you as an auditor need to look at. Background The company has two factories, one in Tongi and the other in Savar. Most of its raw materials are imported from different European countries. Although initially in 2010 and 2011) most of the imports came by ship, during the past 3 years they have mostly been air-freighted. This has increased the production cost by about 30%. Additionally, cost of labor has also increased; and wages have gone up by an average of 8% to 10% over the last three years. Inflation in the country is running at about 7.5%. Corporate tax rate has gone up by 5.5% in the past 3 years and not stands at 30%. The company has enjoyed tax holidays in its initial years. Factories As mentioned above the company has factories in two locations. The Tongi factory, is housed in an old building and has around 800 employees, including about 150 temporary workers. The building is 4 storied with a single staircase. There is no fire escape. Also, both factories need urgent renovation; however this could be costly and the company's present cash flow would not be sufficient. Savar factory has about 1,200 employees out of which temporary workers number about 250 there. Temporary workers at both locations are on Master Roll. The company's Administration department which is located at the Tongi factory maintains personal files of most of the permanent employees of both the factories. Some of employees do not have personal files as yet. There are no records / files of any kind for the temporary workers. Corporate Head office is also located in the Tongi factory. The company requires temporary workers on an ad hoc basis i.e. whenever so demanded by the factories. Marketing Department Unitom Ltd. has a Marketing department consisting of a senior manager, few Marketing Executives and a Sales force of about forty. The department also has a few intern students. Each year the Department sits with the company's Top Team and finalizes the forecasts for next year. The forecasts are then broken down into four quarters and given to the factories for production. The Production departments do not prepare their production schedules until about a month and a half before the products are required. Raw materials purchases are then ordered and workers are deputed. As most of the raw materials come from known sources and come in by air, goods can be supplied to the stores on time. Audit findings The Tongi factory has imported state of the art machinery. Profitability of the factory is however not very high. The Savar factory's performance was good, but there were certain areas which needed looking into. On closer examination the following was found:- Raw material stock in hand in both factories was for 7 days; finished goods stock in hand was 4 days and WIP could be converted to FG in 2-3 days. b. Production scheduling was done weekly and orders placed accordingly for the following week's production. Labor was fixed. Sales orders could be had from the Govt. for its various hotels and guesthouses, which would improve the overall profitability. d. Dept. stores were given both cash and bulk discounts. Cash discounts were rarely taken. On an average, accounts receivable came in after 30 days. f. All expenses were paid off monthly, except raw materials where payment was made according to LC conditions g. Collection from the dept stores were sometimes late in being banked, b. The company enjoyed an overdraft(OD) facility from its bankers. Recently the bankers have informed Unitom Ltd. that their inventory valuation needed to improve, if they were to continue with the OD facility. a. c. e a i. Management had installed new toothpaste making machines at its Savar plant. This was done in June 2013and the machines became operational three months later. Depreciation charge was calculated for the whole year and apportioned in the following ratios: ........ 25% to production ......ii. 35% to administration iii. 25% to marketing ...iv. 15% to procurement j. In 2013 a substantial amount of raw materials was gutted by a fire in one of the factories in Tongi. The accounting entries done to record this incident were: Dr: COGS Cr: Inventory (Raw Materials) Control Account. (As the inventory was not insured against fire, no further accounting entries were made). k. The company has large holding of land which its sponsors purchased and subsequently transferred to company's name about 15 years back. No further purchase or valuation has been done since then. 1. The company's cashier retired after 5 years in the job. His resignation dues were promptly paid by the company. However it has recently come to light that many of the cash memos and bills he had paid during the last four months of his tenure were to suppliers nobody had heard of and for goods for which there were no Goods Received Notes (GRN) from the factories. m. During the tenure of the above cashier, daily cash statements were not regularly prepared. This was found out during an Internal Audit check held well after the cashier had left. Management is planning to raise fresh funds by going for an Initial Public Offering. The company is presently a private limited company. It has not been regular in holding AGMs over the last 3 years. n. Required As the company's auditor , you are required to look at the above from an audit viewpoint and let the company have your comments. (Highlight the Issues, Consequences and Suggestions) UNITOM LTD. is a company specializing in the manufacturing of Fast Moving Consumer Goods (FMCG). It supplies its products to leading departmental stores in Dhaka and Chittagong. The company has a paid up capital of Tk. 100 Million. The company's shareholders happy with its overall performance and have recommended a substantial dividend for the last three years. The company also has an Audit Committee and an Independent Director, who have pointed out certain areas, which you as an auditor need to look at. Background The company has two factories, one in Tongi and the other in Savar. Most of its raw materials are imported from different European countries. Although initially in 2010 and 2011) most of the imports came by ship, during the past 3 years they have mostly been air-freighted. This has increased the production cost by about 30%. Additionally, cost of labor has also increased; and wages have gone up by an average of 8% to 10% over the last three years. Inflation in the country is running at about 7.5%. Corporate tax rate has gone up by 5.5% in the past 3 years and not stands at 30%. The company has enjoyed tax holidays in its initial years. Factories As mentioned above the company has factories in two locations. The Tongi factory, is housed in an old building and has around 800 employees, including about 150 temporary workers. The building is 4 storied with a single staircase. There is no fire escape. Also, both factories need urgent renovation; however this could be costly and the company's present cash flow would not be sufficient. Savar factory has about 1,200 employees out of which temporary workers number about 250 there. Temporary workers at both locations are on Master Roll. The company's Administration department which is located at the Tongi factory maintains personal files of most of the permanent employees of both the factories. Some of employees do not have personal files as yet. There are no records / files of any kind for the temporary workers. Corporate Head office is also located in the Tongi factory. The company requires temporary workers on an ad hoc basis i.e. whenever so demanded by the factories. Marketing Department Unitom Ltd. has a Marketing department consisting of a senior manager, few Marketing Executives and a Sales force of about forty. The department also has a few intern students. Each year the Department sits with the company's Top Team and finalizes the forecasts for next year. The forecasts are then broken down into four quarters and given to the factories for production. The Production departments do not prepare their production schedules until about a month and a half before the products are required. Raw materials purchases are then ordered and workers are deputed. As most of the raw materials come from known sources and come in by air, goods can be supplied to the stores on time. Audit findings The Tongi factory has imported state of the art machinery. Profitability of the factory is however not very high. The Savar factory's performance was good, but there were certain areas which needed looking into. On closer examination the following was found:- Raw material stock in hand in both factories was for 7 days; finished goods stock in hand was 4 days and WIP could be converted to FG in 2-3 days. b. Production scheduling was done weekly and orders placed accordingly for the following week's production. Labor was fixed. Sales orders could be had from the Govt. for its various hotels and guesthouses, which would improve the overall profitability. d. Dept. stores were given both cash and bulk discounts. Cash discounts were rarely taken. On an average, accounts receivable came in after 30 days. f. All expenses were paid off monthly, except raw materials where payment was made according to LC conditions g. Collection from the dept stores were sometimes late in being banked, b. The company enjoyed an overdraft(OD) facility from its bankers. Recently the bankers have informed Unitom Ltd. that their inventory valuation needed to improve, if they were to continue with the OD facility. a. c. e a i. Management had installed new toothpaste making machines at its Savar plant. This was done in June 2013and the machines became operational three months later. Depreciation charge was calculated for the whole year and apportioned in the following ratios: ........ 25% to production ......ii. 35% to administration iii. 25% to marketing ...iv. 15% to procurement j. In 2013 a substantial amount of raw materials was gutted by a fire in one of the factories in Tongi. The accounting entries done to record this incident were: Dr: COGS Cr: Inventory (Raw Materials) Control Account. (As the inventory was not insured against fire, no further accounting entries were made). k. The company has large holding of land which its sponsors purchased and subsequently transferred to company's name about 15 years back. No further purchase or valuation has been done since then. 1. The company's cashier retired after 5 years in the job. His resignation dues were promptly paid by the company. However it has recently come to light that many of the cash memos and bills he had paid during the last four months of his tenure were to suppliers nobody had heard of and for goods for which there were no Goods Received Notes (GRN) from the factories. m. During the tenure of the above cashier, daily cash statements were not regularly prepared. This was found out during an Internal Audit check held well after the cashier had left. Management is planning to raise fresh funds by going for an Initial Public Offering. The company is presently a private limited company. It has not been regular in holding AGMs over the last 3 years. n. Required As the company's auditor , you are required to look at the above from an audit viewpoint and let the company have your comments. (Highlight the Issues, Consequences and Suggestions)