Submitted By: Muntaha Nafis

Inventory ManagementAuditingINCLUDEPICTURE "http://www.classymommy.com/blog/uploaded_images/Pizza-Hut-Logo-780541.jpg" \* MERGEFORMATINET

Submitted to: Darrel Pereira

Institute Of Business Management

INTRODUCTIONPizza Hut first started operations in Pakistan by opening its first restaurant near Bank's Square on Mall Road in Lahore. It then expanded to Karachi and Peshawar. The maximum number of Pizza Hut outlets is in the thickly populated city Karachi. Now it also has restaurants in Faisalabad, Rawalpindi, Islamabad, Hyderabad, Quetta, Sialkot and Multan. The topping Chicken Tikka which is now used in franchises in India was first used in restaurants in Pakistan. The pizza served in Pakistan is Halal according to the Islamic law. Pizza Hut offers annually an "All you can eat" in the month of Ramadan, which is very popular in the country.

PRODUCTSThe following products are manufactured by Pizza Hut Chicken Wings Flaming Wings Garlic Bread Spicy Wedges Garlic Bread Supreme BBQ Chicken chunks Cheese Stuffers Bruschetta Pizza Hut Platter 2 Kebab Stuffers Pizza Hut Platter 1 Behari Chicken Spin Rolls Potato Skins Garlic Mushrooms Soft Drink Fresh Lime Mineral Water orange Juice Cappuccino

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DEPARTMENTSFollowing departments are engaged doing different tasks including the cooking staff and servers Cooking

Cooking department plays a very important role, as all machines are imported and have to be used accordingly as per the instructions given. The staff operating the machines is highly skilled and trained. Management

The major aim is to make sure everything is working right. Human resources

We provide intensive training for our franchisees, which encompasses practical on the job training as well as theoretical training. This training will incorporate many elements, most of which relate to the following areas as outlined in the Operations Manual that will form the basis of your day-to-day management tasks. New franchisees should prepare themselves for an uncompromising 3 to 4 months training and make adequate provision, both social and financial, for this period. This is especially important when taking cognizance of the fact that the training will be conducted at the closest pizza hut . This training is usually structured on a "6-days-a-week" basis and will cover the following:

General Restaurant Management; restaurant Administration; Personnel Management and Training; Customer Care; Safety and Security; Marketing; Restaurant Maintenance; Cleaning and Hygiene; Industrial Relations; Product Preparation and Presentation; Raw Material Management, and; General Business and Financial Management;

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Industry Operating ProceduresRestaurant Industry As a general rule full service restaurants are for the most part company owned with very little franchising. Fast food restaurants are heavily involved in franchising activities. Franchisees will pay a fixed per-cent of receipts to a franchiser for advertising and royalties. Some fast food franchisers will lease the structure to the franchisee for a monthly rate or a percentage of sales. Suppliers will help restaurant chains with marketing and advertising funds. It is not unusual for major suppliers to offer rebates or provide upfront payments to obtain exclusive supplier status. The internal controls of these chain restaurants are extensive; conversely individual independent restaurants do not always enjoy these controls over operations. Normally restaurants purchase from foodservice companies or they may purchase their inventory from a national chain commissary. Perishable goods are usually purchased from a local vendor. Four tip reporting programs are available for these taxpayers to enter into with the Service. Two of these pro forma documents are titled Tip Reporting Alternative Commitment (TRAC) and Tip Rate Determination Agreements (TRDA). The IRS developed the Employer Designed Tip Reporting Alternative Commitment (EmTRAC) Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs. Attributed Tip Income Program (ATIP) is a new three-year pilot program for food and beverage employers. The first annual basis begins January 1, 2007. Details and requirements for participation for employers and employees are available in Revenue Procedure 2006-30. GENERAL RAW MATERIAL ACCOUNTS The raw material received from different sources to put to production, are recorded under the following basic account headers.

Raw Materials purchased of credit Raw Material Accounts Payable (To record: Raw Material purchased on account.) Raw Material returns to the supplier on credit Accounts Payable Raw Material - Returns (To record: defective material return to the supplier.)

xxx xxx

xxx xxx

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Raw Material discount availed from the supplier on credit Accounts Payable xxx Raw Material Discount To record: the discount availed from supplier) Direct Material used in Production Work in process Raw Material (To record: the Direct Material used in production.)

xxx

xxx xxx

Direct Labor Cost Pizza Hut is one of the most famous international franchise in Pakistan. The costing system at Pizza hut is designed in a way that the cost of labor is recorded on a daily basis and the salaries are paid at the end of each month, as the labors are permanent. The branch manager is responsible to keep a check on cost recording. Let us take the example of the administrative dept., which is the most important dept of the restaurant. The average salary of the server is 3000 a month. Direct Labor applied to production Work in process Accrued Factory Payroll (To record: the direct labor applied to production) Salaries paid to labor Accrued Payroll Cash (To record: the salaries paid to labor) Factory overhead cost Factory Overhead is an integral part of overall cost computation. Factory Overhead Cost = Total Direct Material Cost + Total Direct Labor Cost Different costs covered under Factory Overhead account are; Electricity charges Pizza hut cooking Machines repair & maintenance xxx xxx

xxx xxx

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Carriage cost Indirect Material Indirect Labor Catering expenses cooking Based Machines and furniture fitting Depreciation Raw Materials safety and security cost Tea/Water for labors Stationary material etc. Uniform for staff

JIT (Just-In-Time) Pizza hut follows, the JIT (JUST IN TIME) method as well as they believe in keeping stock in store. It depends on the nature of the good.

JOB ORDER COSTING PROCEDUREAt Pizza hut, each job is assigned a specific code and the job number. The code is usually the same code as that of a product listed in menu card. The product codes are also available in the menu provided by the pizza hut, however different jobs are involved in the completion of a product, and the complete code helps to identify which product is at what stage of completion. In the same manner, different codes are assigned to different jobs and different products. The status of the product is acquired on the basis of Job Codes. The` sample Job Cost sheets for the above mentioned specific job is;

Job Order Sheet cooking Department (Code XXX) Description Quantity Actual Required Rs. Total (Rs.)

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Chicken Wings Side lines Beverages Total

Spice levels 4 options

hot Rice

400 120 150 670

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Job Order Sheet Machining (Code XXX) Description Frying steaming baking At Pizza Hut job order costing takes place and all orders are placed according to the requirement of the customer.

(work according to Your order places)

Factory Overhead Cost

ITEM XXX Department Sui gas charges Electricity charges Labor Total Average cost 10000 250000 250000 600000

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JOB ORDER COST SHEET

Job Order Cost Sheet For the year2009 Job # Chicken shuffle 21 chicken steak Direct Material 90 110 Direct Labor 40 40 Overhead 45 45 Total Cost (Rs.) 175 195

The above job order cost sheet is a sample cost sheet prepared for each order of most running item. The cost is broken according to the jobs involved in the completion of each item. From the above statement, the cost of completion of each job and the total cost of all the completed jobs for a order can be seen above.

AUDITING OF ACCOUNTSRaw Material Inventory The Raw Material received from different suppliers and places, is kept into the store houses. The raw material in the form of different woods, received from suppliers is weighted and properly noted by the store keeper. At the end of the month, an individual from the manufacturing factory visits the store house and compare the amount and weight received by the factory from the store house and the total ending raw material amount and weight in the store house. The amounts are verified by the comparison of books maintained by the factory and store houses. Finished Goods

A special warehouse is designed, where the make to order furniture is kept. The customers are informed when the product is transferred to the warehouse. Other products are designed for visitors at the display center; such products are not made to order. The verification of finished

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goods is based on the job order sheets prepared for the month. The job order cost sheets of completed jobs are compared with the physical counts of the finished goods present at the display centers, in the warehouse and the cost of goods transferred to the customers. The cost of completed jobs must be equal to the cost of the finished goods at different places.

Balance Sheet AccountsCash and Bank Balances The liabilities are reduced by issuing the cheques to different suppliers and other related parties. The salaries the factory workers are paid in cash and a salary register is maintained by the factory supervisor. The cash and cheques received by the customers are also recorded. The amounts are balanced and verified by comparing the salary journals with the job order cost sheets direct labor accounts. The comparison of bank balance and the voucher received by the suppliers are used to verify the payments made through bank. Accounts Receivables Many corporate Customers do not pay on delivery; their accounts are maintained by the Redwood furniture as account receivable. The cheques received during the month by different customers are deposited into the bank and the amounts received are verified through bank reconciliation. Fixed Assets The Fixed Assets includes heads like Property, Equipment, etc. The books are checked for any changes made in the Fixed Asset account which might arise from the buying or selling of a/some fixed asset(s). As for the German based sawing machines, the company uses straight line depreciation method for taking out the book value of the machines. The polishing and spray channels are also depreciated at a specific rate, and the book values are calculated on the basis of pre determined rate. Accounts Payable Accounts payable are generated when cost is incurred in acquiring any asset specifically raw materials. There are only few suppliers and contractors, which provide the raw materials and the transactions, are usually on credit. The settlements are made at the end of each month by issuing cheques to each supplier. Comparison of vouchers or bills received from the suppliers with the bank accounts verifies the accounts payable balances and other related accounts.

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Equity Capital As such, there is no specific debt financing, the business is almost financed by the owner himself (Equity Financed) but proper books are maintained to identify the amount drawn for personal or business use. The amount put into business by the owner is also recorded and verified. This step is very important for the authenticity of real income generated from the business operations.

Income Statement AccountsSales The sales account is verified by comparing it with the cash registered maintained by the Pizza hut to record the cash sales. The cheques received by the customers and deposited to the bank are also taken into account to compute the credit sales for a specific time period. Account receivable balances are also checked to compute the sales on credit and amount not yet received. The amount received in cash and in the form of amount transferred to bank is only considered as the sales for the specific period of time. Cost of Goods Sold The cost of sales is verified from the job order cost sheets. The total cost, including the direct material, direct labor and factory overhead cost from the job order cost sheet is compared with the cost of finished goods transferred to warehouse, display center and customers. This way the cost of goods sold and the ending balances are compared and verified. Selling and Distribution expenses There are number of sub accounts under this header, including salaries expense, transportation expenses, sales and promotion expenses, repairs and maintenance and miscellaneous expenses. All such cost are properly recorded and taken into account at the end of each period to arrive at actual net income. The verification is based on the bills and vouchers received from different parties and the journals maintained for few other accounts. As such no formal balance sheets and income statements are formed by the Pizza Hut; just the proper recording is maintained for internal use and proper costing of the items and business.

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INTERNAL CONTROL PROCEDURESFNANCIAL ACCOUNTING i. Evolution of auditing major influences of auditing ; nature and scope of auditing ; basic concepts of auditing ; role of evidence in auditing ; auditing techniques and practices generally accepted auditing standards ; the concept of materiality in auditing. Verification of assets and liabilities fixed assets, investments, inventories, debtors, loans and advances, cash and bank balances, debentures and creditors, provisions for taxation, proposed dividend and gratuity other items in the balance sheet ; verification of items in the profit and loss account ; contingent liabilities; disclosure of accounting policies, practice ; expenditure during the period of construction ; adjustments for previous year provisions of the Companies Act, 1956 regarding accounts. Nature of internal control, evaluation and audit of internal control internal control questionnaires; flow chart ; systems audit, internal control. Audit-in-depth statistical sampling in auditing. Use of ratios and percentages for comparison and analysis trends inter firm and intra firm comparison.

ii.

iii.

Appointment of statutory auditors auditors remuneration, removal, rights of statutory auditors, duties of statutory auditors, joint auditors, branch audits. Audit report report versus certificate, contents of the reports, qualifications in the report. Divisible profits relevant provisions of the Companies Act, 1956 and the Income Tax Act, 1961. Interface between statutory auditor and internal auditor. Nature and Scope of Internal Auditing financial versus operational audit; concepts of efficiency audit, propriety audit, voucher audit, compliance audit, pre and post audits. Impact of the Manufacturing and Other Companies (Auditors Report) Order, 1988 on the internal auditing functions. Organisation of the internal auditing function selection and training of staff assignment of audit projects, organizational status of the internal auditing functions; scope for audit committees. Planning the internal audit project: familiarization; preparing checklist, internal control questionnaires, audit programs.

iv.

v.

Verification of evidence detailed checking versus sampling plans, statistical sampling as used in internal auditing ; flow chart techniques Internal control nature and scope, internal auditor and internal controls Field work collecting evidences, interviews ; memoranda. Audit notes and working papers. Audit reports techniques of effective reporting; follow up of audit report. Summary

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reports of top management. communications in internal auditing improving auditor auditee relationship COST AUDIT i. Provisions relating to maintenance of cost Accounting record under the Companies Act; recording and audit compliance of cooperative societies Act, Customs & Excise Act, WTO, Antidumping processing, export import policy & special provisions of sick industries Act (SICA) etc

ii.

Nature, objects and scope of cost Audit The concepts of efficiency audit, propriety audit, management audit, social audit.

iii.

Appointment of Cost Auditor procedure for appointment , his rights, responsibilities, status, relationship and liabilities professional and legal under the Companies Act, 1956 (1 of 1956), the cost and works Accountants Act, 1959 (23 of 1959).

iv.

Planning the audit familiarization with the industry, the organisation, the production process systems and procedures, list of records and reports, preparation of the audit programme.

v.

Verification of records and reports utilization of statistical sampling methods verification of performance and statements maintained under the cost Accounting (Records) Rules.

vi.

Evaluation of Internal Control Systems Budgetary Control, capacity utilization, inventory control, management information system.

vii.

Assessment of the adequacy of the internal audit function.

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viii.

Audit notes and Working papers audit reports to management.

ix.

The cost Audit Reports contents of the Reports, distinction between Notes and Qualifications to the Report. Cost Auditors observations and conclusions.

x.

Professional Ethics and Code of Conduct.

xi.

Relationship between the Statutory Financial Auditors, the internal Auditor and the Statutory Cost Auditor.

xii.

Cost Accounting (Records) Rules under clause (d) of sub section (1) of section 209 (issued one year before the examination) and Cost Audit (Reports) Rules issued under section 233 B of the Companies Act, 1956 (1 of 1956). Critical study of the rules including the prescribed Annexure and proforma applicable to the industries covered.

xiii.

Review of Cost Audit Report by the Government: objectives, methods, follow up actions and disposal of Cost Audit Reports by the Government company and other end users of the Cost Audit Reports.

xiv.

Comparative Studies between cost audit and financial audit with special reference to disclosure of information to members, parliament and the general public.

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MANAGEMENT AUDIT i. Meaning, nature and scope, organizational needs for Management Audit and its coverage over and above other audit procedure.

ii.

Audit of the Management processes and Functions, such as planning, organisation, Staffing, Co ordination, Communication, Direction and Control.

iii.

Evaluation of Management Information and Control Systems with special emphasis on Corporate Image and Behavioural Problems.

iv.

Corporate Development and Management Audit, including operational and propriety aspects.

v.

Social Cost and Benefit of business enterprises with particular reference to developing countries.

vi.

Audit of social responsibility of management.

vii.

Corporate governance and Audit Committees.

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Perpetual SystemUnder a perpetual inventory system, a continuous record of changes in inventory is maintained in the Inventory account. That is, all purchases and sales (issues) of goods are recorded directly in the Inventory account as they occur. The accounting features of a perpetual inventory system are as follows. 1. Purchases of merchandise for resale or raw materials for production are debited to Inventory rather than to Purchases. 2. Freight-in, purchase returns and allowances, and purchase discounts are recorded in Inventory rather than in separate accounts. 3. Cost of goods sold is recognized for each sale by debiting the account, Cost of Goods Sold, and crediting Inventory. 4. Inventory is a control account that is supported by a subsidiary ledger of individual inventory records. The subsidiary records show the quantity and cost of each type of inventory on hand. The perpetual inventory system provides a continuous record of the balances in both the Inventory account and the Cost of Goods Sold account. Under a computerized recordkeeping system, additions to and issuances from inventory can be recorded nearly instantaneously. The popularity and affordability of computerized accounting software have made the perpetual system cost-effective for many kinds of businesses. Recording sales with optical scanners at the cash register has been incorporated into perpetual inventory systems at many retail stores.

Periodic SystemUnder a periodic inventory system, the quantity of inventory on hand is determined only periodically, as its name implies. All acquisitions of inventory during the accounting period are recorded by debits to a Purchases account. The total in the Purchases account at the end of the accounting period is added to the cost of the inventory on hand at the beginning of the period, to determine the total cost of the goods available for sale during the period. To compute the cost of goods sold, ending inventory is subtracted from the cost of goods available for sale. Note that under a periodic inventory system, the cost of goods sold is a residual amount that is dependent upon a physically counted ending inventory. No matter what type of inventory records are in use or how well organized the procedures for recording purchases and requisitions, the danger of loss and error is always present. Waste, breakage, theft, improper entry, failure to prepare or record requisitions, and any number of similar possibilities may cause the inventory records to differ from the actual inventory on hand. This requires periodic verification of the inventory records by actual count, weight, or measurement. These counts are compared with the detailed inventory records. The records are corrected to agree with the quantities actually on hand.

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