Managem

ent
[None]
Letter
Report
Ref Heading Point

Title Weakness
{000458E1- Financial Management Use of Lock Box for Cash The Company does not implement a lock box
1B40-42CC- Receipts system for cash receipts
BC83-
19F653A8DF03
}
{0042BA74- Cash, Cash Receipts and Excess number of bank The company has a practice of tracking various
87B2-4BC1- Disbursements accounts projects by establishing separate bank accounts.
9BCD-
37EBFA1BB7F2
}
Title Weakness
{00D30C5D- Payroll, Personnel and Adoption of junior stock plan The Company currently offers stock purchase
A579-4CE1- Compensation or stock purchase plan opportunities to key officers and management
AF61- personnel through restricted stock options and
65517DA6C04 incentive stock options. But these opportunities
7} are not available to all employees.
{0117D188- Accounts payable, purchases No formal levels of purchase There are no formal levels of approval for
6E25-4253- and accrued liabilities order approval authority purchases
90DF-
EBE2791F7991
}
Title Weakness
Title Weakness
{015D11AE- Cash, Cash Receipts and Cash Disbursements - access All staff have access to the company's blank
A0A0-4C49- Disbursements to the cheque book cheque book.
8FC1-
51F61FAB401C
}
{02748F23- Accounting Procedures Written accounting policies During the course of the audit, we discovered that
C407-4722- and procedures there are no formal policies and procedures
AC8B- documented for the benefit of accounting
F225B72BE7D6 personnel.
}
 Title Weakness
{029640DE- Cash, Cash Receipts and The petty cash fund carries a substantial balance
4010-4CFD- Disbursements and the activity in this fund is significant.
ACA7-
A92E82625A7A
}
Title Weakness
{02D47ACE- Inventory Inventory management The Company does not use computer systems to
BCEE-4763- technique not requiring manage its inventory.
9F2C- sophisticated computer
7FFD69F9EB4E system
}
Title Weakness
{031F3654- Inventory System unable to determine The present standard cost accounting system does
8922-47F5- individual product costs not determine individual product costs.
A7F1-
B67B47625BA
3}
Title Weakness
{032E374A- Accounts payable, purchases Detailed accounts payable The accounts payable listing identifies the
1347-41C9- and accrued liabilities listing aggregate balance payable by vendor and does
AD3C- not provide a detailed listing of outstanding
FF1EDAFDD76 invoices.
7}
{05DE539B- Scrap Scrap levels not accounted for During a plant tour and subsequently reviewing
7C29-4E03- expenses, we noted a large scrap expense that
AD91- was primarily unsupported by detail. Scrap is
2ADCA807C16 considered in the cost builds of each quote as an
5} estimated expense that is quantified as a percent
of total production

{08031862- Other Through our audit procedures, we discovered

CCAF-4470- several transactions were not properly
82F0- documented and that adequate support was not
A1FF9299B63A available. Specifically this was noted in relation to
} fixed asset disposals and inter-bank transfers.
Title Weakness
{0847E0E5- Fixed Assets There is a lack of record keeping procedures in
1861-4723- place
A2F1-
4FC00DC96BB
4}
{08CEBD1C- Internal audit The Company has made acquisitions in recent
B43E-4AB8- Title years and has expressed an interest in making
Weakness
936F- additional acquisitions. These operations are
E411571BF417 decentralized and receive overall direction from
{08DE94A9- Accounting Procedures Protection of accounting Current records are not stored in secure locations.
3A1A-4B46- records from fire and water
8E61- damage
DA3EEF3CF16
D}
{09DCA07E- Cash, Cash Receipts and Unattended open vault/ petty The vault/ petty cash tin is easily accessible and
3159-49CD- Disbursements cash tin left open and unattended at times.
AFE8-
2E530C554C0
C}
{0A0E98DE- Accounts Receivable and Authorisation of corrections to Unapproved changes may be made to cash
B291-4073- Sales cash register tapes register tapes. A store employee may prepare the
A037- change forms but they may not be approved by an
1A1E114E63C appropriate official.
D}
{0AC7FBF4- Payroll, Personnel and Enforcing use of vacation time A number of employees had substantial amounts
08D0-4EE8- Compensation of accrued vacation and a history of taking very
9AFE- little time off.
5349577FBA36
}
{0ACA728C- Inventory Physical inventory procedures No inventory tags were prepared for obsolete
72FF-4933- inventory items that were included in the physical
921D- inventory at X company.
DAA70E26771
2}
Title Weakness
{0D89F169- Cash, Cash Receipts and Cash Receipts- endorsement The company does not restrictively endorse
D978-4BA9- Disbursements of cheques upon receipt cheques received for customer accounts at the
A2DF- point of receipt.
C98842F6EDD
9}
{0DE8F30B- Accounts Receivable and Approval of corrections to Adjustments to customer accounts are often
F906-43B1- Sales customer accounts prepared by bookkeeping personnel without
A92D- approval. Many of these adjustments are
D6C85A51C49 corrections of improperly entered data. The
4} controller is not fully aware of the number of
transactions that must be re-entered because of
bookkeeping input errors.

{0ED8C251- Other Adequate Control and Support There are no formal procedures for preparing,
9A5C-4F65- for Journal Entries reviewing and controlling journal entries.
A9A1-
02C0DD647F9
D}
{101B06E0- Financial Management Reduction in size of cost The Company's present cost centres are too large
0E86-4BEB- centres to permit better to allow for proper cost and revenue allocation.
8508- analysis of variations
C20222F74BD
2}
Title Weakness
{129C0550- Cash, Cash Receipts and Limiting custody of unissued The majority of the clerks in the accounting
8709-4582- Disbursements cheques department who have disbursement and bank
A711- reconciliation responsibilities also have access to
89EE98F68533 unissued cheques.
}
{13634B26- Cash, Cash Receipts and Cheques are being issued out of numerical
0B04-4CDC- Disbursements sequence.
894A-
F36C3BC12581
}
Title Weakness
{14A95894- Financial Management Implementation of Budgeting Budgets are not regularly used for forecasting and
3A13-479C- Process analysing expected versus actual sales and
8AFD- expenses. Where budgets are used information is
40D392ED35D not taken from all relevant sources, such as the
B} production team and sales force.
Title Weakness
{15B9E089- Payroll, Personnel and Internal control in the payroll system is limited
EAC9-4D2E-
{1736DDB8- Compensation
Tax matters Travel and entertainment because of
Expense a lack reporting
account of segregation of duties
for travel and among
9701-
26D8-48DE- expense reporting the personnel. expenses
entertainment For example,maypayroll
not bechecks are
in conformity
B245CBB7F8F4
B97E- prepared, signed
with minimum and distributed
standards byauthority.
of the tax the same
}
1D593601D3E person; time reports for hourly employees are
D} submitted by warehouse managers who, in turn,
distribute the payroll checks.
Title Weakness
{177FBC10- Debt/Leases The Corporation has entered into a lease
275D-43FE- agreement for personal computers which allows
AC69- the Corporation to continuously update its
BA796AF77532 hardware on a rotational basis over a relatively
} short period. However, the terms of the lease
appear more favorable for the lessor, the total
lease payments exceed 90% of the computers' fair
market value and the lease term exceeds the
{17E0D529- Fixed Assets Physical tracking of property, expected
Currently,useful life no
there are of current computer to
formal procedures
B327-46CA-
{19D02201- Cash, Cash Receipts and plant Receipts-
Cash and equipment
controls over technology.
physically
Cash trackused
registers fixedatasset
storesitems.
do notPhysical
have control
BBAC-
9D9D-453E- Disbursements cash registers over fixed built-in
adequate assets typically
controls. involves an observation
FBFE39D3B5D
A4DE- and tagging process. The factory equipment is
5}
C942C4EC783 physically tagged but has not been reconciled to
9} the accounting records in several years. Office
equipment has not been physically inventoried
Title Weakness
and tagged.
{1B0A8949- Investments Reconciliation of investment Lack of segregation of duties between
3ACA-4524- account authorisation for withdrawals from the investment
B02B- account and the preparer of the monthly bank
86D3EB5A91EF reconciliations
}
Title Weakness
{1B1C7255- Inventory Maintenance of Accurate The Company presently cycle counts warehouse
68AC-4F86- Inventory
Title Balances inventory
Weakness on a periodic basis. The samples picked
834C-
{1B4079AD- EDP (Computers) for counting
Any processingareproblems
selected on
arearelayed
judgmental basis.to
informally
05FB0D13329F
0412-4CF4- In addition, during fiscal year 2XXX, the
the Systems Manager by phone or handwritten Company
}
BB7B- has
note.begun requesting
No log that physical
of these errors inventories
and their status is be
9D333A5F6EC taken
kept. and reported monthly for inventory held or
0} produced at outside locations.

{1E0E315B- Accounts payable, purchases Recording prices on purchase Prices of goods and services are not consistently
2686-434A- and accrued liabilities orders recorded on the purchase orders. The purchase
82BF- order should serve to verify the terms and prices
45C9F4927D11 that should be billed to the Company on the
} vendor invoices.
{2092A5C2- Accounts payable, purchases Approval of vendor invoices or Receiving reports are not always attached to
3779-4350- and accrued liabilities attachment of receiving vendors' invoices.
9FFE- reports prior to payment
4CF2E79ACA27
}
Title Weakness
{20AABFE2- Accounts Receivable and Reserve for uncollectable There is no formal policy in place to determine
B2AC-496C- Sales accounts receivable general and specific reserves for uncollectable
88FF- accounts receivable among the companies.
2246A47B31B
B}
{20C875A3- Accounts Receivable and Large customers have contracted for terms or
E46C-4195- Sales volume discounts. Credits and debits relating to
9497- these contracts are recorded to the subsidiary
D31DE8248FA3 account receivable ledger without proper
} investigation and remain on the ledger without
resolution.
Title Weakness
{2104A617- Accounting Procedures There is a lack of a central file and related index.
7D58-49A4-
9C67-
CC4D1909DAE
7}
{210A11FA- EDP (Computers) Passwords can be repeated, do not require users to
0518-4B8C- change their password after a specified period of
995D- time, and allow passwords to be composed of all
4462ADE357E one character (such as 1111), and, therefore, are
B} easily compromised.
{21852095- EDP (Computers) Review of data processing We understand that the Company is contemplating
28BC-42C1- capacities removing the general ledger from the X system
931C- and installing a new general ledger package.
CB231BBD813
D}
Title Weakness
{2194BE45- Fixed Assets Posting of additions through All fixed asset additions are initially recorded in the
CA10-4D15- construction in progress construction-in-progress account regardless of
8E4E- their stage of completion.
837FCD9F3A07
}
{22200A6C- Accounts Receivable and Both markdown requests and change-in-selling-
8990-4FEB- Sales price forms are summarized manually and only the
A37A- summary is sent to data processing. In addition,
6825D3FC25CF the forms are not controlled numerically.
}
Title Weakness
{22E3B5D2- EDP (Computers) Upgrading computer systems The Company is considering conversion to a more
0F62-41ED- sophisticated data processing equipment.
8BC1-
7D36CAECF87
3}
{23106B71- Accounts payable, purchases Assignment of key functions The accounts payable personnel are responsible
17D8-4BDE- and accrued liabilities to other than accounts for processing vendor invoices for payment,
AFD1- payable personnel including signing and controlling the chequess.
DA49EF87911B
}
{2355D469- EDP (Computers) Failure to log off at close of In order to run the night processing, all users must
287C-401F- day be logged off the system. Users sometimes forget
ADB3- to log off the system when leaving at the end of
80659AC39728 the day.
}
Title Weakness
{235A2F87- Financial Management Formalisation of Merger and The Company is contemplating horizontal
7F5B-4003- Acquisition
Title Program integration
Weakness of the business through the purchase
825A-
{23BB0FF5- Accounting Procedures Standard financial reporting of additional
Currently machinery
there and equipment
is no uniformity or through
in financial
70931BBC3EA
65F8-4DE0- policies the acquisition of an existing manufacturing
reporting procedures and compilation of year end
4}
9D56- company having complementary product lines
consolidation.
F97559FDF4AB and/or manufacturing expertise in similar
} products. Currently no formal integration plan
exists.
Title Weakness
{23D66059- Fixed Assets Fixed assets- proceeds from During our testing of X Corporation fixed asset
C0F6-406B- disposals disposals, we noted that the proceeds from several
B50D- fixed assets had been recorded in the general
DFAB9ED73B4 ledger but not in the fixed asset system, causing
0} the gain/loss to be overstated by approximately
$XXX,XXX.
{23DEDBBE- Shrinkage Shrinkage - parts substitution In the manufacturing of a finished unit, production
4739-4726- personnel may be substituting parts and
B0CA- components that are of a higher quality than is
77A713A1D03 specified in the bill of material.
8}
{24650600- Accounting Procedures Records frequently can not be located because
B8A9-48B8- they are either misfiled or misplaced.
820E-
0707437FB78D
}
{247B8803- Cash, Cash Receipts and Evidencing the review of bank The Controller reviews each month's bank
DDE2-4A64- Disbursements reconciliations reconciliations; however, these reviews are not
B026- evidenced in writing.
288AE5C69E6B
}
Title Weakness
{2492AF91- Financial Management Analysis of acquired The recent acquisition of XYZ Inc. has added a new
4873-426E- operations
Title division
Weakness to the Company's operations. The new
9EED-
{249FAB2C- Inventory Computerisation of inventory operations have
All inventory not been are
transactions integrated intofor
accounted the
739C07546B10
FA08-4C1D- accounting system overall corporate
manually. plans and operations as yet. Top
}
BDA3- management's awareness and knowledge of all
9CF739D7E9EF phases of XYZ's business operations is limited.
}
{24A17F06- Accounts payable, purchases Reconciliation of accounts At year-end, the detail of trade accounts payable
D8DF-4B97- and accrued liabilities payable detail to general did not agree with the general ledger control
8841- ledger balance account. Our review indicated that no
AA2E48E8DBF reconciliation was being performed of the detailed
5} balances to the general ledger control.
Title Weakness
{24C4F174- Fixed Assets Automation of the fixed asset The Company's fixed asset subsidiary records are
1BB1-4AC2- system maintained manually.
9E92-
82B33AEAE9F1
}
{24F175EE- Accounts Receivable and The accounts department does not keep a record
4642-44AB- Sales over the packing slips sent to shipping.
8F3A-
D64CAA85796
A}
Title Weakness
{2516E70F- Inventory Because of the poor organisation of the raw
C963-4B2A- material storage facilities, too much time is
80EA- required by plant personnel to locate material in
C4FD9B7C5C5 the factory and storage yard. Occasionally,
C} materials are substituted because the proper size
or type listed on the perpetual inventory listings
cannot be located.

{25FF9581- Accounts payable, purchases Long-term accounts payable During our testing of the accounts payable, we
578E-4503- and accrued liabilities contracts noted approximately $XX million of invoices with
BA37- due dates beyond [date].. The invoices related
E039A3325924 primarily to X Corporation for wholegoods. These
} amounts should be reclassified as long-term notes
payable rather than current accounts payable.

Title Weakness
{266FB50F- Accounts payable, purchases Use of purchase orders for all Although the company has pre-numbered
00D9-4376- and accrued liabilities purchases over a specified purchase orders, they are not being used for all
892A- amount and other processing purchases.
E960611A1FE0 procedures.
}
Title Weakness
{26C0B9FC- Other Measuring effectiveness of The Company has incurred large advertising costs
CF98-441F- advertising
Title costs during
Weaknesseach of the past two years. We recognise
B46F-
{275742E5- EDP (Computers) the obvious
A contingency difficulties in judging
plan to ensure the the effectiveness
continued
74A5B2B2616F
A8CA-4932- of an advertising
operation program, but we believe
of data processing in the event of that
a an
Title Weakness
}
9A6D- aggressive
localised cost identification
disasterare or matched program
hardwarewith failure wouldnot aid
{27A69CE1- Accounts payable, purchases Segregation of duties in Vendor invoices
management in making judgements. thehaswarehousebeen
7AFE01F62F92
FE9F-4F4C- and accrued liabilities accounts payable procedures developed.
notice The
of receipt Company
and plans
theestate to rely
open purchase on
{27BA6861- Debt/Leases We noted that new real leases areorder by
not being
}
B054- [company]
the purchasing to replace the equipment
department. in thereport,
event
92D9-4D32- reviewed by management toThe receiving
determine their
CC2491DDE29 of a prolonged
purchase orderfailure. However,
and vendor invoicea time estimate
is then given to
to
9F97- proper classification as capital or operating leases.
C} replace the equipment has not been
the accounts payable department for entry in the obtained. Two
31C0B28A058
backup
purchase locations
journal. have tentatively
The invoice and been identified;
supporting
B}
however, it has not been determined
documents are held until the payment date, that they
when
Title could provide
Weakness sufficient processing
the cheque is prepared and presented to an time
{27D8694D- Accounting Procedures Record preparation and The company
authorised has no
cheque procedures
signer or guidance
for approval and in
065A-42B3- retention place in relation to preparation and
signature. The vendor invoice is stamped "Paid" retention of
82F8- records.
prior to review by the cheque signer. The cheques
2FEB20261781 and supporting detail are returned to the accounts
} payable department where the cheques are mailed
Title and the supporting detail filed by vendor.
Weakness
Title Weakness
{27F3422B- Information Systems Functions of a Separate Data There is no control group set up as a separate
DABE-44C9- Processing Control Group function in the data processing department. Such
9245- a function is apparently performed by the user
E7689968B7A2 departments.
}
Title Weakness
{28187D3D- Systems planning Priorities for updating the The data processing department is currently
A5B2-4E0A- reporting system converting the outmoded reporting system to one
B010- that is more appropriate to an operation the size of
1CA858E0FC89 your company.
}
{28965AD0- Cash, Cash Receipts and Authorised cheque Authorised signatures on bank accounts are not
E43A-4617- Disbursements signatories updated to reflect current management personnel.
BC03-
BF92375331F1
}
{295F99AF- Inventory The Company does not utilise written inventory
2FAB-4570- Title instructions
Weakness due to the limited number of
8FA9-
{296F8EC2- Internal audit employees and the
Internal auditing size
is an of the inventory.
independent However,
appraisal
9356B7BBA11
C72D-47D1- we noted
activity inventory tags had been completed for
{29BCEC47- Payroll, Personnel and There is within an organisation
no continuing forprogramme
education the review of
C}
A7DA- items without inventory at year end (i.e.,
accounting, financial and other operations. The quantity
C80B-45A5- Compensation
6B4250EEE40E was marked
overall zero)iswhich
objective reduced
to provide the qualitywith
management of the
B0DA-
} tag control.
information as to the effectiveness of established
E0E2226CC99E
} policies and controls and the extent to which they
are being implemented.
{2B2C7D98- Financial Management Financing accounts receivable Receivable collections are paid into the bank every
96CF-4AAD- one or two days. A lock box system is not
A54B- operated.
ED69D6CA425
4}
Title Weakness
{2B88A919- Accounting Procedures Failure to follow accounting Standard X must be adopted by the Company.
4CF9-408B- standards
91BD-
FE9B81504D96
}
{2BF730D5- Accounts payable, purchases Currently there is no regular reconciliation of the
D9AC-4ACE- and accrued liabilities accrued accounts payable general ledger account
AAFB- to supporting detail. We understand that the
0C3B8520CF41 inventory and accounts payable systems
} automatically update this account, and that the
resulting ledger balance should represent the
"uncosted receivers" amount. However, general
journal entries are also posted to this account to
Title accrue
Weaknessfor other items that have not yet been
entered in the accounts payable system.
{2C591D6F- EDP (Computers) There is no formal approach for dealing with back-
2489-48FB- up procedures for important master files.
87EA-
B741C204121A
}
Title Weakness
{2CBCD27D- General Management Changing the function and The Company's Board of Directors is comprised
A54C-40DE- makeup of the Company's only of its sole stockholder. Its function is to meet
9DC5- Board of Directors the minimum legal requirements of the law
84329A1EF3B9 regarding actions that must be taken by a board of
} directors.
{2CD2346A- Accounts Receivable and Acounts receivable Controls over the aged accounts receivable ledger
FE75-4FFD- Sales recoverability are weak causing accounts to remain outstanding
88DD- for several months
2C8642D7D8C
A}
Title Weakness
{2DA6A49C- Accounts Receivable and Accounts receivable discounts During our examination of receivables received
A270-4644- Sales after the year-end, we noted that many customers
BEF7- take advantage of the X% discount offered.
4F782E335D5C However, there is no accrual for expected
} discounts provided in the accounts.
{301EDF98- Inventory Losses covered by property The Company's property insurance, which also
C639-4354- insurance covers inventory losses, includes a clause that
9D0E- obligates the Company to maintain detailed
324EC57DF392 records (e.g., records of transactions and any
} supporting documentation, such as purchase
orders, receiving reports, vendor invoices) in order
to recover any inventory losses it may incur from
the insurer.
Title In a few instances, we observed that invoices
Weakness
could not be located for certain inventory
{30455274- Accounts payable, purchases The company does not use an accounts payable
purchases. We ultimately obtained the information
D88E-4F9D- and accrued liabilities system.
we needed to complete our audit from the vendor.
965B-
85E7DB84376
2}
{30639B4B- Accounts Receivable and Review of sales invoices Sales invoices are generated and mailed to
E957-4B9B- Sales before processing customers by the accounts receivable clerk
B99A- without being reviewed by an official.
6A0988E117B8
}
{310D1E8B- EDP (Computers) Development of long term The data processing department does not have a
7296-4C53- plan long term data processing plan
AF76-
49BCECDAFB3
3}
Title Weakness
{314CCCD1- Tax matters Tax planning for wholly-owned Currently tax planning issues are not considered
EF9F-4EF7- subsidiary for the Company's wholly-owned subsidiary
A257-
27C3EAEEEC74
}
{3184039B- Other We understand that many contractual agreements
E763-44D3- are entered into by company personnel without
BB2B- consultation with the Company's legal, tax and
64A428B0B9B finance departments regarding the proper
3} structuring of transactions and their impact on the
Company's financial statements.

Title Weakness
{31863BC2- Inventory Implementation of Standard The Company uses standard costs primarily as a
1906-42FB- Cost System means of determining monthly cost of sales. The
BAEF- XYZ Division maintains a separate set of standards
0E42C50164D for customer-quoting purposes.
0}
Title Weakness
Title Weakness
{31C7A07E- Accounting Procedures Management account analysis Management does not consistently review account
838E-4159- analyses and control account reconciliations
A204- prepared by accounting personnel to ascertain
1EBB6190B454 that the detail supports the general ledger
} balances. Supporting detail is not prepared
monthly for all balance sheet accounts.

{321A4DDF- Financial Management Formalising information The Company has established a cash flow budget
C81E-41D4- related
Title to cash management for fiscal 200X. Periodic comparisons of actual
Weakness
A5E3-
{32494D9A- Cash, Cash Receipts and Cash Disbursements- holding cash flow results
To prevent are made against
bank overdrafts, this budget and
large disbursements
299A5EA6C13E
7006-42E7- Disbursements cheques the President is provided with this information.
are withheld from the mail from time to time
}
9960- However,
pending a these
reviewprocedures are performed
of the company's only on
cash position.
1F92380F693B an informal basis.
In some cases cheques are withheld for periods up
} to several weeks.
{32AE2B61- Inventory Inventory observation The current version of the inventory observation
8A85-4D3C- instructions instructions is several years old and does not
BD20- detail specific procedures regarding shipping and
6F90159EC251 receiving cut-off.
}
{33A3132A- Inventory Economic production On several occasions, two small production runs
C527-45D5- quantities were made within a week or ten days of each
9F43- other - generally one for production and one for
C79B6B5A5E8 service. Also, production quantities in 19X2 were
6} smaller than the 19X1 quantities. In some
instances, runs of five parts or less caused labor
costs to exceed standard by 600%.

Title Weakness
{348146AB- Payroll, Personnel and Documentation of payroll In reviewing the personnel files of the Company
B246-429A- Compensation records we noted several instances in which authorisation
8F1F- by employees for payroll deductions could not be
{3497AB4E- Payroll, Personnel and Implementation of Employee The Company does not have an incentive
6E06-4676- Compensation Incentive Program program, nor does it encourage feedback from
95CA- employees via listening programs.
A67D2580C66
A}
Title Weakness
{34E5FE61- EDP (Computers) Computer console logs (a detailed record of all
23D7-4823- computer activity) are reviewed by the operations
B1A1- manager daily and retained indefinitely. The
AFB5D3EA6BFA console logs are not pre-numbered; therefore, it
} cannot be determined if all operator actions are
reviewed.
{350BD78F- EDP (Computers) Computerisation of sales force The Company does not have a computerised sales
D90F-4A1F- force.
A0F9-
6C882EDFAFB8
}
Title Weakness
{3516CC73- EDP (Computers) Hardware and software Management has recognised that the present
3995-4527- upgrade
Title computer
Weakness and software are inadequate and need
8B4E-
{351AB185- Accounts Receivable and Control over accounts written to
Accounts are notto
be upgraded supportreviewed
regularly the Company's
to ensurecurrent
that
DD46CE44F93
71B0-476A- Sales off business needs.
balances are collected on a timely basis and no
1}
BD4A- record is maintained of accounts written off.
6F6B711CC726 (1) Storage space is in short supply necessitating
} the frequent generation of a hard copy of
transaction data so the files can be cleared for
Title Weakness
new transactions.
{353E5AE1- Inventory (2) The computer the
When calculating hardware has malfunctioned
book-to-physical inventory at
9030-4A88- Title times, resulting
adjustment, in the loss of recorded
Weakness inventory received before the cut off data either
B308- duringbut
date, processing or during generation of a hard
{356895F5- EDP (Computers) Performance of security A general not recorded
security review in the
hasgeneral
not been ledger until
performed.
6EBC4C93CE9 copy.
the following period, is accounted for as a
C710-4E65- review
0} (3) Several item.
reconciling programs have been
At October 31, written by the
2XXX, total open
9AB1-
systems programmer
receivers of approximately to create needed
$XXX,XXX reports or
was
D05E5B84E32
solve specific
calculated problems that
by reviewing have arisen
the invoices entereddue tothethe
7}
growth of the Company.
following month and comparing them to receiving
Title (4) The present methodology
Weakness
documentation. Although thefor thereceivers
open input of datawere
{36AB7A69- Inventory Manual obsolescence results
not in
recordednumerous
in October errors.
when received,
The X Division manually identifies potentially slow- they were
74C1-412E- procedures (5) Finalor
recorded
moving monthly
inobsolete accounting
November; reports
therefore
inventory. the are
value notof
80E7- available until
inventory three
was not to four weeks
misstated after month
at year-end.
2F43B72FC329 end.
However, because this process is not a monthly
} procedure, there was an understatement of
inventory of approximately $XX,XXX from open
Title Weakness
receivers not recorded at December 31, 2XXX.
This represents only .5% of total inventory at
December 31, 2XXX and was therefore considered
immaterial.
{36D4B2EC- International During our review of the tax accounts, we became
4BA9-42D8- aware that the royalties paid by the Company to X
955A- Company are accrued in the accounts on a
6BE4ADD1C33 monthly basis. Furthermore, the Canadian
B} withholding tax applicable was remitted on an
annual basis in the month following the end of the
fiscal year.

Title Weakness
{3726D35F- Inventory Upgrading of cost system to The Company's cost records indicate only the
B52C-4F8B- meet inventory pricing material costs of an item. They are also based on
9F5B- requirements the standard usage of raw materials required to
2CA42B6540C manufacture a given product.
B}
Title Weakness
{3741DFCA- Payroll, Personnel and Patent rights on innovations created by employees
0AAD-4C84- Compensation are not secured by the Company.
ADD0-
E063562B158F
}
{375420FB- Tax matters The Company has available state net economic
03F0-4B9A- loss carryovers which can be used to reduce
BF5A- taxable income in future years.
0D26BDB0B67
C}
Title Weakness
{3825B19B- Payroll, Personnel and Lack of segregation of duties The data processing department performs nearly
B07A-4262- Compensation in the data processing payroll all payroll functions; cheques are prepared and
82EF- system signed, the amount of money to be transferred to
1E92499E3173 the payroll bank account is determined and the
} payroll bank account is reconciled.
Title Weakness
{38ED8793- Fixed Assets The Company has several fixed assets with
FBDA-4B61- varying lives and levels of usefulness. Some of
ABB2- these assets are taking up valuable
385B7883FF9D plant/production space.
}
An inventory of fixed assets is not performed.
{3922463A- Cash, Cash Receipts and Cash disbursements- Some cheques were omitted from the numerical
BB82-4FBD- Disbursements accounting for the numerical sequence in the cash disbursement journal. Others
AC51- sequence of issued and marked void could not be located.
2919B1A9649E voided cheques
}
Title Weakness
{399EEA32- EDP (Computers) Development of new system The Company's Internal Audit Department (IAD) is
54C5-4E28- and involvement of IAD involved in the design of new information systems
84CC- applications. This practice offers an excellent
3337D1CCAC8 opportunity to ensure adequate internal controls
8} are included in new systems.
{39A7F2FA- Accounts payable, purchases Accounts payable (cash v Cash disbursements are done weekly on a cash
FF5E-4643- and accrued liabilities accruals) basis rather than an accrual basis. Each week the
9EB1- invoices that are to be paid are entered into
DD8DF636298 accounts payable. At year-end, to establish an
9} accounts payable balance, the Company back-
dated a January cheque run for 2XXX invoices to
December 31, and then booked an entry to record
the invoices paid and the cheques written back to
Title accounts
Weakness payable and cash.
{3AE05A68- Accounts Receivable and During our detailed testing of certain accounts
B45A-4A57- Sales receivable, we noted that some accounts were
8EEC- being credited for services in exchange for other
D10DC4CCC43 services.
9}
{3B2809CF- Payroll, Personnel and Supervision and training of We noted during our fieldwork that a high
5682-4B70- Compensation new
Titleemployees percentage
Weakness of employees were new within the past
82B6-
{3CAF77B7- Payroll, Personnel and Non-competition agreements year. These
No steps are employees wereto
currently taken unsure of the
protect their job
99273C83AA8
993A-440F- Compensation for employees responsibilities and the necessary
Company's competitive position. procedures
E}
A6D2- required to accomplish their duties. In addition, it
EDA99E4AF89F was noted that employees in general were
} unaware of the way their responsibilities impacted
others outside of their department.
{3D0F7E3C- Inventory Application of overhead to We noted during our testing of jobs-in-progress
5D64-49D6- jobs-in-progress that the application of overhead at X% of labor
A3F5- differs from actual historical rates of
73F0AC1B763 approximately X%. However, we understand this
D} difference is mitigated by the under-application of
overhead on equipment, so that the total
difference between actual and applied overhead is
not material.
Title Weakness
{3D799D0B- General Management Corporate Governance - The Company does not identify and compile the
1291-4A06- Executive Perquisites various kinds of management remuneration,
932A- particularly personal benefits (perks) and relies
B66F4D211A09 heavily on estimates for reporting purposes.
}
{3E1A1475- Fixed Assets Establishment of a standard The Company determines the estimated lives of
2F05-428F- depreciation policy new assets on an item-by-item basis.
8445-
69C1894E06A7
}
Title Weakness
{3E414B6A- Financial Management Formalisation of cash planning The Company does not have a formal cash
770B-4CDB- and reporting planning procedure.
ABCB- The Company's growth and related increased cash
4BDFD90AA06 requirements and turnover require the
E} establishment of a formal cash planning procedure
to avoid.
{3F52F648- General Management Assistant Controllership The Company's controller is the only individual in
D9E0-41FD- Function the accounting department with an accounting
A894- degree. No other individual has the background
B87007474E42 and experience to resolve problems as they arise.
}
Title Weakness
{403C51FB- Payroll, Personnel and Reconciliation of production No reconciliation is made by the accounting
1790-4B81- Compensation used for payroll records to department between units produced as shown in
BDCF- accounting records the accounting records and units produced used as
DD39CD2780D the basis for payroll.
9}
{41D90BA8- Intercompany Transactions Intercompany receivable and The Company does not have in place a written
7CA6-40DA- payable
Title reconciliation procedure
Weaknessfor reconciling intercompany
86C6-
{41EC2D4F- Financial Management Borrowing against cash receivables
The company and payables.
has We noted
a large amount that most
of bank
7352D1E9B26
B405-4B6F- surrender value of life differences were a result of cash payments
borrowings. It has not considered alternative being
6}
9AEC- insurance recorded in different
sources of finance. periods or inventory in
46ECB597A33E transit. Occasionally the difference was as a result
} of a dispute regarding the amounts between the
affiliates. We understand that a person from the
Title Weaknessoffice will visit the affiliate locations
corporate
{42DBBEFB- EDP (Computers) periodically
We and review
believe there certain weaknesses
are currently transactionsinand
the
4860-4BE2- balances,
control including
features intercompany
of the remote accessbalances, and
terminals.
9117- make the necessary adjustments.
59B3F149BC70
}
{43889D54- Tax matters Analysis of year-end expense While analysing the tax accrual at the Company,
3965-44A0- accruals for tax implications we noted several accruals which were not
AD98- deductible for tax purposes and had not been
7DDAF1C5F70 reflected in the current or deferred tax provision
7}
Title Weakness
{449263CD- Financial Management The company does not formally plan beyond two
D5DC-4E52- years.
ADD8-
32F922754BAE
}
Title Weakness
Title Weakness
{44CE60D0- General Management Preparation of an Accounting The Company's recent growth has been
1449-4E1C- and Administrative accompanied by increased responsibilities for most
8C50- Organisational Chart members of management. The distribution of
D522B03C745 additional responsibility generally has been
9} accomplished on an ad hoc basis.
Title Weakness
{45657D0B- EDP (Computers) Documenting standards and The Company maintains a relatively small
3207-46AE-
{4598612F- Cash, Cash Receipts and procedures
Cash Disbursements- Information Systems
Individuals signing department.
cheques As payees.
are often a result
AE1B-
46B6-4457- Disbursements signatories and beneficiary of many of the day to day activities are not formally
75BC6FD74C9
A409- cheque identical documented. Although this is not unusual for a
9}
7027F51B88FA small department there are benefits to formally
} documenting key standards and procedures.
{46006E8B- Accounts Receivable and Certain back order items for customers were
0EE8-44F6- Sales invoiced with the ship date of the original order
AAF5- rather than the actual ship date of the shipment of
5E47FED04F6B the back order.
}
Title Weakness
{464A84A7- LIFO Conversion There are errors in the Company's LIFO
C9A7-41C0- calculations for the year.
B924-
92B0233381C4
}
Title Weakness
{466E5CFC- Payroll, Personnel and The Company does not have an employee
6BF2-4FDB- Compensation handbook that consolidates the Company's
AD44- policies related to employee relations.
73479BA551EF
}
{46AB6E09- Cash, Cash Receipts and Cash Disbursements- block Approval of payment/ voucher numbers/ dates of
21DB-4FFE- Disbursements stamp to record approvals payment/ cheque numbers are not evidenced on
8762- purchase invoices.
1518782FAEC2
}
Title Weakness
{46E35673- EDP (Computers) Internal software The accounting software is written in the
7D0D-4F65- development and updates programming language _________. Modifications
8387- are usually performed by a contract programmer
ABE261FC1406 at a per-diem/hourly rate
}
{479B4CFC- EDP (Computers) Reactivation of data security The Company's computer system provides
B3FA-445C- features different levels of data security. Menu security is
BA99- used to restrict end users to specific menus.
A9AD485B88E Resource security is used to limit access to
1} libraries, files, and folders. User security limits
access to the system to authorised users.
However, the data security features of the system
have been disabled.
Title Weakness
{47C15FBA- EDP (Computers) Under the current data processing department
507F-4494- Title organisation,
Weakness documents received from the stores
8138-
{48B8FDFC- Payroll, Personnel and and the purchasing/accounts
The Company's insurance program payabledoesdepartment
not
30EF7F80DA5C
D82A-47BB- Compensation are placed in a basket and input
contain a provision for bonding key employees. on a prioritised
}
A1E7- basis. The individual who inputs the document is
13F371FE68EE responsible for ensuring that the document total
} agrees to the dollar amount accepted by the
computer. In certain instances, such as for sales
Title Weakness
orders and cash receipts, comparison is also made
{4902BAEC- Accounting Procedures between
The Company'sa computer-generated
expansion through control total and
acquisition anda
1096-40A0- manually
growth, ascalculated control total.
well as increased We could not
disclosure
B3FC- ascertain any for
requirements controls
a public thatcompany,
ensured that
haveall
21D3CEA2E17 documents were
accelerated the needinputfor to athemorecomputer
detailed although
and
C} some
uniform controls
systemexist that may
of balance detect
sheet anderrors at a
operating
later date,
accounts. most notably the flexible budget
Title Weakness
analysis.
{497766D6- Inventory The efficiency rate, standard labour dollars divided
BA4B-4B5B-
{49A2AEAE- Cash, Cash Receipts and Cash disbursements- by actual invoices
Purchase labour dollars,are notfor productsonce
cancelled produced
paid.
8E9E-
6CC6-424E- Disbursements cancellation of vendor was X%ofand
Copies theX% for machinery
cheques are attached and converting,
to the invoice
CC4BDE936F2
AB76- invoices respectively.
as evidence ofEfficiency
paymentrates are measures
but these often become of how
7}
C6CD0F5F2F6B well workers
detached. are producing compared to a set
} standard. The current year and prior year rates
indicate that actual production time is greater than
Title Weakness
standard production time which in turn produces
{4A4B693D- Accounts Receivable and Fulfilling customers' specific The Company's
labour inefficiencies.marketing policythese
Currently, is to try to fill any
10FC-4BB3- Sales orders customer
inefficienciesorder.areThis policyinshould
included be revisedand
total overhead to
B0A4- reflect consideration
proportionately of thebased
allocated, nature onofdirect
the business
labour
9550E047357B and its current
dollars, operating environment. Some of
to all products
} these considerations are:
(1) It is difficult for the Company to fill customer
orders that specify color, weight, etc., because the
Company's sources of supply are limited to what
Title becomes
Weakness available on the market. These orders
are expensive because:
{4ACA39F5- Tax matters Depreciation methods- No salvage value is assumed to exist on assets
(a) They require special handling.
6C20-4AD9-
{4AD1D17A- Inventory depreciation of salvage
Cycle Count Procedure value depreciated
Over the are
past onfewthe straight-line method. cycleAssets
(b) They sloweryears,to fill the
andCompany's
thus maintain
AD54-
71CE-4B5E- Documentation
Title depreciated
count
Weaknessproceduresusing accelerated
have methods are
become more sophisticated not
inventory at a higher level.
C5966852DED
8D1D- converted
with the useto ofthe straight-line
radio frequency method,
monitors andandthebar
{4AD94300- International (c) They
The Companyoften and mustitsbesubsidiaries
filled with the more to
continue
3}
B6ED1930BC2 undepreciated
coding systems. value athas the expiration of useful
7B41-413A- desirable
expand items inThis
globally. As yet nomade
inventory, the cycle
leaving count
less desirable
consideration has been
5} lives is keptmore
procedures on the books as
efficient and "salvage
effectivevalue."
by
AD60- items to
given unsold.
reviewing policies and procedures on
730C311531FB allowing
(2) Non-house
foreign additional
exchange sales counts
rate risk.tothe
reduce beCompany's
taken in theprofit
same
} amount of time. During our
by ten percent because of sales commissions. review of the cycle
count plans currently in effect, and from our
{4B44E5BB- Accounts Receivable and Controller acting as credit The controller also functions as the credit
7E9D-4C1C- Sales manager manager. This causes a weakness in the system of
99CD- internal control because the Controller reviews
1300EC1A88B4 credit applications and has a final responsibility for
} accounts receivable balances and bad debt write-
offs.
Title Weakness
{4B8D0C2D- EDP (Computers) Numerous individuals have multiple logon ID's,
D354-4DF4- some with as many as four. Although many of the
B003- multiple ID's relate to users with separate ID's for
0118FABC9904 "Company 1" and "Company 2" (for participating
} loans), several users still have multiple ID's with
access to only the Company 1 system. This
situation provides greater opportunity for the
system to be compromised.
{4C913672- Inventory Surprise observation of There is a lack of segregation of duties in the
1394-4EB2- branch inventories inventory function since the plant managers are
AE37- solely responsible for inventory custody.
9B5A43F32C89
}
Title Weakness
{4D8E6A37- Inventory Establishment of Perpetual The company has procedures in place for physical
5F9B-4560- Records and Cycle Counting inventory counts. However the accounting and
831A- Procedures reporting procedures for inventories are unreliable.
B902B53D3AB
8}
Title Weakness
Title Weakness
Title Weakness
{4E57EC55- Fixed Assets Maintaining Detailed Property The company does not maintain a detailed listing
1CEC-4A87- Records of all fixed asset property owned. It is difficult to
8E0E- match items from the listing to physical assets.
65AB85D878D
8}
{4EE06652- Investments The company maintains excess cash and
52D0-4244- endowment funds in cash equivalents, such as
8A07- certificates of deposit.
707D44E65180
}
Title Weakness
{4EF40EB8- Financial Management Development of Budgeting Budgeting procedures provide for the preparation
4FD5-4738-
{4EFD0F45- Payroll, Personnel and Procedures
Job rotation for developing the of
TheanCompany
annual budget
does notat the beginning
rotate of the year
job responsibilities.
B15D-
0908-4166- Compensation workforce based on a projected fixed level of activity for
1F15EB1F8939
9B32- each division. The Company's practices do not
}
1AC6D60A9B0 provide for soliciting data from appropriate
E} divisional management personnel regarding
operational considerations or for updating the
Title Weakness
budget for operational changes or changes in the
{4FEF4D19- General Management Improving the Segregation of The job responsibilities assigned to accounting
B0D0-41B0- Accounting Duties department employees results in little segregation
AD68- of duties.
B74C20587AF5
}
{503A016F- EDP (Computers) Restricted access to data Access to the computer room is unrestricted and
FE69-4E3B- processing equipment the computer is situated in an area where
9E1B- purposeful or accidental damage could easily
8F35301E3482 occur.
}
Title Weakness
{50502979- Fixed Assets A physical inventory of the fixed assets of the
1553-48E3- Company has not been performed during the past
BF02- several years. Individual assets that may have
386400326CA7 been scrapped, misplaced or otherwise deemed
} unusable may continue to be considered in service
by the accounting department.

{50DF066B- Financial Management Business Planning and The Company does not have a budget or a formal
E8FA-4E4E- Budgeting business plan.
8549-
9C9020BE1CD
8}
Title Weakness
{50FD1276- Accounting Procedures The Company does not currently have a record
3DC9-46AB- retention policy mandating the timely destruction
8337- of certain records.
8BD21FA5BD4
3}
Title Weakness
{511EF492- EDP (Computers) Batching documents before Sales invoices and vendor invoices are posted
60C0-4B61- processing directly to the system without first establishing a
BEFE- control total that could be verified against the
B45E029A33F3 output
}
{5138F38E- Accounts Receivable and There are a high number of low value invoices
C2BC-4B38- Sales raised during the year. A large portion of these
BF05- shipments result from partial-order shipments to
1DFCF6B8C81 customers in an effort to meet their immediate
8} needs.
{519442CF- Accounts Receivable and Attaching cash register tapes During our review of Daily Reports (including
233D-46DD- Sales to the daily report reports of units not observed), we noted several
87B1- units which have registers and recorded the
4C869D69C98 summarised readings of both registers on the
4} Daily Report; however, only one register tape (the
register utilised) was attached to the Daily Report.
In the absence of both register tapes, the register
readings shown on the Daily Report cannot be
verified.

Title Weakness
{51DF4C51- EDP (Computers) A log of computer operations is not maintained.
F710-42B0- The console display flashes the commands and
8E4A- operations but does not print a log.
6C79467A6AA
9}
{51E2F39A- Cash, Cash Receipts and Cash Receipts- funds Daily reports from stores do not include deposit
6E28-4A47- Disbursements deposited by stores slips. Therefore untimely delays are not identified
8B1E- by head office. Some funds are not deposited at
9C9D91976A8 all.
C}
{5226A136- Cash, Cash Receipts and Cash Receipts- reconciliation The company does not reconcile monthly bank
49B3-462A- Disbursements of cash receipts to accounts deposits with the cash receipts applied to the
ACFF- receivable records and control accounts receivable ledger. Cheques received
3B9A14D157C over unidentified receipts. through the mail that are not identifiable with any
6} customer's balance are retained in the cashier's
area while being identified. During this time no
control is maintained over these chequess.

Title Weakness
{52F06B96- Inventory Standard inventory valuation The following summarises procedural weaknesses
4072-455B- procedures
Title with respect to the physical inventories and
Weakness
B9B2-
{5452FF59- EDP (Computers) Utilisation of computers for related inventory
The Company andvaluations at each
its subsidiaries division.
utilise manual
94CF8927E6B8
D35F-46D3- data processing (1)
systems, including posting machines, for alland
Documentation of inventory tag control
}
87BB- accounting for the numerical
financial recording and reportingsequence of tags
functions.
95899A4F9212 used was not retained.
} (2) An overall timetable for inventory valuation
was not established.
Title Weakness
(3) Book to physical adjustments were not
{5489BF54- Financial Management analysed.
The Company does not actively pursue and
C7E1-4ECB- (4) Receiving
implement cutoff procedures
methods were not followed.
of profit improvement.
B9D3- (5) Revaluing of prior years' obsolescence write-
0DEC3BBAEC8 offs was not detected.
8}
Title Weakness
Title Weakness
 Title Weakness
Title Weakness
Title Weakness
Title Weakness
{54DC506C- Information Systems With the Company growing at a rapid rate, there is
FC4D-40FF- a corresponding increase in the number of projects
9C43- with which it is involved. Currently limited
0E7107C6C1D resources are available to address these projects.
6}
{55627AC2- Fixed Assets Evaluation of significant plant In preparing appropriation requests, departments
DDAC-4232- and equipment additions are required to submit information related to cost,
9568- projected return on investment and goals to be
9722840A7372 achieved by the plant and equipment addition.
} Subsequent to the completion of the project, there
does not appear to be a program to evaluate the
achievement of goals for significant additions.

Title Weakness
{55C69B73- Accounting Procedures Confidential information included in the EDP
BACA-4CFB- system is not limited to a clearly defined group of
8DAA- users.
B0FC56F93721
}
{5662FB59- Accounts Receivable and As the company is growing it is becoming
69F0-45A4- Sales increasingly difficult for top management to
9298- continue to give careful scrutiny to accounts
6EA90BDD391 receivable collections for each location.
8}

{56EB0161- Payroll, Personnel and Lack of skills cross over in There is a dependency on each individual in the
1B9D-476E- Compensation accounting department accounting department to perform their job to the
BA21- extent that vacations are limited and work does
BF90B3150498 not get done if someone is gone.
}
Title Weakness
{57B12209- EDP (Computers) The security level value that defines the degree of
A9F7-41E1- global level security checking performed by the
9AEC- operating system is currently set to check only
1DA9324772AF sign-on security.
}
{5804BCF4- Cash, Cash Receipts and Bank reconciliations- Reconciling items are not resolved on a timely
F103-4F7E- Disbursements adjusting cash accounts for basis
893C- reconciling items on a timely
7521FAAE8B16 basis
}
{581105F4- EDP (Computers) Controls over IDs of Current procedures do not provide data security
42B1-436E- terminated and transferring personnel with timely notification of employee
A5A0- employees transfers and terminations, and vendor or
35D4B9EA186 contractor terminations.
5}
Title Weakness
{5885309B- Financial Management Expansion of budgeting The current budgeting system does not provide
26A2-4DE7- system by utilising new data detailed analysis of budgeted results to actuals.
B01D- processing equipment
DAB7E7BF8CE
F}
Title Weakness
{58FC8901- Inventory The Company does not utilise shipping advices or
BA2A-46AB- a shipping log. The only shipments controlled are
901F- those shipped by courier. Shipments by Company-
433E0E3E3EB1 owned vehicles are not recorded.
}
{5928E79D- Accounts Receivable and In fiscal 20XX, the Company paid $___ in outbound
8685-40DB- Sales transportation charges. Although a significant
B0B0- portion of these costs was billed through to
ACFBAF9B924A customers, it is important to minimise these costs
} because they impact the Company's operations by
increasing the cost of the Company's products to
Title its customers or as a direct charge to operations.
Weakness
The client does not review freight costs to ensure
{59410D96- General Management Function and advantage of an The Company does not have a clearly defined
they are consistent with agreed rates.
4160-45B8- organisational chart organisational structure or job descriptions for
8C11- staff.
554ED25EC39
4}
{5979F7FF- EDP (Computers) The X systems are not sophisticated and require a
828B-49B4- Title large degree of manual handling. They do not
Weakness
B1F8-
{59D7B4C9- Payroll, Personnel and utilise certain
Currently, control techniques,
an accounting such as using
clerk is responsible for
A544854F7641
9D2A-4B1D- Compensation batch header forms and program edit
gathering payroll information, reporting checks. Most
the payroll
}
9366- of the reconciliation and balancing takes place
information to a service bureau and reviewing the
F7EB3459AE11 manually byinformation
final payroll comparing computer produced
from the service runs
bureau.
} with predetermined adding machine tapes.
We understand the personnel director occasionally
reviews the payroll information but does not
document the review.

{5A9B1096- Financial Management The Company is holding excessive amounts of

0667-47BC- cash in its general account. The average monthly
8C8B- cash balance for the past year in the general
A1449A6CB2A account was in excess of $175,000, ranging in one
E} instance to $452,000.
{5AF65C76- Payroll, Personnel and It was noted during the current year audit that the
B029-40C1- Compensation Company does not currently have a formal policy
AD9D- regarding severance pay. Currently, any
0224A9F8680E severance package is at management's discretion.
}
Title Weakness
{5BA07749- International Consolidation and Financial The Company has improved its closing process,
8ABB-4AF4- Reporting
Title consolidation
Weakness procedures and financial reporting
8B5D-
{5C69F432- Accounts Receivable and Establishing a general ledger considerably over balances
Trade acceptance the past few
are years.
listed inHowever
the
8FFD72A79C5
2E19-4FD5- Sales control account for trade continuing global expansion, such
accounts receivable subsidiary ledger as the
of the
D}
B143- acceptance balances acquisition
Company. and impending consolidation of B
BFC9752609C3 Company, and the ongoing significant local
} reporting requirements (both quarterly and
annually), continue to impact the financial
{5E695A1C- EDP (Computers) Generic
reportinglogon ID's, multiple users using a common
process.
CCE9-42F0- ID, are present on the system. This does not
B9CF- provide for individual accountability of procedures
CFC35872E372 performed. For example, several generic logon
} ID's are maintained on the system for departments
to use the XX utility and the XX department has
one generic logon ID to perform special projects.

{5EE17D84- Inventory The Company has made good progress in the past
1D80-469F- year on developing a general/overall costing
8335- method. However, we feel it still does not provide
5EC5573460A9 you with enough information.
}
Title Weakness
{5F4A0A2E- EDP (Computers) Program change control is not formally addressed.
F884-485A- Requests for changes to programs are made
9E30- verbally by user departments.
7C1E969D62B
D}
Title Weakness
{5F5BF0DF- Payroll, Personnel and Payroll costs not paid by Employees do not receive payroll via direct
D0E1-470D- Compensation direct deposit deposit.
AA91-
1210D7EF3E9
D}
{605A5000- Debt/Leases We noted several leases for real property with
6055-45BE- related parties had expired and the terms were
AAE9- extended verbally on a month-to-month basis.
6B468BC7D09
E}
{60A80478- Investments Monitoring non-equity Changes in investments are not communicated to
D4D5-44BB- investments accounting staff on a timely basis.
8C7B-
2F6479A15E68
}
Title Weakness
{60D86C45- Payroll, Personnel and Centralised personnel Since the Company has many divisions,
E743-4EFC- Compensation management
Title subsidiaries
Weakness and locations with substantial
8255-
{611A0B7B- Investments Independent verification of decentralisation
The Company has ofamanagement,
large volume itofistransactions
important
7770E0A319E4
62B8-4608- investments that
and a large amount of investment holdings forand
a highly-developed, well-communicated,
}
BED6- consistent
which therepersonnel program be
is no independent maintained. Most
verification.
385900224371 of the major personnel functions and activities
} exist at the Company's various operating units.
However, there is no assurance that all activities
Title Weakness
are provided, or that existing activities are applied
{61FEA312- Taxation in
The consistent
a company has or uniform manner.
not reviewed its tax function for
CEEC-49A2- some time to ensure that it is meeting the
9269- company's needs.
C7D968738B7
C}
Title Weakness
{62E9AD13- Financial Management Increasing the Usefulness of There are several major variables that determine a
9043-4F84- Periodic
Title Reports by Including store's
Weakness profitability. These include the obvious
B5B1-
{62E9B52D- Intercompany Transactions Additional Analysis financial considerations
Intercompany of cost of material,
sales are combined with customer
FA37DEE89CD
1940-45CE- Information facilities and labour, and
sales in the general ledger other
and more subjective
a monthly analysis
2}
82D1- variables such as store location, type
is prepared to calculate the consolidating of location
C76A41BFED1 and amount of advertising. The Company does
elimination.
8} not report on these subjective variables.

Title Weakness
{63CC9697- EDP (Computers) Currently, the use of e-mail by the Company is
C2D0-47F2- very limited. However there is likely to be a
A1CC- significant increase in the number of users and the
5DEBC0587DE quantity of information processed by e-mail.
E}
{646B7257- Cash, Cash Receipts and Bank reconciliations- timely Bank reconciliations are not prepared or reviewed
753A-432B- Disbursements preparation and review of on a regular basis.
A824- bank reconciliations
0F09F737B4CE
}
Title Weakness
{64F91B1A- Work in progress Improving production cost The method of accumulating costs for inventory
CDA9-4172- analysis
Title items does not provide management with
Weakness
BE90-
{65355C29- Inventory Recommendations for adequate informationexist
Serious weaknesses to evaluate whether
in the area of work-in-
AE71B5670426
44DF-47B4- obtaining more meaningful products are being manufactured profitably.
process inventory cost accounting. Accounting
}
BC8F- information from a job order Costs
controlare accumulated
over as follows:
amounts charged to and transferred
DB81297D310 cost system (1)Raw
from this account is weak, as is directly
materials are expensed to cost of
control over
1} goods sold
quantities of materials.
(2)Labour is charged to individual products at a
 Title Weakness
Title Weakness
Title Weakness
{6613BC35- Accounting Procedures The Company does not perform certain year end
8C79-4C31- closing procedures.
A362-
B0040881FBA4
}
Title Weakness
{661F120A- General Management General Internal Control The Company is lacking internal controls in some
735F-4A1B- Practices - Procedural Matters areas.
952E-
FB2EB9FAB7C1
}
{6625B179- Accounts Receivable and Written agreement of rebates The company maintains numerous unique
9F51-411D- Sales and
Titleconcessions agreements
Weakness with most of its customers that
B2F5-
{67CFFC33- EDP (Computers) include,
Adequate but are not
policies andlimited to, overbill
procedures are important in
72CF707A3B29
2BC9-4751- arrangements, volume rebates
promoting a controlled change management and pricing
Title Weakness
}
80A1- concessions.
process. During
Change our audit we
management noted
refers tothat
policies,
{67F20586- EDP (Computers) The Company
signed does
documentation notand/or
have aother
written disaster
formal
4CECACF96460
A1D4-45AD- procedures
recovery and
plan, products used to manage and
} agreements
control didand
changes not
to
there
supportare most
production
no formal
of the accruals.
programs, jobs, etc.
AD31- arrangements
In several for theaccruals
instances, use of another computer
were current
based only on
AA94280E304 The following
system was
in the event noted regarding
of athe
fireaccounting
or other disaster policies
conversations
and procedures: between department
C} and the salesperson responsible for the incentive
Title programs.
Weakness
· Written policies and procedures relating to
{68BF7D5E- Payroll, Personnel and implementing changes are
A number of salesmen to third party asoftware
receiving "salary"do
23DB-4527- Compensation not exist.
rather than a true commission.
8B97-
5F629ECF5846 · Adequate policies and procedures exist for
} changes to software written in-house, but are not
followed on a consistent basis.
{6971D58E- Cash, Cash Receipts and Preparation and review of Bank reconciliations are performed by individuals
5DE5-42A6- Disbursements bank
Title reconciliations generating
Weakness disbursements, and who have access
A2FD-
{6B9CE27E- Payroll, Personnel and to
As unissued cheques.
the Company Further,
continues the bank
to grow, management
CB042598107F
3881-4066- Compensation reconciliation for the Company's "petty incentives
may wish to consider additional officer cash" fund
}
863F- had not been performed for six months.
as currently there are none and employees Thismay
64E45221088D account requires only one authorised
leave if they feel undervalued and non- signature
} and the fund isfor
compensated in their
the custody of a person who is
achievements.
an authorised cheque signatory. Finally, bank
{6D07C95D- Accounts Receivable and Since the company's
reconciliations are notinvoices
reviewedarebyfor
a less than
person $X,
other
547F-4717- Sales collections of delinquent balances is difficult and
than the preparer.
B6B7- time consuming.
822AD89202E
8}
Title Weakness
{6D6E27E4- EDP (Computers) An outside service bureau is used to prepare
5EF0-44C1- certain of the Company's accounting records.
93EA- However, the general ledger and financial
5E38C4AEC1EE statements are prepared by the Company
} primarily from the reports received from the
service bureau.
Title Weakness
{6D7D88AF- Other Performance Based Bonus Presently bonuses are discretionary in nature,
BD6B-4BCF- System
Title determined
Weakness without documented consideration for
8D0A-
{6F7C6EDF- Other Appropriate Approval of the financial
General performance
journal entries areofnot
thealways
Company.
approved
41927601F839
46BE-469A- General Journal Entries prior to posting.
}
A384- This is certainly not unusual for smaller
5C19D14C35A companies, however, as the Company continues in
C} its growth stages, a more structured bonus plan is
preferred.
Title Weakness
{703C24C2- Accounting Procedures A manual of accounting policies and procedures,
9DB2-4BBF- Title which
Weaknessdefines management and staff
97C1-
{709957F5- Cash, Cash Receipts and Authorisation of bank responsibilities and identifies
Lack of segregation criticalauthorising
of duties when internal
69DD29799DE
7A43-4D9F- Disbursements transfers controls in each
bank transfers major accounting area, is not
3}
8AC4- maintained. Presently, all policies and procedures
88EF143D82C are communicated verbally.
A}
{7378361D- Accounting Procedures Recording significant The Company did not record several significant
314A-43DF- transactions on a timely basis transactions completed during the year.
AD3C-
43932990FFF4
}
{73ADA2A4- Debt/Leases X Corporation and Y Corporation are making
7DEB-48C7- monthly lease payments to related parties.
BD12- Documentation relating to these leases was not
50033A9E2920 available.
}
Title Weakness
{73B75673- Work in progress Developing and monitoring The Company does not have an accurate and
D408-4018- cost estimates for each phase formal method of developing cost estimates for
8BE3- of a contract each phase of a contract and monitoring
679F53C886C8 performance as work progresses.
}
Title Weakness
{7402BEA3- Debt/Leases The Company requires prior approval for all capital
0A29-4ECE- expenditures exceeding a specified amount, but a
BCC5- similar policy does not exist for leases. During
5A47E3BE0204 [year], Divisions ABC and XYZ entered into long-
} term leases for various manufacturing equipment.
{75C3A9C6- Accounts Receivable and Reconciliation of accounts The accounts receivable subsidiary ledger has not
F8C6-49B4- Sales receivable detail to control been reconciled to the general ledger since (date).
8EFF- account
383C7029F331
}
{76FD3807- Accounts Receivable and Accounts receivable charge- The provision for doubtful accounts decreased
46CB-46B5- Sales offs/ provison for doubtful significantly in comparison to the accounts
ACDC- accounts receivable ledger
38B15AF1FBE4
}
Title Weakness
{77C593DF- Debt/Leases No schedule of loan covenants is maintained.
770A-4A4D-
9299-
677B5FF22B94
}
{7889DF41- Payroll, Personnel and Although the payroll registers are reviewed by X,
7A51-4765- Compensation one individual performs the majority of the payroll-
97E1- related functions
44B2A230CCC
E}
Title Weakness
{7891CD07- Accounting Procedures Advantages of an accounting During the course of the audit, we discovered that
EFD5-40B9- and operating procedures there are no formal written policies and procedures
8590- manual documented for the benefit of accounting
C09BD720E7A personnel.
B}
Title Weakness
Title Weakness
{796655B7- General Management The Company has experienced significant growth
8410-41AD- over the past two years and projects continued
BB7F- growth over the next five years, creating the need
8D6AE4CB1B3 for an accounting/administrative manager
A} (controller). Currently the Company does not
employ a controller.
Title Weakness
Title Weakness
Title Weakness
{797A635D- International The company has significant cash balances in
205F-47BB- foreign currencies.
90BD-
B6AADE78D2B
0}
{79F286AA- Fixed Assets Property and equipment record maintenance and
3781-4AB0- Title the annual depreciation calculation is performed
Weakness
AE25-
{7A3EFBDE- Investments Derivative instruments and manually.
StatementAsof considerable clerical effort
Financial Accounting is required
Standards
362DB8CF042
1C5E-4B0E- hedging activities to maintain these records, it has not been
(SFAS) No. 133, Accounting for Derivative
{7A5DF7B7- Accounts Receivable and The company does not prepare a detailed listing of
4DB5-4C7A- Sales accounts receivable.
8C72-
2CE5F180F31C
}
{7AE39464- Accounts payable, purchases Identification of vendor The trial balance of accounts payable prepared as
5449-46EB- and accrued liabilities balances in the accounts of December 31, 2XXX, was a chronological listing
9D9B- payable trial balance of unpaid invoices, not in vendor sequence.
4C66D7A0ED1
9}
Title Weakness
{7C2B8E0E- Scrap Scrap as a percent of paper used has been
C41B-4253- steadily increasing since [date].
BAD4-
5293A579C011
}
{7E30DA2A- Cash, Cash Receipts and Strengthening Bank Account The client's bank reconciliation procedures are
4211-4484- Disbursements Reconciliation Procedures weak. Reconciliations are not regularly produced.
B98D-
0487AC9913C8
}
Title Weakness
{7EEC0251- Inventory Out of date raw material Raw material was not always valued using current
D9AF-43D8- values purchase invoices and bills of material for
B760- manufactured products were not updated on a
B26238AB311F timely basis for current production costs.
}
{7F3EB68C- Cash, Cash Receipts and Employee cheque cashing There are no controls to prevent employees from
544A-43AE- Disbursements policy cashing cheques.
AB05-
081D85F8C9A
3}
{7F82C9C3- EDP (Computers) Establishment of corporate A number of personal computer requisitions have
0C3D-4311- policy on microcomputer been placed during the period.
8670- purchases
4141B036EC86
}
Title Weakness
{80E8DF18- Inventory Written inventory instructions, setting forth the
DE51-41C3- procedures to be followed in each department are
AEF2- presently not prepared and reviewed with the
C03C6B3C418 employees prior to the physical count.
D}
{80FF9E31- Accounts Receivable and Use of freight consulting Several national motor and air freight carriers are
D84B-4D1E- Sales services now providing no-fee consulting services to assist
A6F6- companies in determining the best method and
569DE51B35FB lowest cost means for shipping products. These
} services include reviews, benchmarks on shipment
size and weight and how that impacts the shipping
method and the use of shipping hubs or zones
rather than direct shipping.
Title Weakness
The client is not currently using these services.
{81107E8C- Accounting Procedures Suggested Revisions to Chart The available ledger accounts are not specific
1B0A-4F5A- of Accounts enough in some areas whilst others are too
A184- complex.
3CD8B179439
2}
Title Weakness
{81576209- Payroll, Personnel and Adoption of profit sharing plan The Company does not contribute to a pension,
A1E4-4696- Compensation profit sharing or other retirement plan for the
B8AE- benefit of its employees or officers.
35E1B4B11DC
4}
Title Weakness
{81802391- Payroll, Personnel and Evaluation of prospective The Company does not have written procedures
B783-49C7- Compensation employees for evaluating prospective employees. Individuals
8E1D- are evaluated through interviews with corporate
158317D074B officials; however, these interviews are not
2} documented and maintained in the Company's
personnel records.
{81BF345C- Accounts Receivable and Opening cash register The opening cash register readings are not printed
A71F-4ABD- Sales readings on the register tape used to reconcile the Daily
AE80- Reports.
0FB954BF7DB5
}
{81EF3385- Cash, Cash Receipts and Bank accounts no longer used or used infrequently
3250-4C8A- Disbursements are left idle.
9A35-
E4588022C764
}
Title Weakness
{81EFA2F2- Other Warranty Costs-Procedures for Warranty cost expense has become a significant
B501-4421- early identification of factor in the Company's overall operations.
A13C- potential problem areas Currently no summary of warranty work performed
0732E6344026 for each machine sold is maintained.
}
Title Weakness
{83CC5CB8- Accounts Receivable and Timeliness of billing Customer invoicing may be delayed several days
449F-4BFF- Sales procedures as shipping documentation is first routed to the
9AC6- service department for matching with sales orders
27E8E59B2BF1 prior to being forwarded to the accounting
} department, and the accounting department may
accumulate shipments for several days prior to
invoicing.

{850E02EA- Accounts Receivable and Contract accounts receivable The company routinely enters into agreements
787B-484D- Sales aging with its customers to construct or procure various
B728- items of machinery necessary to produce a
921AE21A263A particular product in accordance with the
} customer's specifications. Typically as is the
custom of the industry, the customer is billed for
product tooling upon completion of the project.
Currently, due to inefficiencies in billing for these
tooling items, and customers' reluctance to pay,
tooling accounts receivable have increased to
approximately $Xm, with $Xm being 90 days past
due.

Title Weakness
{85A4A07E- Inventory Lengthy year-end inventory The Company currently performs annual counts of
30A4-4660- counts physical inventories which generally result in an
9296- immaterial book to physical adjustment. During
34B5B82B8150 the count, shipping is halted for several days and
} production time is lost.
{85E4CB43- Shrinkage Shrinkage factor in cost The shrinkage factors provided for in the cost
0659-4E4F- standards standards are excessive.
BDCF-
32263CFE2214
}
{8696971C- Accounts Receivable and Matching bills of lading to Bills of lading and other shipping documents are
898A-44FD- Sales sales invoices not agreed to the invoice to which they apply and
8069- no control is kept over the bills of lading.
C322798D11C
D}

Title Weakness
Title Weakness
Title Weakness
{870F06B4- Investments Safekeeping of security There appears to be little control over security
EC32-4CE9- investments certificates held in the Secretary's department
A4BB- safe. Access is not restricted nor monitored. The
75AF2C96D93 records of securities are not updated on a timely
6} basis.
Title Weakness
{881A59B3- Accounting Procedures Review of accounting Schedules prepared by individuals in the
CD2E-4548- department staff work accounting department are not reviewed for
B674- accuracy, reasonableness and consistency with
9F25AD35616 Company policy.
D}
{88DB628A- Inventory Perpetual inventories are maintained on computer
CCAB-431B- for a significant portion of the inventory items.
9767- During the year, unit costs were not updated in a
2C5D30F81E67 timely manner.
} Labour and overhead standards for a significant
portion of the inventory items were not updated
during the current year for new labour rates and
for changes in overhead.
{8921E73E- Tax matters The Company's recent expansion in XX suggests
E0FF-4F4D- that additional attention should be focused on
BC6C- international income taxes.
65B844483861
}
Title Weakness
{8A0AF8CA- Inventory Control of production costs for At present, one individual is almost entirely
DDD7-4782- a small manufacturer responsible for controlling production costs.
8850-
74A95660FC8E
}
Title Weakness
{8AC9E55D- Information Systems Under-Utilisation of Computer The Company's equipment is capable of
C9D1-425E- Capabilities performing many automatic functions now done
9A0B- manually. There are several areas, such as
F0D84A187AB customer over- and under-billing reports, that are
9} done manually that could be done automatically
by the computer.
{8C3A0CC6- EDP (Computers) Increasing volume of data The Company is experiencing an increase in the
91AC-4847- processing levels of data processed.
94B3-
816F531B97D2
}
Title Weakness
{8D3B1A61- EDP (Computers) Systems and program There are varying degrees of formality of controls
1351-4580- development controls over the development of new systems and
9B52- programs and changes to existing ones. In some
86C32D54DC0 cases requests for program development and
A} maintenance are oral with little documentation as
to the justification for the change and a complete
lack of formalised procedures to control the
programmer's work; in other cases, there are
{8E728F5A- Inventory Manual inventory costing relatively
The productformal
cost procedures fortocertain
records used aspects of
value the
5379-4015- records
Title the requests
physical
Weakness for data processing effort
inventories and to determine selling
A4C6-
{8EC5D548- EDP (Computers) Data rejected by data prices are prepareddo
User departments manually. A computer
not maintain records of data
3FF741B135B5
74CD-4D30- processing system application
errors foundtoby
partially automate
the system. Such the bill ofwould
records
}
8079- material for each product is being developed
ensure that data rejected by the system is in factand
FB3B3FA68B85 the remaining bill of material detail
corrected and subsequently reprocessed.will be
} developed in the future as a by-product of another
application.
Title Weakness
{8EDD372C- Accounting Procedures Improving the Accumulation Currently quarterly closing procedures are not
3494-49E7- of Information for Quarterly followed.
BF32- Financial Statements
2F403C28A81C
}
Title Weakness
{8F06100C- International Compliance With Customs The Company imports most of its machinery and
05AB-463D- Regulations equipment from Europe. Legislation imposes
A9A5- specific documentation and record retention
1708F9F67F46 requirements which the Company has to meet.
} The Company does not have a formal system in
place to assure that the Customs' requirements
are met.

Title Weakness
{90153F60- Financial Management Evaluation of Plant Expansion The Company is considering expansion of its
A057-414F-
{91B494CB- Accounting Procedures General ledger reconciliations warehouse
The generalfacilities.
ledger isAny
not expansion
reconciled adds
to thea new
A723-
70AC-4EF5- dimensionpayable
accounts to operations because
subsidiary the
ledger innew
a timely
F564395D4E23
A181- operations must be integrated into the overall
manner.
}
1ADA4D5EC2C corporate plans and operations. Top management
F} has very little awareness of how the plans are
progressing.
Title Weakness
{9246850E- Accounts payable, purchases Posting accounts payable The accounts payable system does not properly
EAFC-4772- and accrued liabilities balances to units individually post invoices that must be allocated to several
AECB- business units. Instead of posting the allocated
A1D602D6DAB amount to each unit, the system posts the full
A} amount of the invoice to the first unit.
{93D912AB- Accounting Procedures Accurate quarterly The Company produces quarterly statements
1C2E-45C2- statements directly from the computer-generated trial
858A- balance. These statements do not reflect
E0B70A7C5D7 eliminating and consolidating entries or the
5} needed tax adjustments
{946BF9E0- EDP (Computers) Large number of high level Thirteen user profiles are provided system
E314-48BE- access logons operator capabilities allowing complete control of
B8B2- all jobs executing on the system. Some of these
86557F086ADF are established for personnel designated as back-
} up operators. This appears to be an excessive
number of individuals provided with this capability.
These users are also provided an additional ID to
perform typical user functions.
{94AA126F- Other The current production facility layout requires
685C-4F11- large amounts of time to break down and set up
ADB8- different product lines. Also, product is moved up
A867C8B197A to 25 feet from one process to the next, which
A} slows the entire production process.
Title Weakness
{95C27403- Stockholders' Equity In reviewing the stock book we noted that a
D3D2-4E80-
{966AE83C- EDP (Computers) Access controls with on-line stockholder
The Company lost a certificate
recently and wasan
implemented re-issued
on-line
8093-
7559-496F- report
Title viewing software another.
report In addition
viewing
Weakness during
system. Thisour review
system of the the
provides
8C845C2D7B3
83BC- subsidiary
capability stock
to have records several discrepancies
{96ECF006- Information Systems Disaster Recovery / The Company has reports
started stored on a platter
the process of
5}
F6044D94EB9A were noted,
(similar to a such
disk) as
so cancelled
the shares
information cannotbebeing
B5C7-4F53- Contingency Plan developing a disaster recovery/contingency plan,
} marked
requestedcancelled,
later director
and viewed shares
on-line.still in the
We noted name
that
9B4D- but as yet no formal planning has occurred.
of persons
all users arenoable
longer with the
to access allCompany
information andthat is
08B090DEC68
missingon
stored shares.
the system. This allows users to access
9}
information that is not applicable to their job
{97877377- General Management Increasing the number of The Company's Board of Directors is comprised of
function.
54C3-4E40- outside members on the seven members. Six of these individuals are
BEBB- Board of Directors serving or have served as part of the Company's
807DE57BC61 management group.
D}
Title Weakness
{979C21CB- Inventory Inventory products contain a bar code on their
726A-4949- packaging. Although the products already have
B285- bar coding capabilities, the function is not utilized
A56097F1767D internally by the Company.
}
Title Weakness
{9A0FC915- Financial Management Use of daily cash investment The Company does not actively manage its cash
96C6-4B1E- system balances to ensure that its interest expense is
A10E- minimised / income is maximised.
345DAB6A5EA
F}
Title Weakness
{9A266839- Debt/Leases There is no notes payable register in existence.
1785-4959-
AF3C-
111E64D191F7
}
Title Weakness
{9B556DFE- Cash, Cash Receipts and Bank reconciliations and cash The Company has many bank accounts to
353F-4BF5- Disbursements Title reconcile
Weakness and delegates these responsibilities to
AF36-
{9B69A536- Inventory Control of materials at outside various
During the past yearSome
personnel. reconciliations
the quantity for the
and movement
B5CD7F5B156
8AB6-488E- vendors general account were revised twice after
of materials at outside vendors significantly being
E}
8987- given to us for our audit testing and still
increased and there is no formal system in place had a to
A862208C176E large unreconciled balances
control the increase in movement. remaining after
} completion. The outstanding checklists are also
manually prepared. As discussed in the prior year,
{9BA6E668- Debt/Leases Updating capitalised lease A majority
there were of the Company's
reconciling rental
items that equipment
should have
AE38-4462- amortization schedules packages
been writtenareoff.
classified
Althoughas capitalised
a majority leases.
of thoseThe
AFF2- Company
items havehas established
been cleaned up, amortisation schedules
we still noted
CDA1C3FE7F89 detailing the monthly which
cheques outstanding principal reductions.
date back several We
} noted
years. the terms of several leases had been
modified; however, the amortisation schedules did
not reflect the change in status.

Title Weakness
{9DA16CFA- Inventory Inventory levels have increased substantially over
C31A-4F2E- the past year, with inventory turnover decreasing
BA56- at all divisions.
3B45EED20E2
1}
Title Weakness
{9E664934- Payroll, Personnel and The Company's payroll is prepared by inputting
320B-40D1-
{9FB914C8- Compensation
Inventory Segregation of similar employee numbers
Similar inventory and are
items hours worked
stocked in to the
different
B157-
7908-41DF- inventory items computer. The computer is
locations within the warehouse.relied upon to match
D86CE0AAC04
8664- the employee with the payroll master file to obtain
9}
0F6FBAF9507F the appropriate pay rate, to determine gross pay,
} deductions and net pay, and to prepare payroll
checks. Controls over this processing include
Title Weakness
agreement of hours input with hours paid and a
{A0AC73FD- Cash, Cash Receipts and Performance of bank Employees
review of thewith cashand
payroll receipts and disbursements
deduction registers for
8FF6-4565- Disbursements reconciliations by person not duties
obviousperform
errors. bank reconciliations. A bank
9CFB- having receipts or reconciliation, if effectively carried out, constitutes
A51979FE6D6F disbursements duties a partial audit of cash receipts and disbursements
} and therefore, should not be made by an
employee taking part in those functions (including
preparation of the payroll).

Title Weakness
{A0E03CDA- General Management Realigning Responsibilities A realignment of the duties of management
3196-4E25- and the Organisational Chart personnel is in process and a management-by-
B9C8- objective program is being instituted.
BF5AF9D4FAF5 Organisational documentation has not been
} updated as yet.
Title Weakness
Title Weakness
{A0EF9EFB- Accounting Procedures The monthly report package produced for
8EE5-4D4C- management includes only monthly financial
9C16- statements.
2C053A53EDD
6}
Title Weakness
{A15786B8- Payroll, Personnel and Future personnel The Company is growing rapidly and we
8B28-4BB9- Compensation requirements understand that plans are to accelerate this
B893- growth in the future. Without adequate planning,
76CB892B61F5 such growth could create a shortage of accounting
} and management personnel.
Title Weakness
{A21CAEF2- Accounts Receivable and Accounts Receivable clerks have access to all
F07D-4CCF- Sales customer accounts on the system. The accounts
80AB- receivable clerks record the cash receipts without
063E6154AAD the prior preparation of batch totals or other
1} mitigating controls.
Title Weakness
{A2236477- General Management The Controller currently works as part of the
A9FD-4428- treasury function but is involved with the control of
A3F7- management information systems.
8330BE0D7D6
A}
Title Weakness
{A2ED0CEC- Accounting Procedures Monthly review, analysis and General ledger accounts receive little critical
9624-4765- timely correction of errors review during the year. For example:
8C5E- (1) Accounts are not analysed
E5EB75E8609A (2) Unapplied credits existed in accounts
} receivable, deposits and claims accounts at year-
end; apparently little effort had been made to
match these to unpaid balances.
(3) Withheld tax accounts do not zero out after
{A3A87641- Accounts Receivable and Reconciliation of sales register each payment.
The sales entry for the test month posted to the
270A-4DC9- Sales (4)Intercompany
to the monthly general ledger general ledger was accounts were
$X higher notthe
than reconciled and
total shown
ACB9- sales entry several erroneous journal entries were undetected
on the sales register for the month. The cause of
658E1385883D until our audit.is not clear because the detailed
the difference
} (5) Interest
tapes was not
supporting theaccrued on miscellaneous
sales register entries from
notes receivable
the outside as of year-end.
bookkeeping service are not available.
 Title Weakness
{A41A08EA- Cash, Cash Receipts and Signed cheques mailed by The cheques for payment of vendors' invoices are
9EC7-46B2- Disbursements someone other than the reported by the bookkeeper and attached to the
8AE2- preparer vendors' invoices for approval by the President of
83125BA5ACB the Company. An officer of the Company signs the
E} cheques and they are returned to the bookkeeper
for mailing.

{A424F3D9- Inventory Inventory cut off and In a manufacturing environment, accurate

C832-47E9- receiving
Title information
Weakness relative to the physical receipt of
852C-
{A4F8FCB5- Other Calculation of Warranty inventory
Management items is critical.
does not use The Companyapproach
a systematic does not
E49724BC6A1
DDD5-4A60- Reserve have in place procedures necessary to ensure
to estimating the reserve for future warranty costs.
B}
A38D- accurate receiving cutoff. Presently, there are no
4CF10645D864 controls requiring prompt posting of the receipt of
} goods to the inventory system. Also, receiving
personnel are able to circumvent the inventory
Title Weakness
system by backdating receiving records.
{A6329BA6- Debt/Leases We noted that there are many leases utilised by
EE9B-4951- the Company which are not formally written, or
9EC9- which have not been updated once the lease term
893D5B82B9E has expired, even though the Company continues
B} to pay rent.
{A6CA11D2- EDP (Computers) When program changes are made, the Company
03C7-4343- contacts the contract programmers and the
ABF7- programmers perform modifications to a test
7419343E07CC library. However, after changes are implemented,
} the test library is deleted.
Title Weakness
{A6F5CBB6- Accounting Procedures Developing and monitoring The Company does not have a formal method of
3294-41CA- cost estimates for each phase monitoring performance as work progresses.
B1BE- of a contract
EC715E0A69AE
}
{A6F9CE20- Cash, Cash Receipts and Bank reconciliations- cash No outside review of bank reconciliations is
3EBD-4B17- Disbursements disbursement reconciliations performed
BAC4-
56A23A353F1C
}
Title Weakness
{A77D2B2B- Cash, Cash Receipts and Cash disbursements- When preparing a vendor invoice for payment,
36A5-4E3A-
{A7C696B3- Disbursements
Financial Management evidencing
Developmentverification of
of a strategic procedures
The Company arehas
notexperienced
documentedsubstantial
to evidence that
sales
9D45-
B8B9-45D2- vendor
plan invoices the invoice has been agreed to the purchase
growth since 200X. It does not have a strategic order
9BBB5EFF3073
BBEB- and receiving
plan to ensurereport if applicable/
that the the payment has
growth continues.
}
41F3D37048C6 been approved/ the invoice has been checked to
} ensure it is arithmetically accurate/ the invoice is
correctly coded for the general ledger posting.
Title Weakness
{A86F35F4- Accounts Receivable and Detailed accounts receivable The accounts receivable subsidiary ledgers include
515D-4987- Sales ledger miscellaneous accounts. Each account contains
A308- several detailed account balances that are posted
49253D839F4C onto one ledger card.
}
{A8A307C7- Inventory Prenumbered receiving Prenumbered receiving reports are not used for all
6532-44F8- reports inventory receipts. The current system uses
876A- receiving reports for a limited number of inventory
6057666C838 items. Generally, a copy of the purchase order is
D} used for receiving all other inventory.
Title Weakness
{A8AE824B- Accounts payable, purchases Proper recording of cash Cash discounts are recorded in the accounting
5A54-40AD- and accrued liabilities discounts records when the vendor's invoice is entered in the
AA76- purchase journal.
4E0796DA3E1
B}
{A97DE0CD- EDP (Computers) The accounting software was developed and
BA65-4480- Title installed
Weakness by a vendor named X. Data processing
98EB-
{A9B90B99- EDP (Computers) personnel
Departments aremay
uncertain whether
receive or not
computer the source
reports more
9D5E3B9CBCC
0351-4FCB- code is resident on
often than is needed. the system. In addition,
9}
B1EB- determination of ownership could not be
117C42C2D07 ascertained and there is no program
7} documentation available. The Company currently
relies on the software vendor for program
{AA6FE09B- EDP (Computers) Facilities to disable the processing capabilities of
modification.
9DFF-4BBE- an idle computer terminal are not in place.
BADB-
D5B728B486C
8}
{AB381FA8- Accounts Receivable and Identification of finance Finance charges are automatically computed on all
6DA3-48AE- Sales charges overdue account balances. Finance charges are
A68B- added to the total balance due from the customer
6D5F3A67A9F1 and are not separately identified.
}
Title Weakness
{ABE0B153- Cash, Cash Receipts and Cash Disbursements- Supporting documents do not always accompany
3142-4C7D- Disbursements improving documentation cash disbursements.
97D4-
99835170DF6
D}
{AC7E7E95- Accounts payable, purchases Documentation of There is no formal procedure to document
6887-4FB9- and accrued liabilities adjustments to vendors' adjustments to vendors' accounts.
B3FB- accounts
2CFBEC75F018
}
{ACDC421A- Accounts Receivable and There are large credit balances appearing on the
73ED-46BA- Sales accounts receivable ledger due to credit memos,
A99D- partial invoice payments and cash advance
A104515E233F payments.
}
Title Weakness
{ADD519AF- Tax matters Preparation of a Tax Calendar As the Company adds accounting units and
0830-43E1-
{AE1D1A27- Cash, Cash Receipts and becomes
There is asubject to taxation
considerable in additional
time lag states,
between when
BA40-
10EF-4E3B- Disbursements the number of tax returns required to be
cash deposits are recorded in the ledger and filed
53AFCF291C23
AEB8- increases.
actually Various federal,
deposited state,statement.
per the bank and local tax laws
}
DA6796F3BA3 have different filing requirements that may change
C} from time to time.
{AE7ACA5C- Accounts Receivable and While reviewing accounts receivable, we
9CA8-4F23- Sales discovered that many of the Company's customers
8506- take advantage of the discount terms even if they
316E4B5CC768 do not meet the discount terms.
}
Title Weakness
{AE89EAA8- Accounting Procedures Audit adjustments posted in We noted that X Company had not posted audit
A206-444E- subsequent year adjustments for several years.
99B5-
112C24843D9
1}
{AF41A566- Financial Management Comparison of actual financial Annually, the Company prepares a budget for the
7832-4A3E- results to budget upcoming fiscal year. The budget is prepared on a
B9D9- cash basis.
6532605F8ABC
}
{B081506C- Payroll, Personnel and Review and approval of All hourly and salaried clerical employees are
27B6-49FD- Compensation employee time cards required to document hours worked through the
A0DE- use of time cards. However, these time cards are
27951E74326A not approved by authorised supervisory personnel.
}
Title Weakness
{B0E55716- Accounts Receivable and Accuracy of sales reported by The company's royalty income is based on
F71A-46CD- Sales franchisees franchise sales as reported by the franchisees.
AD86- There is no verification of these sales by the
20FBBE4729D4 company.
}

Title Weakness
{B142C6E8- General Management Suggested topics to be Director's meetings are held infrequently without a
DB96-4233- covered at annual meetings of clearly planned agenda.
A049- directors
B255BC6F1505
}
Title Weakness
{B1D4981F- Intercompany Transactions Reconciliation of The Company experienced problems in reconciling
D465-4BF1- intercompany accounts a number of interdivisional balances at year-end.
AECC- In some instances, large discrepancies were
7D40D84883F reported.
3}
{B296D9DD- Financial Management Formalisation of Corporate The Company has grown significantly in a very
94AA-497B- Objectives short time and plans to continue at a significant
806A- rate of growth.
24D9BBB4821
1}
Title Weakness
{B32432C0- Accounts Receivable and Credit memos to customer accounts do not have
BF72-469F- Sales supporting documentation attached and are not
A5D8- authorised by an official prior to being processed.
CF20DCD853C
9}
{B46B78AC- Accounting Procedures Only a few general ledger accounts for the various
FF4B-4548- tax expenses and accruals are used.
A9C7-
1588291F6C23
}
{B4E85990- Fixed Assets Timely and proper recording Fixed asset additions and deletions are not
AA70-456A-
{B4FB8EEA- EDP (Computers) of fixed
Users assets
able to change their recordedare
Profiles in set
a timely
by the manner nor are
computing internal to
department
A7AF-
21B3-48BF- own profiles records access
restrict maintained
to thetosystem.
monitor Users
which have
assets are
the
40D6A778409
9088- acquired
ability to and
make sold. The Company's
changes to their ownpurchasing
profiles.
7}
82114FEFA0E7 department does not properly code purchases,
} rendering the fixed asset system ineffective in
correctly identifying and tracking fixed asset
Title Weakness
purchases.
{B660E0DC- Inventory In the past two years, there have been significant
EC70-4B75- fluctuations between the projected overhead rates
A349- used to value inventory throughout the year and
A2B4D3BA04C the actual overhead rate calculated at year-end.
C}
{B779FDD4- Inventory Comparison of actual scrap Scrap produced in the plant is not picked up
FF83-49F2- produced to acceptable regularly from the various departments.
9CC4- standard allowances
F4969230C53D
}
Title Weakness
{B7D1166C- Inventory Separate quantity and cost The Company has two computer systems for
52EA-473B- systems maintaining inventory information. One system
94C3- maintains inventory quantities by warehouse
D174144277BF location and the other system is used to cost the
} inventory. Currently, only one location uses the
computer system to track inventory by warehouse
location.

{B8728B6B- Cash, Cash Receipts and At the are

There timeoutstanding
of our auditcheques
fieldwork attendance,
still unpresented
6136-42B2- Disbursements there were no
after X months. reports providing inventory parts by
8540- location information maintained on file.
B2F69639DDB
5}
{B8B8FA8C- EDP (Computers) Study of data processing The Company's conversion to a new data
447B-44F9- needs processing system presents an opportune time for
9C55- a thorough study of the Company's data
78B38F198FC0 processing needs and methods of operation.
}
{B8BD886A- Cash, Cash Receipts and Cash Disbursements-facsimile All cheques are signed with a facsimile signature
76BC-45C4- Disbursements signature plate plate.
9222-
D29542CBEF3
D}
Title Weakness
{B97938FB- Accounts Receivable and Billing and collection of Accounts receivable and unbilled disbursements
2232-4AE0- Sales accounts receivable have improved, but there remains a lengthy delay
B104- between delivery, invoicing and receipt of funds.
F7A31F2F5B1C
}
{B9EF0F46- Accounts Receivable and Authorisation of voided sales Sales slips are not accounted for numerically
E99E-401C- Sales slips
BD24-
EDBB0730D10
D}
{B9F900E5- EDP (Computers) Several user IDs with powerful access capabilities
2C1F-46F6- were supplied with the operating system.
AD50-
6E5371C70BA5 These IDs are used by service technicians for
} diagnostics and testing and allow the user to
perform all functions on the system. These IDs are
not required for use on a day-to-day basis, thus
should only be active when service is required.
Title Weakness
{BA3C5733- Financial Management Utilisation of profit planning The Company does not operate a profit planning
E2FB-4A95- and related systems to attain process. In the past, the Company has been
8625- desired profit goals successful in attaining its desired profitability
BA0E21B5FE49 Title Weakness
without the use of a formal profit plan or a
} Title Weakness
budgeting system. However, for the year just
{BA7E6956- Scrap The Company does not maintain a record of why
6F44-43DE- scrap is generated.
9258-
097CA4E5F833
}
{BAD74F9B- EDP (Computers) Program documentation kept All documentation of programs and processes is
64EB-48A9- off site kept on site.
9621-
FA4C965F651F
}
Title Weakness
{BB2D64AC- Tax matters Expense reimbursements for The Company provides cash advances to cover
4A9D-4C10- individual employees expenses of those employees who travel on
866C- business.
2C8224D0794
A}
Title Weakness
{BB4F47FC- EDP (Computers) Systems narratives and user The Company has the basis of good systems
C8A7-4E7D-
{BB7D725D- Inventory manuals
Inventory Valuation and Cost documentation,
During the course such as record
of audit layouts,performed,
procedures program
9CE1-
64D5-4BC2- of Sales listings
we noted several shortcomings relating to X in
and operator instructions. However,
5BBF05DD062
BC36- general,
Company's most of the documentation
inventory including: does not
3}
854276857247 -contain an overall
Inventory systems narrative
count procedures are not that
formalised in
} describes the overall objectives of the system.
writing;
-Also,
Rawuser guidesare
materials arenot
notalways
prepared. User
valued guides
using
are manuals
current that prices;
purchase inform the user departments how
to complete
- The inputcosts
production documents, how
allocated to deal with
to manufactured
errors and how to reconcile the reports.
goods are not updated on a timely basis.

Title Weakness
{BC197178- General Management Documenting compensation The Company does not document authorisation of
8AC2-4FD9- to officers-stockholders in the compensation for officer/stockholders in the
8A9A- corporate minutes Corporate Minutes.
8A1449DF618
D}
{BC523A16- EDP (Computers) Loss of records due to Computer programs and files are not kept securely.
3A44-4706- damage Access is not restricted and files are not kept in
AADD- fireproof storage facilities.
42E0DBE627C
D}
Title Weakness
{BC53EEB3- EDP (Computers) Allocation of Management As the Company continues to grow at a rapid pace,
75C8-461A- Information Systems there are increasing demands upon the MIS
9DAC- resources Department and the current systems.
4FA2290F6EC2
}
Title Weakness
{BCF50135- EDP (Computers) The current policy permits programmers to
8D4E-4E57- Title operate
Weakness the system for testing their programs.
8DFF-
{BD2E2641- Financial Management They also
Timely Analysis of Changes in The Company maymadehave unsupervised
sufficient salesaccess
duringtothis
the
11F1148D8C8
DEA1-41C3- Gross Profitfor
Percentages computer
past room
year tofor
pass on weekends. While
the break-even-point.in the
{BD515870- Fixed Assets Minimums capitalisation All invoices repairs are scrutinised toThe
determine
D}
B4C6- computer room,represented
resulting they
profit programmers an have access to
outstanding
4F2C-430E- and periodic inventory of whether should be capitalised.
C3F80335D481 production
turnaround programs and data files
from the preceding yearstored in on-
and again
BFCC- fixed assets
} line libraries and tape files
established a positive balance in retained
F5AC4305999A
} earnings. There is, however, a disturbing trend
that has persisted for the last four years. The
Title Weakness
Company's overall gross profit percentage has
{BD8EDDBD- Accounts Receivable and Study of additional cost and The Company
declined each factors substantially
year, with all receivables
a 3.2 percent drop in the
9DAA-412C- Sales cash if factoring discontinued to maintain
current year.a cash position sufficient to run the
B4BF- day-to-day operations of the Company.
9FEE600D4913
}
{BE89A123- EDP (Computers) Ownership of data stored at The Company uses a service bureau for all of its
7218-4DAC- service bureaus data processing needs.
9846-
C009BE9246AE
}
{BEFA62EE- Accounts Receivable and Separation of sales, collection Segregation of duties within the sales and
412F-4ABA- Sales and credit memo approval accounts receivable functions is lacking.
8A06- functions
63E165275360
}
Title Weakness
{BF09C592- Payroll, Personnel and Establishing deferred The company does not have any pension plans or
4270-49DD- Compensation compensation contracts and compensation contracts open to all employees,
8350- pension plans only to executive personnel.
F6D333717670
}
{BFAFABDA- Cash, Cash Receipts and Cash Disbursements- second The company's procedures require only the
8B78-459B- Disbursements signature requirement Controller's signature on each cheque.
B6F4-
F9B3C31ED3FE
}
{C02DD39B- EDP (Computers) Formal contingency plan for There is no written contingency plan describing
79FC-4123- system failure the operating and data collecting steps to be
9A68- performed in the case of a system failure. Each
BC94B07BD1A area is assumed to understand what must be done
4} in the case of failure.
 Title Weakness
{C0A2C4A5- Accounts Receivable and Evaluating the effect of The Company's marketing policy is to try to fill any
A26E-4027- Sales company policies on customer order.
A751- profitability
5FF36D71A67A
}
Title Weakness
{C1375544- Tax matters A majority of the work performed by the Company
396B-4C04- is done manually rather than on personal
81F1- computers.
C32077BE990F
}
Title Weakness
{C3451302- Scrap Lack of documentation of Revenues generated from the sale of scrap
61D3-40A1- scrap sales represent sizable dollar amounts and should be
9341- controlled to assure proper credit. At most
C89170AF8577 locations there is no record prepared when scrap is
} picked up.
{C3FD8EF8- Cash, Cash Receipts and Cash Disbursements- lack of Lack of segregation of duties within the cash
FBC6-4005- Disbursements segregation of duties disbursements function. Eg cheques are returned
AF94- to the accounts payable clerk for mailing and the
A54428185C1 individual who reconciles the payroll bank account
D} also generates the manual payroll cheques.
{C578D5DC- Financial Management Retirement of Long-Term Debt The Company has long-term loans on its books in
7830-4DE0- the amounts of B and C that carry interest rates of
BC23- X% and Y%, respectively. The Company has a Z
40F61DE53D6 value line of credit available at A% that is not
C} utilised.
Title Weakness
{C59CE921- Accounts Receivable and Numerical control of sales Although sales invoices are prenumbered, the
D242-4A8E- Sales invoices company does not account for the numerical
9FFD- sequence of these invoices.
627D316C34A
1}

{C5FB1BD6- Accounts Receivable and Developing Monthly Analysis Management evaluates the performance of the
E5DF-4F57- Sales of Retail Units retail units on a limited basis periodically. No like
A923- for like comparison is made between units nor are
EBE807F33023 variances investigated.
}
 Title Weakness
{C70E0DAA- Inventory Inventory levels should be maintained at a level
5A20-47F8-
{C7A206EB- Inventory consistent
Due to the with theand
nature sales
theand production.
changing technology of
BD88-
B484-432B- Communication
the betweenobsolescence
business, inventory the marketing,is an
FBCEF1123349
A347- purchasing, accounting
ongoing problem and an
from both production
operating and
}
68A8A75673D departments is essential for maintaining adequate
reporting standpoint.
4} inventory levels. We noted instances in which
there was little or no communication and inventory
Title Weakness
was ordered that was not needed. One item was
{C935B3D5- Tax matters Benefits of a medical The
notedcompany currently
during our testingdoes not havereceivable
of accounts a medicalin
BDEA-4B93- reimbursement plan reimbursement plan department ordered the
which the purchasing
882F- wrong quantity. This item was subsequently
EA727A697FAF reclassified to other receivables. In addition,
} discussion with personnel and review of inventory
{CA154419- EDP (Computers) Updating accounting software indicates
The Companythat items are being
has recently madeproduced without
a considerable
F529-4EA3- enough market research to support the production.
investment updating its computer hardware in the
8098- accounting department. Review of the Company's
D9F0CA23733 accounting software, suggests that an upgrade is
2} also desirable now that the system can support
the change.
{CA257CD7- Inventory Intercompany inventory It was noted during our inventory observation at
011E-401A- transfers Location X that intercompany inventory transfers
9437- are reconciled and posted to inventory at the end
75B511DA8AB of the month. This is a breach of Company policy,
E} which requires shipments to be reconciled and
posted on a daily basis.

Title Weakness
{CAA8EC6D- Accounts payable, purchases Purchasing Procedures- We noted that an employee in the purchasing
A9D1-464C- and accrued liabilities Segregation of Duties department has the authority to initiate purchase
94ED- orders and approve the invoices for payment.
D9984833E79F
}
{CAB5ACE4- Payroll, Personnel and It is our understanding that the Company has not
7353-4B1B- Compensation formed a policy requiring all new employees to
84B0- sign an agreement enforcing confidentiality of the
FF4274936E68 Corporation's trade secrets.
}
Title Weakness
{CB331C6E- Financial Management Long-range planning as a tool The Company does not use long range planning as
F0E7-4B38- for increasing profitability a tool for considering the direction of its future
9A90- growth.
BD4DCD1F390
C}
{CB801AD8- Accounting Procedures The Company has experienced significant growth
99E9-41F2- recently and has not increased its accounting staff
81EA- accordingly.
3C5497433069
}
Title Weakness
{CBEC5C70- EDP (Computers) Program backup and related The Company is not maintaining an offsite storage
796A-485A- documentation facility for information systems source programs
8438- and associated documentation
F13862D94D2
6}
{CC3A0DDB- Fixed Assets Computerising Property and It was noted that a computer software package
269A-4E7E- Equipment
Title has not yet been purchased to account for
Weakness
AAA2-
{CC9EF0EF- Accounts Receivable and Invoices recorded for property and equipment.
The company's information Assystem
mentioned in our
permits
01AB7905E137
A0BE-43B2- Sales merchandise not shipped. prior year comments, detailed listings and
invoices to be recorded as sales, even though costthe
}
BCC0- records are helpful in reviewing the adequacy
goods are not shipped until the subsequent month. of
2E0A24FA1C1F insurance coverage and helpful in the preparation
} of insurance claims in the event of asset loss or
destruction. Also, with the possible purchase of
{CCE0FD7D- Tax matters Summary of available The
majorCompany has
additions in available
the future,certain tax carryovers
this would be a very
0B20-4227- carryovers that can
useful be used to reduce taxable income in
tool.
952B- future years.
BD9B306AD14
5}
{CDBF52F1- Stockholders' Equity Lack of formal documentation We noted that the Company does not have a fully
8B08-465D- executed copy of the X stock agreement.
8D68-
2D13700ED6D
C}
{CED5A5BE- Financial Management Centralisation of treasury Periodically one division is required to obtain short-
E859-4236- function term borrowings to meet immediate cash
9B1A- requirements while another division maintains
F9ECBB9E1DC invested funds.
E}
{CFE67317- Accounts Receivable and Separation of cash handling, There is lack of segregation of duties in the
158A-41E0- Sales receivable and billing accounts receivable department with the accounts
9728- functions receivable clerk maintaining the petty cash fund,
D4CBAB1226B preparing sales invoices and maintaining the sales
5} journal and detailed accounts receivable
subsidiary ledgers.

Title Weakness
{D010CC5F- Inventory During the past several years, X Company has
B186-4FD6- experienced book to physical adjustments of
BDE0- approximately $XXX,XXX on an annual basis. This
7DBAA130416 amount represents approximately X% of sales and
0} X% of cost of goods sold. In 2XXX, the Company
{D09B052E- Information Systems Linking Engineering The Systems Manager is currently in the process of
5279-4114- Workstations linking all engineering workstations to the main
B489- system via direct cables from the system to the
28E8F99B2EEF second serial port of the engineering workstation.
}
Title Weakness
{D09B66AB- EDP (Computers) Access to the on-line system is not restricted or
6ABF-4738- monitored.
B010-
119AE4DD4BA
7}
{D0CEB97B- Accounts Receivable and The standard percentage applied to calculate the
65DC-4A6D- Sales allowance for doubtful debts does not necessarily
91CA- coincide with the past history of actual accounts
2F0E96BF3623 written off.
}
{D0F20078- Shrinkage Shrinkage - material at A $X adjustment for shrinkage of material at
FE27-4B8F- outside contractors outside contractors was recorded at year-end.
8449-
CAD8992D491
0}
Title Weakness
{D104D7B9- Financial Management The Company uses limited cash flow forecasting.
E63B-4A67- The forecasts used are fairly simple.
B11C-
E5F984E8066B
}
Title Weakness
{D12F4B53- Payroll, Personnel and The Company does not have a formal procedure
B770-4EB8- Compensation for holding an annual review with each of its
8FCE- salaried employees.
8CAFB6057B07
}
Title Weakness
{D1AAD97F- Accounts Receivable and There is no written authorisation for changes in
6AF5-4949-
{D1DBB64E- Sales Cash Receipts and
Cash, billing
Cash disbursements- drawing The rates. For
company example
is still rates
adopting used
the in extending
policy of drawing
9537-
124D-4DD6- Disbursements cheques payable to "cash" labour hours
cheques on production
payable to "cash" jobs are determined by
40F1B8AB8C7
9326- the production clerk. Modifications to the list are
A}
EF58A4EEE3EE made by the clerk upon verbal authorisation by
} the controller. Modification to rates may not be
reflected on a timely basis and there is a lack of
Title Weakness
audit trail.
{D246D83E- Accounting Procedures Use of scheduling and Currently monthly reporting deadlines vary by
85D9-4CBC- standardised reports function. The output produced also varies in
BA70- format by function. The output produced also
F894B07BF913 varies in format between departments.
}
 Title Weakness
{D2CF4F13- LIFO Conversion Development of LIFO Costing Details of the Company's LIFO costing processes
3467-4E92- Procedures are not included in its procedure manuals.
94F7-
C73FC9011878
}
Title Weakness
{D2D2FB34- Inventory Management reviews inventory for obsolescence
3C56-45FF-
{D2D5451A- Cash, Cash Receipts and Cash disbursements- and reorder
There points
is a high by manually
volume of manualreviewing
chequesthe
written.
8CF6-
3124-4617- Disbursements establishment of "cheque inventory listing. Because the Company's primary
5AC11157EED
8184- write" days product continues to change and evolve rapidly,
B}
8F0C56262CA maintaining current analyses of potentially
D} obsolete inventory is important for the Company.
This will become more critical as inventory levels
{D2DDC786- Accounts payable, purchases The
growCompany's employees are allowed to
in the future.
8292-450A- and accrued liabilities accumulate vacation time, which will be paid to
BD3D- the employee upon termination. The Company
B755FC7C766B should have recorded a liability for accrued
} vacation time at the year end.
{D3933080- EDP (Computers) Coordination of group We believe there may be some benefits to
3AE3-4CF0- information system resources corporate-wide coordination of information system
9BC9- resources. The Company has not considered such
AC21DEAB01C coordination.
D}
Title Weakness
{D3B90BF0- Inventory During physical inventory observation at the X
14A1-4B4A-
{D4C2AB41- International Division,
Foreign Currency Transactions The it washas
Company noted that therenumber
a significant were several tags
of ______
BFFC-
C266-4640- on lumber that
denominated had no change
transactions. in quantity
These from are
transactions the
F70D9D0FAC8
9B30- prior year's
currently inventory
recorded tags.
at the Upon further
average monthly
B}
E0C4E36EE6D investigation,
exchange rate.it was
Whiledetermined that is
the difference this
notmaterial
5} is no longerthis
significant, used in the manufacturing
method process.
is not in accordance with
local Financial Accounting Standards

{D4D04F86- Inventory Inventory held and produced The amount of inventory held at outside locations
0FC3-46F6- at outside locations has increased significantly from prior years and
908D- may continue as more products are produced
FFA35B521A46 outside and overall sales continue to increase.
} Outside confirmations were sent to the
warehouses and resulted in several differences,
some of which could not be explained.

Title Weakness
{D5081CE8- Information Systems The Company uses multiple IBM AS\400 computers
3EB8-441E- Title to process its business applications. The AS\400
Weakness
A736- provides the ability to select certain options that
ABB73737A25 determine how the system handles security
1} related activity. In reviewing the options selected,
we noted certain values that should be
{D571BE0C- Accounts Receivable and Communication between The Company's credit review function operates on
BC0D-4170- Sales divisional credit departments a divisional basis. Credit departments are located
A59E- in X, X, X and X. There is no formal interdivisional
2BFAB682D123 communication system regarding high-risk
} customers or customers with significant past due
balances.
{D66ECB4C- Inventory Reviewing the cause of Labour efficiency variances for the year were
5294-4221- variances significantly unfavourable in relation to the total
B26A- direct labour charges.
040F74842596
}
{D6CBC3A0- EDP (Computers) Distribution of computer The distribution of computerised reports is
8619-43DB- reports informally controlled.
94BC-
40495392D8C
C}
Title Weakness
{D7780FBB- Other It is our understanding that although written
E62A-406A- conflict of interest statements are sent to
95F2- employees on an annual basis, no formalised
85B5FC36AF05 conflict of interest policy exists including follow-up
} and documentation of possible conflicts of interest.
Title Weakness
{D7CD3BAE- Accounting Procedures Reporting results by business The Company's general ledger system does not
B079-4073- segment permit the monthly reporting of operating results
868E- by business segment.
7674F4F0D5C4
}
Title Weakness
{D80AF18A- Accounting Procedures There are several individuals who have extensive
7840-4476- knowledge of their particular area of the
901A- accounting and finance department. Often, they
CD645BBCF04 are the only ones who have detailed knowledge of
1} "how things work."
{D87C3617- General Management Periodic Review of the The Company's various insurance plans are
0196-4D77- Adequacy
Title of Insurance complex.
Weakness In certain instances, one type of
8E57-
{D925A387- EDP (Computers) Coverage coverage
The normal is information
representedsystems
by several policies. cycle
processing
6B818ACCD35
02B3-4841- includes backing up computer files nightly. These
8}
8679- In addition,
files, tangible
along with assets
other backuparetapes,
insured
arefor less in
stored
0C61EEB8AED than book value. Generally, this
a fire resistant locked box on-site. amount is not
D} representative of market or replacement value.

{D982D512- Financial Management Conversion of Short-Term Bank note financing has increased over the last
955B-41A7- Financing into Long-Term two years. The use of short-term financing should
B7C9- Financing or Equity be limited to temporary needs of the business.
9CD7580E2E6
C}
{D9AF67E0- Payroll, Personnel and Adoption of semi-monthly The Company operates a weekly payroll for all
E958-4939- Compensation payroll policy employees.
8E7E-
F8D1A79D391
7}
Title Weakness
{DA900E8B- EDP (Computers) Access to the system software, including
1A06-4004- applications, is gained by entering valid user
81A4- identifications and passwords to the system;
E110B0C55E1 however, passwords are not changed on a
D} frequent basis.
{DC00C99D- LIFO Conversion Use of LIFO Inventory Method Inventories are valued at the lower of first-in, first-
E91C-4AD0- out (FIFO) cost or market value. Present industry
AA79- conditions may result in substantially higher prices
D1ACE90982A for components in your inventory. As a result,
E} conversion to the last-in, first-out (LIFO) method of
inventory valuation may be desirable. Such a
change may result in reduced taxes. However, the
resultant reduction in earnings must be
{DC09BC2A- Accounts Receivable and Accounting for sales return considered.
Sales return credit slips are prenumbered but not
DA50-4E25- Sales slips numerically accounted for.
A4C0-
CC15087D4DA
7}
Title Weakness
{DD433286- Accounts Receivable and Customer receipt date for No determination is made of dates that customers
8CE3-4EB1- Sales drop shipment merchandise receive the merchandise drop shipments. The
BC19- accounts payable is recorded when the customer
EB9DF7301493 is billed.
}
Title Weakness
{DD727F1A- EDP (Computers) Documentation standards are guidelines that
E5DB-4B3E- Title ensure
Weaknessnew systems, as well as changes to
916C-
{DD79E01C- Payroll, Personnel and Changing overtime payment existing
There are systems,
a limitedare documented
number of waysinan
a thorough
employee
4A16622B2601
DD06-4D49- Compensation policy and consistent manner. Inadequate program
can receive overtime. The Company pays overtime
}
AB7C- documentation may result
to qualified employees on aincurrent
excessive program
basis only.
6379017B538B maintenance costs and undue reliance upon "key"
} individuals.

{DDF396C8- Accounting Procedures Timely recording of general We noted significant transactions that were not
89E6-4CB6- ledger transactions being recorded in a timely manner and in some
87AD- cases not at all during the prior fiscal year. For
1B14F1054617 instance, $XXX,XXX was received from
} contributors during the year for the X Project and
was not recorded on the books which resulted in
an understatement of assets and liabilities.

Title Weakness
{DEA8AB6F- Inventory Advantages of Pre-Numbered The Company does not use pre-numbered
1875-4EA4- Receiving Reports receiving reports, in some cases no reports are
8D4D- used.
C349033D1D1
D}
{DECC509A- Cash, Cash Receipts and Cash Receipts- control listing Incoming mail is handled by two people before the
6B66-4209- Disbursements of cash receipts cash is collected and recorded. A listing of mail
803B- receipts is not made.
125F4CC3550F
}
Title Weakness
{DEFBAB04- Inventory Review of inventory pricing (1) In certain circumstances, the President
60A9-45E0-
{DF16EF85- Inventory system and controls overrode the the
Control over computer's
shippingautomatic
date couldpricing method
be improved.
8E78-
9DFB-4AC2- (FIFO based
Sales orders on
arecurrent invoices)
filled and checkedby and
processing
then put
CBE013C7F2A1
AE61- price
on thechanges.
dock to await pickup. The pick-up
}
868C211B3EE1 (2) There was
procedure no documentation
consists of the customer of inventory price
pcking their
} changes
own (i.e.,
goods off no
themaintenance file report).
dock and loading them for
(3) Therewithout
delivery is general access to the computer
supervision.
maintenance file for pricing data; therefore, pricing
changes could be processed by anyone in the
{DF357621- Cash, Cash Receipts and Bank reconciliations- accounting department.
There are unexplained differences of [amount] and
BF06-44E3- Disbursements unexplained differences in (4) Individuals
[amount] in two incash
the accounting department did
account reconciliations
98EF- cash reconciliations not know the computer's method of calculating the
521A4490FFE7 price and, therefore, were not able to detect errors
} in pricing.

Title Weakness
{DF68D9A1- Cash, Cash Receipts and Cash Disbursements- The Signature plate used to sign cheques is kept in
8C82-466A- Disbursements signature plate an unlocked desk drawer and control of its use is
B256- not maintained.
EEADAAB396A
F}
Title Weakness
{E21563EA- EDP (Computers) Some users have a profile (or multiple profiles)
5C07-47CF- that allows access to elements of the system that
86DD- they do not require as a result of their day to day
F51F4CB423A6 work.
}
{E24588D5- General Management Business interruption The Company does not have business interruption
AFA0-45C6- insurance insurance.
9A21-
D42516B48BF8
}
Title Weakness
{E2832C07- Accounts Receivable and Sales returns and allowances The Company does not establish a reserve
9763-474B- Sales reserve allowance for sales returns. In addition the
8FB9- company does not match returns with
82606F39077A corresponding sales.
}
{E3C1156A- EDP (Computers) The tape library is not maintained under the
6C3D-48FB- Title control
Weaknessof any one person. The application
910F-
{E4CBADAF- EDP (Computers) Computerised accounting and supervisor
The company hasdoes
responsibility
not have a for the library, but
computerised
38DB9BAC4AB
100C-4C6E- information reporting system tapes are actually taken out of the
accounting and information reporting library by the
system.
D}
8B22- control clerk on first shift and the shift supervisor
D6D9F790CBF on second shift. Further, the tape library is
C} unlocked and is open to all personnel with access
to the computer room
Title Weakness
{E563CD97- Payroll, Personnel and During our review of the accounts receivable and
D848-4237-
{E5B01EB5- Compensation
Fixed Assets Formalisation of fixed asset payroll
The systems,
Company it was
does not noted
have athat commissions
fixed asset are
879B-
7BEB-4DE0- capitalisation policy being paid based
capitalisation upon unbilled sales data. In
policy
AC397D97FF7B
B05C- some cases, subsequent credits were applied to
}
DF3F3DA0469F customer accounts that were not credited to the
} salesman's commission account.
Title Weakness
{E6C4CFBB- EDP (Computers) Accuracy of computer There is no established procedure for verifying the
B541-4163- processing accuracy and completeness of computer
8444- processing and reports. Users are responsible for
73957E3C9C01 verifying the accuracy of reports and processing
} and notifying the Systems Manager if errors are
detected.
{E6CB56E8- Investments Return on Retirement System The County Employees Retirement System is party
5EF5-48EB- loans to a securities lending arrangement with Bank X.
B276- The Retirement System lends securities and
666979B67635 receives collateral in the form of cash, investments
} or letters of credit form specified borrowers, with
Bank X acting as the intermediary.

For the year ended December 31, 2XXX, the

Title County
WeaknessEmployees Retirement System earned
approximately $x,xxx, net of bank fees, on loans
{E86E66AC- Accounting Procedures Standardised Consolidation Standard consolidation schedules are not used at
made. The value of securities loaned by the Plan
C1E1-410A- Statements each group location.
to the broker at December 31, 2XXX was
8749-
approximately $x. The average balance of
1BE78230A002
collateral invested during the year was $y.
}
{E87D75D8- Payroll, Personnel and There is no evidence that payrolls are reviewed by
2A1F-42E9- Compensation an appropriate Company official.
8CAE-
1A2F23813E54
}
{E980558A- Other Utilisation of standard journal Most of the journal entries recorded in the general
A247-4FCB- entries journal each month are of a recurring nature,
A402- affecting generally the same accounts each
AC38A2B1747 month. Each month the journal entries are
1} redrafted.
Title Weakness
{E9A4449A- Inventory Inventory cost standards are adjusted annually to
2902-48C0- reflect current material, labour and overhead
9AF6- costs.
65346A9EBD8
8}
{EAE587AF- Accounts Receivable and Several accounts receivable accounts have
A71A-4C5B- Sales erroneous amounts billed and subsequently
9DEF- credited.
C1790F786DBF
}
{EB1CB7B9- Tax matters The Company has a significant potential asset in
26E4-49F1- the form of benefits from its operating loss
83DF- carryover.
700F8D524A62
}
Title Weakness
{EBAC7435- Inventory Inventory counting Inventory count procedures are not formalised in
F87C-480E- procedures writing and distributed to all relevant employees
8A97- prior to the count.
0B42115E42FA
}
{EBAD8A65- Accounts Receivable and The credit controller is also responsible for
2421-4785- Sales reviewing credit applications and has final
9512- responsibility for accounts receivable balances
C80063775212 and bad debt write-offs
}
{EC91D426- Fixed Assets Approval of significant Currently there is not an established process to
2461-4AD5- additions authorise and approve significant fixed asset
88CD- additions.
F2E7BC051FB4
}
Title Weakness
{ECB0E5A4- Inventory The Company's procedures for recording transfers
0AF1-4062- of inventory involve batching the transfer tickets
82CF- by the accounting department. These batch totals
48056DF814E1 are sent with the transfer tickets to the data
} processing department. The information systems
department verifies the input into the system by
comparing transfer edit reports to the batch totals.
For each transfer ticket, the edit report lists the
Title number
Weaknessof units and the unit retail price. It does
{ECFFDF8E- EDP (Computers) During our review, we examined the control
F431-4598-
{ED632DA9- Payroll, Personnel and Contributions to Individual procedures
While for managing
the Company has a changes to theplan, due
profit-sharing
BF00-
BCE7-426C- Compensation Retirement Accounts production
to systems.
its integration withProcedures are in
social security, it place that,
may not
D539FB93DF0
8C65- if complied
benefit with, promote
all employees a relatively
for whom controlled
management
6}
A122F60039DE environment.
would However,
like to provide procedures
retirement can be
benefits.
} circumvented by programmers making changes
directly to production objects. In addition, due to
Title Weakness
the manual nature of the process, review of
{ED8F51B3- Tax matters Tax assessments/ During
changes our
madereview of the
is more tax accounts, we
difficult.
925C-47DC- reassessments on a timely discovered that the authorities had reassessed the
BC19- basis Company for $XX,XXX of disallowed expenses for
99967AEFB72B the XXXX year.
}
{ED9F68FF- EDP (Computers) Lack of procedural Data processing programs and procedures are not
3892-49B1- documentation formally documented.
9659-
11D852FEEE85
}
Title Weakness
{EE55EFE9- Accounts Receivable and Sales returns and allowances Sales returns and allowances are not separately
73A9-434A- Sales identified for accounting purposes.
AAED-
2CE250D85FB
8}
{EF5D7C7E- Inventory The adjustment from standard to actual cost is
AE2B-45EE- done by an extensive price test performed by
ACD6- client personnel.
DAB80B7FA765
}
Title Weakness
{EF6DB65E- Cash, Cash Receipts and Cash Receipts- control over Lack of segregation of duties in the cash receipts
0295-4C58- Disbursements cash receipts process. Eg the accounts receivable clerk who
836A- receives cheques in the mail also makes the bank
D87D1645E3A deposits and has access to the company's
E} accounting records.
{EFA6DFAC- Work in progress Labour rate access by During the walkthrough of the work-in-process
849F-4397- unauthorised
Title individuals system,
Weakness it was noted that the rate for labour on
9591-
{EFF168AA- Inventory work
Periodically, in
orders the work-in-process
production report
personnel elect tocould be
write-off
2D51CC2DC11
B2DA-474D- changed without authorisation and the change
obsolete inventory directly to inventory variance
3}
B517- was not limited
accounts. to authorised
This activity shouldpersonnel. In
all flow through the
9AEFC5356CF9 addition, rates used by
obsolete inventory reserve.the branches do not always
} reflect the standard labour rates as determined by
management.
{F04D358E- Payroll, Personnel and Job objectives and Individuals do not appear to understand fully their
3DAC-42DD- Compensation performance standards responsibilities and job descriptions.
9DB2-
6E00D72F0A2
D}
 Title Weakness
{F0DDB547- Financial Management Sales analysis and record The percentage of mill sales and warehouse sales
325D-4221- keeping to total net sales for the past three years indicates
A5D0- a significant trend toward increased mill sales,
7F25D7EF0B6E which provide a 5-7% gross margin compared to
} warehouse sales which provide an average gross
{F1DB6DD6- Accounts Receivable and margin of 30%.
The company andIt appears that
its dealers the
are lower margin
spending
1C0C-4E7C- Sales mill sales have replaced higher margin
significant time and resources on resolving warehouse
pricing
A917- sales, yielding an overall smaller gross
differences and issuing billing adjustments. margin to
CBC0988F3FAE cover warehouse, delivery, selling and
} administrative expenses.

Title Weakness
{F255D06A- General Management Role and responsibilities of an The company does not have an audit committee.
7037-4B1A- audit
Title committee Weakness
AFB6- Title The establishment of audit committees by boards
Weakness
15DDB70D35B of directors of public companies is recommended
E} Title Weakness
by organisations concerned with financial
{F2C80779- Financial Management Use of budgets to establish The Company
reporting does
and the not currently
fiduciary dutiesuse a formal In
of directors.
C59F-4BFA- goals budgeting system
addition, audit to compare
committees areactual results
required as a with
AA98- planned
conditionactivity. Formal
of listing by theoperating
New Yorkbudgets
Stock are a
7812C4DFCDF valuable
Exchangetool
andinother
the control and measurement of
stock exchanges.
4} company activity.
Title Weakness
{F346C1B3- Accounts payable, purchases Freight bills are processed for payment
F4FC-4E7D- and accrued liabilities independently of vendor invoices.
B526-
EDDC61503A8
3}
Title Weakness
{F39C5F4E- Accounts Receivable and Review of buyer Consideration should be given to eliminating the
F7E0-42CD- Sales responsibilities
Title responsibility
Weakness for buyers to approve merchandise
ACD7-
{F42F23B7- Fixed Assets Calculation of gains and/or invoices
We notedfor payment.
during All theofcontrols
our review are inthat
fixed assets place
1A9253BAC40
76B5-4569- losses onbonuses
fixed assets in the
there accounts payable department for the
{F4958C8C- Payroll, Personnel and Accrued and Duringwere disposals
our testing of of various
accrued vehiclesand
bonuses and
1}
AE56- disposals automatic
equipment payment
during of year
the invoices
that (i.e., matching
resulted in bookof
2757-4A8D- Compensation commissions commissions, we noted that bonuses in the
A9A502894125 purchase order,
gains or of
losses. vendor
These invoice and receiving
A394- amount X, based on gains or losses were
the percentage not
of market
} document).
calculated by accounting andbonuses
there does not
EA46682EAF70 share, general discretionary for salaried
} appear to be
employees a policy
and for accounting
commissions for such
for customer items
service
in the consolidated
representatives werefinancial statements.
not accrued at year-end.

Title Weakness
{F499D2F4- Inventory The Company stores a considerable amount of
E9B6-495A- goods in the warehouse for customers. At year-
8653- end, much time was spent by the Company
2AE83F134B91 reconciling perpetual storage records with the
} physical inventory.

When goods are purchased by a customer and

stored for future shipment, they are tagged as
Title stored goods. The goods are often processed and
Weakness
the processed goods are retagged. The new tags
{F4D04324- Inventory Adoption of written The Company's obsolescence policy is highly
are seldom key-punched and substituted for the
A785-422A- obsolescence policy subjective
original tags resulting in the perpetual inventory
A6D9-
records not being updated.
8B5B2E5870B4
}
Adequate accounting control over goods stored for
{F5E95BAD- Financial Management Timely Preparation of Annual customers
The annualshould
budgets befor
maintained
20X1 andat all times.
20X2 This
were not
9CBA-4080- Budget control includes
completed prior physical identification
to the preceding year'sorend.
8DE7- segregation of stored goods as well as
2C29AC8F66B maintenance of perpetual records enabling
D} identification of goods owned by customers.
Title Weakness
{F5F9BE52- Accounts Receivable and Lack of dedicated cash The controller has primary responsibility for credit
7A5B-432B- Sales collection resource and collection. The amount of time the Controller
BC76- has available to spend in this area is very limited
64D20D6392C in relation to the amount of outstanding
4} receivables
{F61EE6F1- Fixed Assets Evaluation of Capitalisation Legislation requires that costs incurred to create a
29FE-4FAD- Policy of Software Costs software product be expensed up to the point that
9EE7- the technological feasibility of the product is
4253FCE2187C established. Subsequent to establishing the
} technological feasibility, the cost is capitalised and
amortised over the estimated economic life of the
product.
The software developed by the Company is
Title marketed
Weakness through the services provided to its
customers and therefore is subject to the
{F6B42003- EDP (Computers) Reviewing security related events is an integral
requirements.
1051-4727- part of the data security function. This review can
A714- bring attention to weaknesses which management
6E3219E73E70 is unaware of. Currently, all failed attempts to
} login within the authorised number of attempts are
recorded and reviewed. No other types of security
related events are reviewed.

{F78822A2- Taxation ParentCo purchases all of its merchandise, other

6D6A-44E7- Title than ________, from SubCo. We recommended, in a
Weakness
9D2B- memorandum dated _______, that ParentCo have
1B589D0A8E3 an intercompany transfer pricing study performed.
0} The Chief Financial Officer of ParentCo has
represented to us that the prices charged by
SubCo to ParentCo are equal to or lower than
{F7BFB4F9- Payroll, Personnel and Verification of information Control totals of hours worked are not established
7C10-4688- Compensation submitted to data processing prior to submission to data processing. In addition,
8234- the payroll clerk compares the time cards to the
A04FBCD261B worksheet generated at the Company as opposed
7} to the data processing-generated report.
{F7E9BF0D- Inventory Currently, the Company does not yet fully utilise
4623-4A9D- its perpetual inventory system for all inventory
8504- categories.
BFD82D25B20
2}
Title Weakness
{F912E0E7- Information Systems Monitoring of Security-Related During the review, management stated that it
2279-4791- Violations monitors security related activity. However, it
922E- does not use the audit journal facility provided by
36C5A7E73903 the AS\400 to record and report security events.
}
{F94E67C0- Accounting Procedures Guidelines for awarding The Company operates without written guidelines
6C72-43EE- contracts for awarding contracts to significant contractors
ABBE- and written comprehensive guidelines for
5A2421C7A13 awarding contracts for the sale of its products. In
A} addition, there is no requirement to abstract
contracts or to communicate significant contract
terms to the accounting department and other
appropriate departments to ensure compliance
Title and proper recording.
Weakness
{F96F92B7- Inventory The lack of inventory control is reflected in the
0DAA-4988-
{F9CAC819- Payroll, Personnel and increased to
Advances inventory of approximately
employees are expensedX% fromof
instead the
8D41-
2A0E-469F- Compensation prior year,
being whileas
recorded net sales increased
miscellaneous only
receivables.
886A9F6C5067
994C- approximately
Subsequent X%. Further, the
reimbursement investment
of the advancesinis
}
9935C2337C20 inventories
offset at the
against [date] amounted
expense to X% of working
recorded.
} capital compared to X% for the preceding year.
{FA90E6AA- EDP (Computers) User ID's, including most of the generic IDs, are
E48B-42E2- not assigned a mandatory menu. This situation
AEA3- gives these users the capability to override their
10BC94B919E menu assignment and access other data.
D}
Title Weakness
{FAA1F783- EDP (Computers) One of the basic aspects of internal control is a
14DB-407B- separation of duties so no one person controls all
919B- phases of an operation.
E3DE9BD17FAF
}
Title Weakness
{FAA4C5FE- Investments The review of the minutes of the Board does not
307B-43C0- clearly state the type of investments the
87C5- Company/ Association is allowed to maintain for
04F4B6BA1B50 risk purposes.
}
{FAD48C0A- General Management Improving the Safeguarding of During our audit we noted that:
9455-4003- Assets
Title (1) The computer facility is not locked after daily
Weakness
9AC9-
{FB765C24- Accounting Procedures use.
The Company's policy of obtaining competitive
35021272982C
CD4A-434F- (2) Unissued
bids for purchasescheques are not
in excess stored
of $X in being
is not a locked
}
821D- safe or other
followed in allsecured
cases. Inarea.
some cases, there was no
DF5624861EE0 (3) Keys are left
documentation in the
of the cheque
reason writer overnight.
competitive bids
} were not obtained.
These weaknesses in internal control could result
in Company
When funds being
competitive disbursed
bids were for there was
received,
unauthorised purposes.
no documentation of the basis for vendor
{FC4AF992- Accounts payable, purchases Numerical sequence of selection. orders
Purchase For example, in one case,
and receiving it was
reports are
639B-4D08- and accrued liabilities purchase orders and receiving believed that the
prenumbered; purchase
however, thecontract was awarded
accounting
8F4B- reports on the basis does
department of thenot
lowaccount
bid. Upon
for investigation,
the numerical we
16A12663EA72 learned that the real basis
sequence of these documents. was superior
} specification and performance.

Title Weakness
{FD9F9AAB- General Management Periodic review of internal Management is responsible for designing,
4BB0-413B- control implementing, and monitoring the system of
80D1- internal control. Reviews are only performed on an
AE73A14B9424 ad hoc basis.
}
{FE1FA229- Accounts payable, purchases Lack of vendor invoice Although there has been considerable
27F0-4D14- and accrued liabilities support for certain improvement over last year, vendor invoices could
8685- disbursements. not be located for 13 of 263 disbursements tested.
C97D22435B4
2}
Title Weakness
{FF6F9F1A- EDP (Computers) Physical security of IT Computer facilities are not physically secure
B853-43D9- infrastructure
8F7E-
68D6036D070
8}
Effect
Use of this system would (a) strengthen
internal control by removing cash
receipts from employees with access to
accounting records until an independent
listing has been prepared, and (b)
enable the Company to have receipts
This makes the monthly reconciliation
deposited at least one day earlier and,
process tedious, time consuming and
therefore, improve cash balances.
unnecessarily complicated.
Consequently there is an increased risk
of errors occurring in reconciliations.
Effect
The opportunity to benefit personally
from the growth and success of the
Company is a powerful incentive to
employees and promotes teamwork.
This is not currently in place at the
company therefore the company is not
Purchases can be made without the
achieving its full profit potential.
knowledge of management. This can
lead to duplication of purchases or
purchases that are made for personal
versus company use.
Effect
Effect
Staff can potentially use the company's
cheque book to misappropriate funds.
This generally reduces the efficiency of
the Company's operations.
Transactions are not processed in a
consistent manner, and problems will
be incurred when an employee leaves
Recommendation
To improve the utilisation of cash resources, the Company
should consider implementing a "lock-box" system of
handling cash receipts for all divisions. Under this system,
customer payments are mailed to the Company in care of a
bank. The bank immediately credits the receipts to the
Company account and forwards the details of the deposit.
Consolidate cash/ investment accounts down to a
manageable level in order to reduce the burden associated
with monthly reconciliations. Various projects should be
analysed separately on the general ledger through fund
accounting.
Recommendation
Through the establishment of a junior stock plan or a stock
purchase plan, this opportunity can be opened to all
employees.
The adoption of a formal policy of purchasing authority
should specify the dollar limits of approval authority at each
managerial level to assure that larger purchases come to the
attention of higher levels of management before
commitments are made.
Recommendation
Recommendation
Unissued cheques should be kept in a secure location with
limited access to authorised personnel only. Additionally a log
of all cheques issued or voided should be maintained.
Establish an accounting and operating procedures manual
outlining policies to be followed by all departments, as well
as customising the manual to specific departments. The
preparation and maintenance of written standard procedures
will facilitate necessary review processes and training of new
Effect Recommendation
Lack of control over the petty cash fund Controls should be improved over the petty cash fund by:
as it is not being used for its original - Setting a limit on the amount of disbursement allowed.
purpose could lead to misappropriation
of company funds. - all disbursements should be recorded on vouchers in ink.
- expenses and loans to employees should be made from the
general bank account and not from petty cash.
Effect Recommendation
- Require a responsible employee to approve all
Manual systems for monitoring Certain useful inventory management techniques can be
disbursements
inventory are likely to be time applied
- Cancelwithout a sophisticated
all supporting documents computer system.
that support theSignificant
consuming and less effective than reduction
disbursement in carrying costs and inventory investment can be
computerised ones. achieved by concentrating
- Do not commingle proceeds time andcash
from effort on reducing
sales the
with the petty
number
cash fund of weeks supply of high unit cost/usage items and
allowing anindependent
-Recommendation
Someone increase in the weeks
should supply of perform
periodically those itemsa that
Effect
will add little to inventory investment.
surprise count of petty cash and examine related vouchers
The conditions above could result in A cost accounting
Inventory investment system
can bebased on machine-hour
reduced rates
by using selective
unauthorised price modifications being should be developed
controls as follows: for the manufacturing operation.Some
processed and remaining undetected. of
(1)the benefits inventory
Categorise to be deriveditems from a complete
based on their standard
annual cost
accounting
monetary usage. system are:
(1)
(2) More
Ordereffective
items with analysis of inventory
high annual monetaryandusage
operating
verycosts,
including
frequently theandidentification
in small of cost variations
quantities, maintaining resulting
small from
safety
Effect Recommendation
quantity
stocks and and efficiency
making factors.
frequent cycle counts and stock status
Therefore, the detailed components of a We
(2) recommend
Provision the accounts
of basic tools for payable system
development andbe modified to
reviews.
vendor balance at any point in time provide a detailed
implementation of month-end
an operating listing of accounts
budget, cost payable
controls,
(3) Order items with low monetary usage infrequently and in
cannot be determined without balances
production byscheduling,
vendor. This listing
shop should machine
manning, identify and age all
utilisation,
large quantities.
performing an extensive review and open
etc. invoices.
(4) Use economic order quantities to the greatest extent
search of all cheque registers and (3) Development of important information for management's
possible.
purchase journals prepared subsequent use in establishing prices and submitting price quotations on
Large unaccounted for scrap levels may Consider formulating a policy that involves personnel in each
to the date of inquiry. jobs.
indicate the need for modifications in production area to document reasons for production of scrap
the production process. Additionally, (4)
andAdded
identify interim financialThis
by contract. reporting integrity.
may result in increased
scrap estimates may not be accurately efficiency and more accurate pricing. of inflationary price
(5) Quick determination of the effects
reflected when pricing various jobs. changes for materials, labour, and overhead items.

There is a risk that transactions could Properly document all transactions and maintain all relevant
be misstated. support to ensure adequate audit trails for both internal and
external accounting inquiries.

Effect
Record keeping procedures for
properties and related accumulated
depreciation result in numerous
adjustments, misclassifications, and the
need to "derive" data that should be
readily available as a by-product of the
As the number, variety and complexity
system.
of these affiliates increases, it becomes
Effect
more difficult for management and the
Board of Directors to evaluate whether
Recommendation
To improve this situation we recommend that a formal
procedure be implemented across divisions to ensure that all
property records are maintained safely.
All transactions should be analysed at division level to ensure
that movements are monitored and correctly recorded.
One of the ways that oversight can be enhanced is through
the use of an internal audit function. This group reports to
Recommendation
Divisions should be reminded of the importance of adhering
the Board of Directors and is charged with monitoring the
to the policies concerning property records.
operations, including information systems, for compliance
There is a risk that the records can be We recommend that the Company store all current records in
lost or damaged. closed cabinets. Out of date or otherwise unused records
should be moved to a fireproof storage facility.

This can lead to the misappropriation of The vault/ petty cash tin should be closed and locked at all
company's funds. times unless the manager is in the office and has a need to
withdraw or deposit funds.

This could allow inappropriate changes We recommend all changed forms be signed by the preparer
to be made. and approved by the store manager.

The purpose of vacation is to give We recommend that the Company require all employees to
employees a needed rest. It is also an take their vacations during the period to which the allowance
integral part of internal control to have relates.
people take vacation and have their
duties performed by someone else. The
possibility of concealing fraudulent
The financial statements do not reflect All inventory items, including obsolete inventory, should be
activity is increased when employees
the underlying records and physical tagged and counted during the physical inventory. Tags
are constantly at work.
count due to differences in the nature of should be retained to maintain an audit trail for both internal
controlling the inventory. and external audit purposes.

Effect Recommendation
Endorsing cheques at a later point All cheques should be restrictively endorsed at the point of
increases the risk of misappropriation of receipt.
funds.

Uncorrected errors will lead to incorrect Bookkeeping personnel should be adequately trained to
invoices being sent to customers, which reduce input errors. In addition the controller should review
may lead to loss of customer goodwill. and approve all adjustments to customer accounts. This will
also provide a basis for evaluating the bookkeeping
department.

Errors in the journals are unlikely to be
identified promptly.
To prevent processing erroneous or unauthorised entries, we
recommend:
- All entries be reviewed and approved before processing.
- Responsibility for preparing monthly journal entries be
restricted to authorised personnel.
- Journal entries should be sequentially numbered and
accounted for numerically.
- Supporting documentation for each entry should be
attached to the respective entry.
The selection of cost centres is We recommend that cost centres be broken down into
necessary for the purpose of smaller geographical areas.
accumulating costs and matching them
with the related revenues.

Effect
Not safeguarding or accounting for
unissued cheques may result in
unauthorised disbursements being
processed.
Recommendation
We recommend that access to unissued cheques be
restricted to an individual not responsible for generating
disbursements or reconciling bank accounts.

There is less control over cash Cheques should be issued in numerical sequence.
disbursements and recording of cash
movements in the general ledger. This
increases the risk of misappropriation of
cash.
Effect Recommendation
Without forecasting the results of Budgets should be prepared annually and revised periodically
operations it is difficult for management as market conditions change. Variances between budget and
to establish goals and identify potential actual should be identified monthly and investigated to
problems. Forecasts would also help to determine cause and possible corrective action. The
anticipate the need for additional computerised accounting system proposed in this letter
staffing and financing. Regular accommodates budgets. A fair amount of time of the
Effect Recommendation
comparison of actual results with proposed controller will be required to establish initial
The lack ofamounts
budgeted segregation
helpsofmanagement
duties The control
budgets andover payroll routine
to develop disbursements would
procedures, be
therefore,
exposes
Non
control theoperations.
the Company
compliance with theto the
aboverisk that strengthened
To avoid thewith
compliance if the
potential duties ofprocedures
problem
prescribed payroll preparation,
of losing a valid
must signature
bebusiness
emphasised
payroll is generated
requirements for nonexistent
could cause the expense and check distribution
deduction,
throughout the
the Company
Company. were Insegregated.
should improve
addition, In
itsaddition, surprise
record-keeping
effective budgeting
employees or unauthorized
to be nondeductible changes are
by the Company distributions
system
involvesfor ofthan
travel
more payroll
and
the checks by qualified
entertainment
accounting persons
expenses.
department. We in the
Individuals
made to current employees'
and possibly cause the expense ratetothat
be accounting
responsible department
recommend that
for thea policywould provide
be established
purchasing, additional
production, and control
requiring expense over
may not be detected.
considered as additional compensation corporate
reports assets.
or requests
marketing/sales We also recommend
for reimbursement
functions are important that officials
tocontributors of the
meet the reporting
to the
to an employee or a preferential Company
requirements
budgeting periodically
of the tax
process. review the payroll
authority register
and that for propriety.
preprinted
Effect Recommendation
These reviews
dividend to a stockholder-employee. expense reportshould evidenced on the register by the
forms be used.
The company may not be holding the Reexamine the lease
official's signature andversus buy option
be performed on more closely
a surprise or In
basis.
most cost effective leasing arrangement negotiate more favorable lease terms for future
addition, input documents initiating changes to the payroll leases.
available should be approved by an official prior to being submitted for
processing.

Therefore, there is the potential for Perform a physical inventory to verify the accuracy of the
itemscan
This that areto
lead nomisappropriation
longer being used,
of to fixedcompany
The assets recordkeeping.
should ensure This process that
at minimum should
cashinclude both
registers
still be or
assets recorded on thedata
manipulated books;
if resulting officelocked
have and factory machinery,
in cumulative equipment,
register automobiles
totals. These and
can also be
in additional property
unauthorised access istaxes beingtopaid.
available cash leasehold
used and store
to verify building improvements.
sales Physical
and reconciliation verification
of sales.
An accurate fixed asset costing also
registers would improve the integrity of the fixed asset records and,
facilitates the evaluation of insurance more importantly, ensure that the Company is paying the
coverage and appraisals, if necessary. appropriate property taxes.
Effect Recommendation
This can lead to potential Strengthen controls over invested funds by assigning the
misappropriation of company assets. responsibility to reconciled the account to an employee who
is not authorised to make withdrawals from the bank account.

Effect Recommendation
The judgmental method of sampling We encourage the inventory quantity verification efforts.
does
Effectnot consider the monetary value Consider cycle count selections on a monetary volume basis
Recommendation
of
Importantheld.
stocks errors and processing rather than the judgmental
Define and document selection
a formal process
problem currently
reporting and used.
problems may be overlooked and In this manner, high monetary volume parts
resolution procedure. This should include maintenancewould be of a
Inventory reports
solutions not received may vary
found. counted quarterly, medium volume parts would
problem resolution log that will identify the problem, be counted
the
from the accounting records, currently semi-annually, and all other parts would be counted
resolution and the time required to resolve the problem. annually.
these differences are not considered. Parts to be counted could be selected and tracked directly
from an automated database. The code given to each part
If the prices do not appear on the We recommend
should be basedthe individualsvolume
on monetary responsible
of thefor preparing
individual part
purchase order, there can be no purchase
number toorders
ensuretothat
record all relevant
all parts information on them.
are counted.
verification of amounts to be billed.
Continue efforts of receiving physical counts from outside
vendors on a monthly basis. All reconciling differences
Lack of documentation increases the should
Invoicesbeshould
addressed
not beinprocessed
a timely manner. Report
for payment results of
without
risk of fictitious, improper or duplicate the reconciliations to Purchasing to make them
adequate documentation that goods have been received. aware of
payments being made. vendor's adherence to accuracy. Such procedures may
Those invoices for which receiving reports are not appropriate
provide
should beindications
approvedof the
for overall by
payment control environment at
the appropriate
vendors, including product quality-related
responsible official. We recommend a receiving report be
attached to each invoice regardless of the type or size of
Effect Recommendation
receipt. If the invoice is for services, it should be routed to an
This can lead to inadequate provisions Implement divisional
individual who policies
can verify thatfor
thedetermining
service wasthe reserve for
performed.
for doubtful accounts which can uncollectable accounts receivable.The accounts receivable
potentially misstate the financial aging should be analysed to establish a reserve based upon
statements. historical accounts receivable write offs by aging category as
well as an overall general reserve component. The reserve
should also have a component for items that have been
The total net adjustment as a result of Analyse the nature of customer debits and credits and record
specifically identified as potentially uncollectable. Personnel
these individual credits and debits or expense them appropriately. Develop a standardised
at the company should assist in the development and
exceeds materiality and therefore the coding system for open debits and credits for identification
implementation of a policy appropriate for each division.
financial statements will be at risk from on the accounts receivable subsidiary ledger. Develop a
being misstated. system of monitoring and approving debits and credits.
Effect Recommendation
This has caused some difficulty in A copy of all important contracts and leases entered into by
locating current contracts. any of the divisions or subsidiaries should be maintained in a
central file at the corporate office. To facilitate a review by
management and other interested parties, such a file should
contain a current index that includes the following
information for each contract; terms, renewal options and
This could potentially lead to The system should be reconfigured to prevent this from
other important provisions. In addition, a tickler file should
unauthorised access to the system. occurring.
be maintained to alert management to important contract
terms that require attention such as renewal dates, rate
changes, option dates and expiration dates..
These types of actions should be The Company should consider a hardware utilisation and
contemplated in a data processing plan. capacity review to determine what solutions for hardware
may be available in the future.

BDO can advise on formulating a detailed data processing

plan.
Effect Recommendation
This leads to numerous transfers and We recommend that only those assets that are expected to
depreciation is not recorded on a timely incur additional costs to complete be posted to this account.
basis. All other assets should be posted directly to the appropriate
asset account.

By manually changing the forms there We recommend the entire process of accounting for price
is a risk that the process is both changes be computerised to improve both the efficiency and
inefficient and inaccurate due to the accuracy of the process. Computerisation of this process
risk of human error. could provide the following benefits:
(1) The computer could numerically control all the forms,
provide a listing of missing documents; and
Effect Recommendation
(2) The computer could match changes in selling price forms
The company is currently not realising To assistoriginal
to their you in this
mark process, we would
down requests beprovide
and happy to instruct
a listing of
its full potential with the existing data our specialists
those in the
that require areaapprovals.
buyer of computer system conversion to
processing equipment. discuss your
In addition torequirements.
providing the benefits described above, the
computerisation of price changes could enhance operating
reports and eventually be integrated into the merchandising
With this system it would be possible for system.
We believe the possibility of paying fictitious vendors would
them to process and control payments be reduced if the following were performed by personnel
to fictitious vendors. independent of the accounts payable processing.
(1) Authorisation to information systems for additions and
deletions to the vendor number master file (by general
accountant).
This causes problems in the night The server should be set to disable terminals after a
(2) Operation of the cheque-signing machine (by treasurer's
processing and also provides the reasonable time (with sufficient warning for any users who
secretary).
opportunity for an unauthorised user to are still logged on at that time).
access certain information.

Effect Recommendation
Mergers and acquisitions are, by nature, We strongly believe that a merger and acquisition program
complex
Effect transactions. The lack of a should be formal and comprehensive. The program should
Recommendation
formal plan
This can may
result inresult in complications
inconsistencies in include, among
To achieve other matters,
uniformity in financialthereporting
followingand
considerations:
to facilitate
during any transactions.
financial reporting between years. Planning
the compilation of financial information in the year-end
(1) Define external
consolidation, and internal
the Company expansion
should and
establish thediversification
following:
goals in writing.
(2) Setorganisation
1) An criteria for prospective
chart clearlyacquisitions with
defining lines ofreasonable
responsibility
parameters.
and reporting.
Effect Recommendation
(3)
2) ADefine
uniformmethods
chart ofofaccounts,
finding prospects.
including a description of the
Investigation
The effect is that the underlying records Reconcile the fixed assets
nature of items to be recorded gain/loss peraccount.
in each the general ledger to
(1)
do not reflect accurately the balances in the Prescribe
fixed assetinvestigation
system on procedures
a monthly and
basis.
3) A written manual of accounting policies and responsibilities.
procedures to
fixed assets, which could result in (2) Adopt checklists for
be followed by employees. investigation guidelines based upon
additional depreciation expense the degree of investigation
The manual should include: desired.
charged and property taxes paid. Financial and policy
(a) Company operational
on such reviews
itemsorasaudits of significant
capitalisation of assets,
prospects should be conducted to substantiate and protect
This deviation from the bill of material A system of controls should be established to ensure that
could result in inventory shrinkage and finished units are manufactured in accordance with the bill of
an unanticipated reduction in margins. material and that any approved substitutions are accounted
for in the cost system.

An inefficient filing system results in
records being frequently misplaced or
misfiled. This requires more time by
personnel to locate files and may result
in a loss of support needed to collect
income or pay vendors timely.
It is not possible, in retrospect, to
guarantee that every reconciliation has
been reviewed.
We recommend the Company's filing system be organised to
ensure that all documents and records are properly filed on a
timely basis. In addition, employees should be required to
sign for records removed from the files. This practice will
reduce the possibility of records being misplaced or misfiled.
To improve the Company's audit trail, we recommend that all
reviews be evidenced by the Controller initialising the item
reviewed.

Effect Recommendation
Without the involvement of top We recommend an operations analysis be conducted at XYZ
management
Effect the integration of XYZ is Inc. This would involve a review and analysis of operations,
Recommendation
unlikely to be successful.
As a result, certain This could
information that controls,
The Companypolicies, systems,
should and
explore financial
the results,
feasibility in light of
of computerising
result in a loss of profitability
could be useful to management from the
is not good management practices, to determine the effectiveness
its inventory accounting system. The following are among the
transaction.
readily available because of the time of present
benefits of practices and to system:
a computerised point out areas for improvement.
and cost involved in obtaining it. (1) Provides greater flexibility in production scheduling.
The objectives
(2) Enables of the analysis
management are: inventory controls,
to install
(1) To determine whether XYZ Inc. andprocessors.
particularly over inventory at outside its organisational units
Lack of reconciliations does not identify Such
are a reconciliation
being run should be made each month and
effectively.
(3) Facilitates establishing reliable perpetual inventory
or rectify errors on a timely basis. approved
(2) by the appropriate
To reveal supervisory employee.
records at alldeficiencies
locations to in business
improve thepractices; and
integrity of interim
(3)
financial reporting and control of inventory levels.and
To provide an opportunity for early disclosure
correction
(4) Permitsof problemofareas
analyses salesbefore practices
by customer, become
part firmly
or model
established.
number, territory, salesman, etc.
Effect Recommendation
As the Company has acquired new We recommend the Company consider implementing an
assets, the time required to perform this automated fixed asset system. We believe the benefits
task has increased and now causes derived far outweigh the costs of automation. These benefits
delays in closing the year-end financial would include:
records.
1. Facilitating the preparation of interim financial statements;
These current procedures give The accounting department should maintain control over the
2. Providing more economical processing of transactions;
management no assurance that all packing slips so all documents can be accounted for as part
3. Improving the accuracy and efficiency of accounting
shipments are billed. of the billing process.
personnel;
4. Facilitating detailed fixed asset account analyses; and
5. Providing the Company with sufficient records to elect
Effect accelerated
Recommendation depreciation methods for tax purposes
Some of these substitutions cost more We recommend that management promptly consider
than the original bill of material improving the organisation of the raw material storage
requirements. Inadequate storage facilities.
facilities also can cause excessive
inventory investments. The large
increase in raw materials on hand may
have resulted, in part, from inadequate
facilities.
Disclosing long-term creditors as short Reclassify invoices with due dates beyond one year to long-
term does not fully reflect the actual term notes payable.
situation and charges to be made.
Investors could potentially make
strategic investment decisions based on
misstated information.

Effect Recommendation
Consequently many invoices do not
bear proof of receipt of the To provide control over the purchasing function, we
merchandise, are coded incorrectly or recommend the following procedures be implemented:
are misplaced. (1) Purchase orders should be required for all purchases over
a specified amount. Account classification should be made on
the purchase order when prepared.
Effect Recommendation
(2) Receiving documents should be initialed, dated and
The current level and type of We recommend
forwarded to thethat all authorised
accounting advertising
department by theexpenditures
person
advertising
Effect expenditure may not be be assigned
Recommendation
receiving to a
the goods. specific store, region or all stores. Those
adding value
Should the to the
need for Company.
backup processing expenditures
(3)avoid
To Accountsevere assigned
classifications
impairment to aon specific
toboth store
the should
purchase
the Company's be charged
orders
computer and
arise, to that
invoices store,
should and other
in thebeevent
reviewedadvertising costs
and initialed should
by the be allocated
department
Effectadequate planning can prevent operations
Recommendation of a prolonged failure or localised
serious delays to theand
head individual
disaster, theCompany
the stores should:
controller. within the region or all stores by some
Although the controls are in place to To increase
ratio such asthe effectiveness
prior period sales.of In
theaddition
internalto control
thethe over cash
above, a
(4)
(1) The accounting
Establish a priority department
processing should
plan periodically
based on review
impact
ensure
It a tight
appears controlare
all leases environment disbursements,
being recorded Review
record all
of new we recommend
leases
advertising for
by the
type the
proper
(e.g., following changes
classification
TV, radio, etc.), as in be
should
and
of investigate unmatched receivers
the delay expected for equipment replacement. to determine if any
some
as modifications
operating leases.could be made to
Generally procedure:
operating
maintained orforcapital
overall lease. Include
budgetary documentation
control. of the
invoices
(2) have
Investigate been misplaced
alternate or not
facilities received.
to provide sufficient
increase effectiveness.
accepted accounting principles (GAAP) decision-making process with the lease documents.
processing time for critical applications.
require that leases be treated as capital (1) The matching of purchase order, receiving report and
(3) Perform
vendor invoiceperiodic
should test
beoperations
performed at bythethealternate
accounting facility
leases if they meet any of the four
and document
department. the contingency operating procedures.
stated criteria.
Effect (4)
(2) Provide
Chequesfor
Recommendation notification
should be mailed of equipment
by a person changes
directlyatunder
the the
Local legislation requires documents to In alternate
light of facility
the and
volume for
of updating
the the
Company's
check signer's control and not returned to the accounts plan periodically
records and the costs
be kept for specified periods. The related to their preparation and retention,
payable department after being signed. In addition, all we recommend
company may not be adhering to these procedures be adopted
supporting detail, not only to review and evaluate
the vendor record be
invoice, should
rules in all areas. keeping
stampedrequirements
"Paid" by the and person the mailing
adherence the thereto
cheques, onor a
periodic
someonebasis under (e.g., every supervision,
his direct one or two years).
to reduce Thethefollowing
chance
record
of keeping
duplicate considerations should be investigated during
payments.
Effect Recommendation
such a review:
Effect Recommendation
(1) Local legislation retention requirements for each type of
There is a higher risk of errors going record
We and document.
recommend the Company consider establishing a control
undetected. A control group would be (2) Internal
group retention
to balance requirements
all edit reports and oftocertain
correct records
errors and
that can
responsible for: documents
be correctednot covered
easily suchby as legal dictate
keypunch (e.g.,Errors
errors. government
that
(1) Receipt of input. contractbe
cannot records
corrected andby other
the customer
control groupcontract
should records).
be referred
(2) Recording batch control totals. (3) The
back thetype
userofdepartment.
paper to be The usedfunctions
to recordand data, considering
duties of the
(3) Reconciling the output with prior the length
control groupof the retention
should period and
be dove-tailed intothe type
the of storage
controls
Effect Recommendation
facilities.
Without careful consideration of BDO are able to provide specific advice on the matters that
appropriate factors, the new system should be considered in connection with the project.
may not meet the current and future
needs of the Company.

Former employees who were authorised Current signatories should be maintained on all accounts.
signatories are still able to write
cheques. Therefore there is a risk of
misappropriation of cash.

Errors such as this could have been We therefore recommend at a minimum that the Company
eliminated
Effect by proper instruction. have an instruction session for the counters to detail and
Recommendation
Without an internal audit function discuss
Considerinventory procedures
establishing before
an internal the physical
auditing functioninventory
at the
companies increase the risk of not begins.
corporateThis session should
level to strengthen help eliminate
and monitor errors and
Company-widecould
Consequently the understanding and Provide personnel in all departments with opportunities to
preventing and detecting fraud and for possibly
policies improve the
andinsystems. efficiency of
Thiscontinuingthe physical
function could inventory
be outsourced
application of accounting principles participate longer term education such as
errors. process.
which hasoffered
become
personnel in all departments is not seminars byan effective andassociations
governmental cost efficient alternative
possible and facilitation of continued to using internal staff. Include areas not limited strictly to
improvement is not available. financial matters, such as purchasing, production and
inventory control, and maintenance. Expansion of the
The Company finances accounts The Company
internal should consider
audit function implementing
to such areas a "lock-box"
would provide
receivable at a local bank. Under the system of handling cash receipts. As interest
management with a more objective appraisal of is charged
the on a
security agreement, all receivable daily basis, a lock box would
performance in these areas. eliminate the one-or-two-day lag
collections must be applied directly between receipt of the cash and subsequent deposit, with a
against the outstanding debt. Interest resulting decrease in interest expense.
accumulates on a daily basis.
Effect Recommendation
If the entity does not adopt the Management should assess the impact the new standard will
standard this is a breach of legal have on the Company's consolidated financial position and
requirements. Additionally the standard results of the operation.
requires certain financial statement
disclosures.
No regular reconciliation increases the We recommend that a detail report of "uncosted receivers" is
risk of errors not being identified and generated and reconciled to the accrued accounts payable
resolved. general ledger account on a monthly basis. All reconciling
items should be investigated and properly resolved in a
timely manner.

Effect
This could cause problems if, for any
reason, the computer was not operating
for an extended period of time or
certain master files were damaged or
destroyed.
Effect
Recommendation
We understand that there is an informal system for backing
up certain master files. However, we recommend the
Company review and formalise its back-up procedures. The
documentation should include, but not be limited to, the
following:
(1) The physical location of back-up files (master files and
Recommendation
systems).
(2) Frequency with which master files are copied for back-up
purposes (i.e., weekly, monthly, etc.).
(3) Operating instructions.
The Company is not making use of a Consider establishing a functioning board of directors. Two
proper Board of Directors. individuals from the Company's Executive Committee could
be asked to asked to join the Board and an additional two
individuals from outside the Company could be added, with
the sole stockholder serving as the fifth member of the Board
and its chairman. This would provide several benefits to the
From a cash flow perspective the cost of Implement regular procedures that focus on the collection of
Company, including:
financing completed and shipped accounts receivable. As part of, but not limited to these
(1) Access to additional management expertise at little cost;
inventory to customers can become procedures, management should consider regular credit
(2) Added prestige to the Company's name and actions by its
very expensive when compounded over checks on customers and their adherence to terms.
association with recognised names in the community;
several months.
(3) A mechanism for an independent appraisal of
Effect management's
Recommendation decisions and policies; and
Since it is a certainty that some of the (4) A mechanism
Estimate to provide
the expected for innovative
discounts based on solutions
customertoterms or
customers in the accounts receivable Company problems.
account history and provide for a year end accrual.
subsidiary ledger will take advantage of
the discount, failure to record an
accrual for discounts will result in
receivables being overstated.
Without the documentation held as The Company should ensure that its records comply with the
stated in the insurance policy, the property insurance policy provisions, so that in the event of a
insurance company may refuse any loss, the insurer will not be able to avoid payment for a
request for recovery of inventory losses failure to keep accurate records.
submitted.

Effect Recommendation
Under an accounts payable system, all Implement the use of an accounts payable system whereby
bills are entered upon receipt. This invoices are formally controlled and recorded when received
process posts the expense or capital rather then when paid.
addition to the proper general ledger
account and provides a control over all
invoices, reducing the risk of lost or
This may allow invoices to be processed We recommend that sales invoices be reviewed on a limited
unentered invoices. This would also
incorrectly and errors may arise which basis by the accounting manager. The review should include
reduce the likelihood of not entering an
can result in the loss of customer the extensions, coding and pricing of the invoices.
invoice on a timely basis. Using an
goodwill.
accounts payable system would also
allow management to better manage its
cashbelieve
We payments
this as, at any point
is necessary in time,
if data We recommend a long term data processing plan be
they could review
processing a current
resources are to listing
keep paceof developed detailing the future systems requirements of the
outstanding
with invoicesprojected
the Company's and determine
growth. Company and the associated costs of implementing these
which
This ones toshould
process pay. be performed in systems. The plan should also detail the anticipated dates
connection with the Company's overall that the new systems will be put into operation.
strategic planning process.
Effect Recommendation
The company cannot benefit from Consider tax planning issues for the Company's wholly-owned
finding a balance between minimising subsidiary.
taxable income and utilising the
subsidiary's existing net operating
losses.
If transactions are not properly The Company should consider implementing a mechanism
structured the company could incur that would provide for proactive involvement by the legal, tax
liabilities. and finance departments for all significant contracts being
negotiated.

Effect Recommendation
A standard cost system that is used for We recommend the Company review the benefits derived
both customer-quoting and accounting from the present standard cost system:
purposes can provide management with
timely, meaningful data to identify - Reporting material price and usage variances from expected
operating inefficiencies and problems. targets (standards) to measure the effectiveness of the
Under such a system, estimated actual purchasing function;
Effect Recommendation
costs for inventory items would be - Reporting labour, overhead, and scrap variances to measure
Effect
determined and used as standard costs. Recommendation
the effectiveness of the production function;
Subsequent
The accuracypurchases would
of financial be
information - Providing
We recommendmorethat
accurate information to
all reconciliations determine
and product
related account
charged
used to inventory
by upper at such cannot
management standards profitability
analyses be and pricing
reviewed bystrategies; and management
the appropriate
and anybe
always variations
relied on.due to price - Providing a basis for isolating physical inventory shrinkages
personnel.
differences would be charged or or pickups.
credited to an appropriate cost variance
account. Subsequent usage, including Also consider the following:
appropriate loss allowances, would be
relieved at standard costs. (1) Establish new material standards that are based upon the
Money has a high cost. If the actual expected
We recommendmix of the
foreign and domestic
President purchases.
of the Company be furnished
cash
Effectflows of the Company are not (2)
with Review and adopt variance reporting
an analysis of cash flow at the end of
Recommendation procedures
each month.that
closely tracked and monitored management believes are critical to the operating and
This practice weakens internal on a
control (Consideration
This practice
quoting
should
should
functions. bebe given to preparing
discontinued. such an analysis
Disbursements should
formal basis against the cash
over cash disbursements and may flow on
be a weekly
issued basis
promptly during peak
to ensure cash-flow
the control periods.)
system isThese
budget (3) Establish a procedure to review reported variances
result inthe
theCompany may
loss of cash make
discounts. analyses
maintained.should show cash flow as compared to the budget
periodically and to the
follow-up
incorrect business decisions. for the month and year toon unusual
date. fluctuations.
In addition, we
recommend these analyses show investment income earned
to date against budgeted amounts with all variances
Inaccurate physical counts may occur Update inventory
explained. observation
By obtaining instructions
these formal on a the
analyses, regular basis.
President
due to improper cut off during the Inventory observation instructions are an
should be able to ensure that the excess cash of the important part of
physical inventory. the year-end
Company physical
is being inventory
properly andand
utilised caninvested.
effectively
communicate information between the accounting
department and the plant sites. These instructions should
specifically detail shipping and receiving cut-off procedures at
Small production runs result in costing Better production planning would result in fewer runs and
year-end.
the company more as it is not taking save the cost of additional setup time and duplication of
advantage of cost savings derived from orders.
bulk ordering.

Effect Recommendation
As a result, improper amounts may be We recommend that documentation for all payroll deductions
deducted from or paid to an employee. and rate changes be maintained in employees' files to ensure
correct payments are made and that all modifications to
Not listening to employees can result in Management should encourage employees to make
unmotivated individuals and low recommendations as to how the Company can improve its
company morale. operations. A proven method of involving employees in the
management of the Company is to establish an incentive or
awards program. Under the program, employees would be
given cash awards for suggestions that resulted in significant
Effect Recommendation
savings or additional revenues for the Company. Additionally,
Operator actions may be overlooked To reduce
cash awardstheshould
possibility of unauthorised
be given computer
for identifying use, we
potential
and errors or fraud may not be recommend
customer leadsconsole logs be additional
or acquiring pre-numbered to ensure
business that all
for the
detected. activity
Company. is accounted for.

If the company does not consider We recommend management consider the feasibility, cost
computerising its sales force it could and benefits of computerisation of the Company's field sales
potentially lose it competitive edge and reporting. Many companies are now offering low cost
lose it's customer base to its portable computer equipment that can tie into centrally
competitiors. located mainframes. As the costs have decreased and the
capabilities of the portables increased, their use by field
Effect Recommendation
salespeople has grown. Computerisation of field sales
Problems experienced with the current We encourage
reporting the Company
can enable to continue
salespeople to be intotouchobtain proposals
with the
system
Effect have resulted in the investment for theinformation
replacement
Recommendation
latest onofinventory
the existinglevels system and to obtain
and customer order a
of a considerable
There amount
is an enhanced of personnel
possibility of bad system
status
We thatpermit
and
recommend fulfils
thatcurrent
the and projected
aplacement
memorandum of orders, needs
control as soon
expense
account beas
time to regenerate transaction data,
debts and there is little possibility of possible.
reporting, customer
maintained for accounts cost written
analysisoff and to the filingaof
provide all reports
basis for
write programs
eventually and investigate
recovering debts thatand
have over phonecollection
continued lines. Benefits
effortsofon computerisation
these accounts.include All accounts
resolve input off.
been written errors. BDO
should is be
increasingable to act asfor
face-to-face
reviewed advisors
selling during
time,
collection the purchasing
better
monthly enhanceprocess
inventory
to control
timely
to
and ensure that
reduction all
of factors
order are considered
processing
collection. The accounts receivable manager should time when decidingbe on
which
relieved new system to
of general implement.
office duties to enable him to spend more
Effect Recommendation
time on collection efforts.
Identifying open receivers is a time It is important that monthly inventory be properly valued
consuming
Effect process. If cut-off based on all inventory owned at the end of the month. When
Recommendation
procedures are not performed
Without appropriate correctly calculating
data processing We recommend the book-to-physical
a general security adjustment,
review be the international
performed of
then inventory valuation, purchases and inventory shipped before the cut
security the processing of unauthorised the Company's data processing environment to address off date and not yet the
trade payables
or erroneous may be incorrect.
information may occur received
following should
matters: be included in the actual physical inventory
and go undetected. as
(1) of
Canthat date.
a sensitive computer program be amended without
authorization?
Recording open receivers
(2) Can computer users gain should
accessbe done
to data ontoa which
monthly theybasis.
Effect Recommendation
Since the Company cannot hold accounts payable open to
have no authorization?
This is a tedious process and may not record
We such
recommend
(3) Are late invoices,
that management
data processing a separate
records andconsider accrual
equipment account
implementing should
adequately
provide management with complete be used. Reversing
automated
protected procedures
against theflood
fire, toaccrual
identify in slow-moving
or other thenatural
next month andwould
hazards?obsolete
information on a timely basis. prevent
(4) Is tooduplicate
inventory, taking
much recording
into
reliance of the
consideration
placed on keyliability.
days inventory
members on-hand
of the data
and
processing department or an external software house? in any
inventory which is not currently being sold or used
In addition
of the bills ofto material.
setting upThe the automated
accrual, a better system process
identification of
calculating
should be the open
supplemented receivers
by should
manual be implemented.
controls
We recommend access to the data centre be limited to data and The
judgments.
Effect Recommendation
procedure
processingnow used requires many hours of comparing
personnel.
receivers to invoices. An alternate procedure may be that
the date received be entered into the computer system at the
time the goods are received. A report listing
Generally, Canadian withholding tax on Submit the remittance of withholding tax by the 15th day of
the payment to non-residents is due at the month following the period when royalties to X Company
the point in time when the amount is are accrued in the accounts. This practice should be
paid or credited. Accordingly, the implemented immediately to avoid exposure to the interest
applicable withholding tax on the and penalties described.
payment of royalties by the Company is
due in the month subsequent to it being
accrued in the accounts. As such, the
withholding
Effect tax is being remitted late. Recommendation
The current cost accounting system We recommend that a study be conducted to determine what
Furthermore, interest at the prescribed
prevents interim financial statements type of cost accounting system will better suit product pricing
rate is applicable on the amount
from being more informative and requirements, inventory valuation needs, cost control and
remitted late, and a penalty of 10% of
accurate, and does not allow gross profit analysis. The following items should be
the amount withheld and not remitted
management to analyse gross profit by considered:
plus interest on such penalty at the
product lines. (1) Standard labour requirements should be established for
prescribed
Effect rate. Accordingly, it is Recommendation
the manufacturing process. The Company could then initiate
exposed to
When employeesthe interest
leave on late
they can take Require each salaried
a reporting system so employee to sign
actual labour coulda patent agreement
be measured
remittances and the penalty plus
the rights to new ideas/ innovations that assigns
against thesetostandards
the Company themeasure
to help rights toefficiency.
all inventions made
interest
they oninvented.
have the amount withheld and not in
(2)the course actual
Similarly, of employment as a condition
material input of employment.
could be measured against
remitted by the date it is due.
standard material required to determine usage as well as
ensure that the proper materials are being used.
By not developing a plan to utilise these (3) A review
Consider should be
expiration made
dates of the Company's
in overall allocation
financial planning of
as the
assets, valuable benefits may be lost. direct
periodlabour
duringand overhead
which expenses to
these carryovers maycost
beof sales. is
utilised This
review
limited.is imperative so accurate rates can be established for
inventory valuation purposes.

Effect Recommendation
The lack of segregation of duties The data processing department should not act as a branch
exposes the Company to the risk that of the accounting department nor should it substitute for a
payroll is generated for nonexistent payroll department. The payroll department should receive
employees or unauthorised changes are cheques and payroll registers from the data processing
made to current employees' rate that department and should be held responsible for the accuracy
may not be detected. of the registers. A request for a transfer of funds from the
Effect Recommendation
commercial account to the payroll account should be
The cost of holding assets may exceed Perform
originateda fixed
by theasset inventory
payroll of all items,
department paying extra
and approved by the
the benefits. attention
Controller. Someone other than data processing orofpayroll
to the usefulness and current condition the
items.
personnelBased on the
should results of this
be responsible forinventory, management
prompt reconciliation of
The Company may need to adjust may choosebank
the payroll to shorten
account.the useful lives of certain fixed assets,
property lives. or dispose of certain fixed assets as the cost of holding such
assets
In may exceed the related
thatbenefits. Consider in the
Control over cheques issued may be Alladdition,
cheques we recommend
should be recorded accounting
in personnel
the cash disbursements make
future scheduling
periodic fixed asset inventories periodically as
lost if issued out of sequence journal to ensure all prenumbered cheques have been is
distribution of payroll cheques to employees. It
management
imperative, deems necessary.
however, that all checks
accounted for. The signature sectionare accounted
of voided for should
checks prior
Lack of control over void cheques may to distribution.
be removed and defaced to prevent their re-use. Voided
allow unauthorised use. cheques should be interfiled with cancelled cheques.
Effect Recommendation
The effectiveness of controls can not be The possibility for further strengthening internal controls
measured without regular periodic
reviews.
As a result, there are generally no
accounts payable on the books at any
given time, causing a potential material Consider paying invoices twice monthly rather than weekly.
misstatement of the Company's
financial position. A weekly
disbursement schedule may create
additional work for the staff in the
accounts payable department.
Effect
This practice results in improper
revenue and expense recognition.
As a result, the internal control
environment
Effect is not as strong as it could
be
As the Companycommunication
given better andand
continues to grow
understanding of employee
add employees who need access to
responsibilities.
confidential information, this
information can be divulged to
competitors when personnel leave the
company and may go to a competitor.
Inconsistencies between data cause
irrelevant decisions to be made at
management level.
Effect
The Company is not fulfilling its
reporting obligations.
This method may result in
inconsistencies in policies and improper documented establishing estimated lives by asset
lives being assigned.
Effect
within the information systems group could be realised when
the IAD extends its procedures to include testing the controls
of existing information systems. Periodic review and testing
of all systems by the IAD would help to determine that proper
standards of control are maintained. Because of the
Implement procedures to enter invoices on a due date basis,
increasing importance of information systems, involvement of
so that the system will determine when they become due.
the IAD with the information systems group should be
expanded. IAD's involvement might be expanded to include
tests of control totals, balancing procedures, and control logs
on a periodic basis.
Recommendation
Bill and collect for all services, and likewise, all services
received in exchange should be invoiced and paid by the
company in order to facilitate more accurate and meaningful
financial reporting.
Develop and begin a training program, emphasising
individual positions and responsibilities, and the proper
Recommendation
document flow.that
It is important Prepare
stepsspecific
be takenwritten job descriptions
to protect the Company's and
procedures necessary to accomplish a function.
competitive position. While one alternative is to strictly limit
Management should develop
access to all confidential controls certain
information, which would
of thisenable
them to monitor progress in the above-mentioned
information must be available to specific employees areas.
to
perform their required job functions. As an additional
alternative, we suggest consideration be given to requiring all
Consider using the actual overhead rate incurred in the
officers, and possibly other specific employees, to sign non-
application of overhead costs to jobs-in-progress or use a
competition agreements which effectively prohibit the
more meaningful estimate that more accurately reflects
employee from competing with the Company for a specified
actual costs.
number of years after termination.
Recommendation
In view of the reporting obligations for executive perks, the
Company should develop methods to identify specifically the
various forms of executive compensation. In addition, the
Company should consider establishing a compensation
committee composed primarily of non-management
directors. The functions of the committee may include,
We recommend a standard policy be developed and
amongst others, the following:
(1) Approval, or recommendation to the board of directors, of
classifications.
management's annual compensation, including bonuses.
(2) Approval of new compensation plans in which officers and
directors participate.
(3) Granting options under the existing option plan.
Recommendation
The lack of a formal cash planning The Company should consider developing the following
procedure could result in unnecessary information:
and unpredictable borrowing. Prudent (1) A daily report that summarises changes in cash position,
investment of temporary excess cash is outstanding accounts receivable and payable, and the
likely to be overlooked. borrowing or temporary investment position.
(2) A weekly forecast of cash requirements and receipts
Consequently, most issues are not We recommend the Company hire an assistant controller with
projected over the following four-week period.
resolved until the controller addresses a strong accounting background.
(3) A monthly status report of unusual billing, collection, or
them. This creates problems because of
payment backlogs influencing cash flow.
his involvement in special projects and
This information can be reported routinely by accounting
the daily operations of the Company.
personnel to management. This should keep management
Effect informed on a current basis of the cash position and trends
Recommendation
As a result, improper amounts may be and the position in
We recommend, as accounts
a minimum, receivable. It would
production counts also guide
used in
paid to an employee. decision-making as it relates to the expenditure of funds,
cost accounting be reconciled to the production counts used
borrowing, and follow-up
for payroll purposes. of unusual
We also changes
recommend thatinareceivables.
reconciliation
be made of time worked as reported in the cost records to
time summaries prepared by the timekeeping function.
When these amounts are out of balance Develop and document procedures for local personnel to
it can cause a misstatement of financial
Effect reconcile intercompany transactions and balances on a
Recommendation
position and results
The companies haveofavailable
operations.
to them periodic
We recommendLocal
basis. personnel
management should work
consider with their
borrowing on the cash
approximately X of cash surrender counterparts in the other affiliate locations
surrender value of the policies. These funds can to reconcile
be usedtheseto
value of officers life insurance. This is amounts throughoutinterest
invest in short-term the yearbearing
and at obligations
year-end. Corporate
or to reduce
available at very low interest rates personnel
the amount should
of bank review the reconciliations
borrowings. Where funds and
areassist
to bein
resolving any unreconciled items and
when compared to rates being charged invested, it is relatively easy to generate earnings on disputes that remain
minimal
by other lending institutions. Interest unresolved.
risk investments in excess of the insurance Company's loan
Effect Recommendation
expenses would be lower using this rate and thereby increase corporate earnings. Similarly,
Weaknesses in remote
source of financing. access can lead We
wheresuggest
borrowedthe following
funds arerecommendations:
necessary, insurance loans (1)
to unauthorised access and corruption We noted that the passwords used to obtain
generally represent a less expensive financing alternative. entry into the
of data. files are stored in a desk drawer. Better security would
involve placing
In addition, cashthese under a supervisor's
or investments generatedlockfromand key.would
loans In
addition, the in
be classified passwords
the balance should
sheet beas changed
currentperiodically,
assets rather as
well
than as
as when
a personnel
non-current leave.
asset as is the case for cash value of
This can result in misclassification of We recommend year-end expense accruals be reviewed for
(2)
life Entries can By
insurance. be increasing
made for any net date
currentdesired.
assetsThis
and could lead
reducing
the tax liability and provision on the tax implications and be reflected appropriately in the tax
to back-dating
non-currentorassets,
post-dating transactions. To strengthen the
Company's financial statements if these net
provision. the Company's bonding capacity will
controls over daily input, we recommend that only
accruals are not shown as adjustments be expanded.
transactions with the current date be accepted into the
system or that the system generate a processing date
Effect Recommendation
Opportunities may be overlooked if a With the above in mind, we suggest that management
formal planning process is not followed. consider developing a formal strategic plan which will cover a
Such a process is likely to generate period of three to five years. Such a plan would document
even more ideas and develop the present and anticipated future marketplace, the
productive interaction among the Company's goals and objectives, specific steps required to
management team. meet such goals and objectives, and the specific roles of
Effect Recommendation
each officer and manager in carrying out the plan. We feel
Effect Recommendation
the Company would benefit in the long run if this planning
process were performed and documented. It is surprising
what types of ideas can come out of periodic, unstructured,
brainstorming meetings, ideas that could ultimately shape
the Company in the years ahead. Consider:
This approach may not result in an We recommend that an organisation chart and written
optimum distribution of responsibilities. descriptions of job responsibilities be prepared for all
personnel in accounting and administrative functions. This
will provide management with a basis for redistributing
workloads, evaluating personnel requirements, and judging
job performance.
Effect Recommendation
A standards and procedures manual Establish
As a framework
the Company and itsofaccounting
standards and staffprocedures for EDP
grow, efficient
provides
Individualsa central source for
can potentially related activity.
Individuals
organisation who
andareThis wouldcontrols
authorised
effective provide a more
signatories
may structured
should
require not be
that
management
misappropriate tofunds
communicate
from the how it environment
permitted
individualsto for
thethe
insign EDP department
cheques
accounting payable to to
department function
becomeand
themselves. could be
specialists
intends keybank
company's procedures are to be
account. extended to satisfy certain ISO 9000 certification
in certain functions. We recommend that the accounting
performed. It can also provide an requirements,
department policies which and
the Company
procedures is be
currently
definedpursuing.
to maximise
excellent reference source for current individual efficiency through specialisation.
employees, new hires, and external
This causes confusion as to when an
contractors. Management should consider updating their system so that
item is actually shipped and can cause In addition,
invoices for disruptions
back order itemsof established
reflect theroutines
shipping(such
dateasofthat
the
issues with the year end cut off. resulting
original order and the date the back ordered item was so that
from field assignments) should be minimised
efficiency and accuracy
actually shipped. This willwill not suffer.
provide moreFurther,
accurate soinformation
that
personnel turnover
for shipping and invoicing. will have a minimum effect on the
accounting department, department policies and procedures
Effect Recommendation
should be documented in manuals
Inventory valuation may be misstated. The following illustrate areas where improvements in the
Company's annual LIFO calculations may be necessary:
(1) The double-extension method is used in computing the
LIFO inventory value based on the earliest acquisition cost
during the current year. By drawing a relatively small sample
the Company determined that the costs on the perpetual
Effect Recommendation
inventories near year-end approximated earliest acquisition
Consequently benefits and terms of We
pricesrecommend
for purposes the of
Company
determiningconsider the need
the current for aindex.
year's
employment are not communicated to consolidated Employee handbook.
The sample was not statistically valid nor was it correctly
employees as well as management's evaluated in reaching the conclusion.
expectations of employees. In light of (2) The current year's index was derived by comparing the
litigation against businesses brought by aggregate inventory value as reflected in the perpetual
employees questioning "promised" records to the aggregateshould
inventory value arrived at by
A weakness in controls increases the All required information be completed on the block
benefits, the lack of an employee extending
risk of fraud or error occurring in the stamps to ensure errors do not occur and to reduce theA risk
current year quantities at base year prices. test
handbook may lead to of these listings revealed that some quantities were not
underlying records. of fraud.
misunderstandings of Company policy. extended on the base year listing and no provision was made
to allow for this effect when the base year run was compared
to the current cost run. It also was determined that the
Effect Recommendation
listings
The low volume of changes may permit Management should consider training the data processing
an in-house staff member to apply manager in the use of (programming language). This would
modifications that will reduce costs.. permit more control over the development of the accounting
application. However, if programming is performed internally
by the Company, there should be a menu and resource
security to limit programming to a test library.
Without data security in place,
unauthorised persons can access data
files and programs that can result in
unauthorised transactions or erroneous
information entering the system.
We recommend that data security features of the system be
reactivated. This will improve controls over access and will
safeguard the Company's financial data from unauthorised
tampering.

Effect Recommendation
Controls that ensure the completeness We recommend the development of Prevention controls to
and
Effectaccuracy of input at the initial improve the accuracy of data input.
Recommendation
stages of processing
Consequently are preferable
key employees to
may leave While internal controls are designed to safeguard assets and
controls
and divulge confidential information of
that rely on the occurrence to BDO will be happy
help prevent lossestofromadvise on the dishonesty,
employee implementation of such a
insurance,
some event or a review after the fact.
competitors. control system.
such as fidelity bonds, may be a practical, relatively
The absence of such controls can result inexpensive supplement to internal controls.
in misstated financial records and We
Therecognise that atofthe
following types presentare
coverage level of operations, the
available:
additional time and effort to investigate addition of personnel
(1) Scheduled to perform
bond - used whereaemployer
purely control
needsfunction
to cover
Effect
and correct errors as they are found. Recommendation
may not appear to be cost justified. However, as operations
only certain named employees.
The Company's original standard chart continue
We suggest
(2) Blanket to bond
expand and internal
that management
- covers controls
review
all employees, increase
chart of in
theincluding accounts
automatic
of accounts does not include new importance,
and make resources
appropriate
coverage for new employees. should
revisions betoallocated
include to accounts
all the
accounts that have been created for enhancement
currently
(3) Position in bond
use, of additional
controls
- covers so as to provide
accounts
specific accurate
necessary
positions and timely
for than
rather disclosure
various divisions. Further, many financial information.
requirements, and
certain named employees. other accounts that management believes
divisions do not classify expenses will aid its review and evaluation of operating performance. In
comparably. addition,
We a set ofthe
recommend detailed
Company instructions
considershould be developed
obtaining bonding to
Effect Recommendation
aid each division
insurance providing in making
coverage accounting
for all keyclassifications
employees.
Labour inefficiencies adversely impact Adjust machinery
consistent with thelabour standards
consolidated to accurately
group. Consistencyreflect
in the
on profits
Lack and sales
of evidence causing them
of payment leadstoto actual
All labour
purchase
reporting timethe
invoices
among incurred
shouldtobe
various produce
cancelled
locations the
is product.
on toAdjusting
payment
essential a either
fall.
duplicate payment or no payment. these
by standards
a "paid"
meaningful stamp
review would
or by
and result in a higher
the cheque
comparison overall
ofsigner efficiency
initialling
operating the
results.
rate for all machinery products. Additionally, the labour
invoice.
inefficiency variance, included in overhead, would be reduced
resulting in more accurate product costing.
Effect Recommendation
These considerations suggest a We recommend the Company establish the policy of
marketing policy that discourages marketing what is currently held in inventory in standard
special customer orders, pays full sales packs. To implement this policy, salesmen should be provided
commissions only when salesmen sell with weekly listings of items for which they will be paid full
what management wants sold, and commissions for selling.
keeps inventory at a minimum level.

Effect Recommendation
Approximately $X of such salvage value The Company should fully depreciate all assets for tax
is available for
Inconsistent further
cycle tax
count deductions.
procedures purposes to benefit
We understand that,from
given thetheavailable tax
nature of thesavings. No
Company's
may be used. This may impact on the
Effect salvage
business value is normally assumed under accelerated
and organisational structure, cycle count procedures
Recommendation
effectiveness of exposure
the counts methods, and conversion tolines
the straight-line method mid-way
The Company's toperformed.
foreign may vary
Review between
policies andproduct
procedures and plants.
regarding theHowever,
use of to
in the useful
ensure that lifebenefits
the will maximise
of tax
cycle benefits.
counting are consistently
exchange rate risk is not actively derivatives to minimise foreign exchange rate risk. The
minimised. achieved
Company throughout
should assess thethe
Company, written
impact of procedures
Statement should
of Financial
be updated on a timely basis to address any
Accounting Standards (SFAS) No. 133, Accounting for changes and
should alsoInstruments
Derivative be includedand in the policies
Hedging and procedures
Activities when
manuals for each plant.
Lack of segregation of duties can We recommend all credit approvals over a stated dollar
increase the risk of misappropriation of amount be subject to final approval by a higher level of
company funds. management.

Effect Recommendation
Information security controls are an Eliminate the multiple IDs residing on Company 1. Also,
integral part of a secure electronic data consider including all participating loans on Company 1,
processing environment (if instead of maintaining a separate system for these loans.
management decides not to resolve
these situations, determine whether
adequate compensating controls are in
place, thus providing assurance that the
Company's assets are protected).
This can lead to misappropriation of We recommend that management direct its staff or engage
company assets. us to selectively observe the monthly inventories on a
surprise basis. If each plant was visited once or twice a year,
management would have more confidence in the accuracy of
inventory quantities listed and, at the same time,
demonstrate to the plant manager that management is
Effect Recommendation
interested in the accuracy of the counts.
Inventory levels may be misstated We recommend that perpetual inventory records are
where accounting procedures for established for substantially all inventories and that standard
monitoring stocks are unreliable. This cost systems are implemented for all manufacturing
may lead to misstatement of stock operations. The current information system could be modified
valuation and unreliable decision by reporting production quantities and, together with sales
making in respect of stock ordering. data already generated, this information could form the basis
Effect Recommendation
for perpetual records of manufactured inventories. Once
Effect Recommendation
established, perpetual records and the use of standard costs
Effect would:
Recommendation
Currently it is difficult to ensure the (1)
We Reduce
recommend the frequency of physicalstatement
a written procedure inventory becounts.
prepared
accounting for property disposals is (2) Provide better
that would require: accounting control over the flow of goods
and increase the possibility of detecting
correct, substantiate insurance claims, (1) A detailed property record for each fixed asset. theft or unrecorded
provide information for proper filing of shipments.
(2) A property identification number to be assigned and
income and property tax returns, and (3) Provide
affixed management
to each asset. with more valuable tools to monitor
provide controls to safeguard the realisation and quickly
(3) A capitalisation spot
policy production
under inefficiencies. below a
which disbursements
The company does not hold a balance Develop
(4) Provide and adhere
more to ancost
reliable investment
and policy that
accounting datacombines
as a basis
assets. specified dollar amount would be charged to operations.
portfolio that matches desired risk with desired risk withproduct
for determining return. profitability and needed shifts in
return. Liquidity can be an issue if all production and thesales emphasis.
At a minimum, detailed property records should include
excess cash is tied up with
the following information:
investments. Using existing data
(1) Description, asset number, and location.
Effect (2) Historical cost and date of acquisition.
Recommendation
The current budget may be obsolete (3) Assigned
In an effort tolife and method
evaluate of depreciation.
operational performance more
due to inaccuracies
Consequently in forecasted
employees are not (4)
We Depreciation
accurately,
recommend taken
consideration on
the Company an annual
should basis
be given
review with
to
the areas accumulation
revising
wherecurrent
job
operating
trained fordata or mayofbecome
a number responsibilities thereof.
obsolete rotation
budgeting procedures
may be possible by:and develop and implement a job
after
in theseveral
event ofmonths.
illness,The fundamental
dismissal, etc. (1) Obtaining
rotation plan. forecasted operational
It may generate more data fromgreater
interest, appropriate
purpose of budgetary control is to plan divisional
efficiency sales, manufacturing,
and higher morale. and administrative
for the most profitable operation, and personnel.
then maintain operations according to (2) Implementing a flexible budget concept.
Effect
such plan. Budgets stimulate early Recommendation
(3) Updating the current year's budget at least quarterly for
In many instances, employees
responsible for recording transactions
are the same employees responsible for
reviewing the related data for errors.
This gives rise to a greater risk of errors
or manipulation of entries.
The ease of access to the computer
room will increase the risk of accidental
or malicious damage being caused.
Effect
Therefore, depreciation could be taken
on assets that are no longer on the
Company's premises or property tax
could be paid on the net book value of
these same assets.
We recognise that the accounting department has a limited
number of employees and therefore the Company is
somewhat restricted in obtaining maximum segregation of
duties. However, we believe the system could be
strengthened by requiring the Controller to review the work
of other accounting department employees. We also
Data processing equipment should be adequately
recommend that the Controller does not handle the receipt or
safeguarded against vandalism and accidental damage. This
disbursement of Company funds - he should only review the
situation could be corrected by installing ceiling-to-floor
results of these processes to ensure these activities are being
partitions to isolate the data processing equipment from the
handled properly.
rest of the office and restrict access to authorised personnel
only.
Recommendation
We recommend that fixed assets be inventoried at least once
every two years. This inventory could be performed on a
rotating basis with a separate group of assets being
inventoried each month.

Without forecasting the results of Develop a budget and business plan for the short and
operations it is difficult for management medium term with the involvement of all managers.
to establish goals and identify potential
problems. Forecasts would also help to
anticipate the need for additional
staffing and financing. Regular
Effect Recommendation
comparison of actual results with
Records
budgeted may be disposed
amounts of
helps management In light of the volume of the Company's records and the costs
erroneously
control the operations. related to their preparation and retention, we recommend
procedures be adopted to review and evaluate recordkeeping
requirements and the adherence thereto on a periodic basis
(e.g., every one or two years). The following recordkeeping
considerations should be investigated during such a review:
Effect Recommendation
(1) Legal retention requirements for each type of record and
In the absence of control totals there is We recommend that both sales and vendor invoices be
document.
no assurance that all documents have batched andretention
(2) Internal totaled prior to being posted
requirements to the
of certain system.
records and
been posted correctly or at all. Subsequently, the control totals should be compared
documents not covered by legal dictate (e.g., government to the
output
contract listings toand
records verify the customer
other information was input
contract correctly.
records).
(3) The type of paper to be used to record data, considering
The cost of processing these items is the length of thethat
We recommend retention
both theperiod and the
minimum typeorder
dollar of storage
criteria
high and there is a risk that the related facilities.
and the partial shipment policy should be reviewed to
loss of data processing capacity will (4) Availability
determine of storage
whether facilities approach
an alternative (microfilmed/scanned
is available to
increase due to expanded volume records require less space than source
meet customer needs or whether a special documents).
fee for such
(5) Costisofappropriate.
service microfilming/scanned records versus the cost of
storing the original documents.
(6) Frequency of referral to documents (microfilmed /
Therefore, there is no assurance that all We recommend all register tapes be attached to the Daily
sales for the day have been recorded. Report regardless of whether a register is utilised, so that a
verification of the day's sales can be made.

Effect
Without a printed log, the data
processing manager cannot properly
control the operations of the computer
nor can he adequately evaluate the
efficiency of the data processing staff
and equipment.
Lack of controls over daily reports and
deposit slips can lead to
misappropriation of company funds.
This leads to unallocated cheques which Monthly reconciliations should be performed
may be lost or misappropriated and
may have an adverse affect on cash
flow.
Recommendation
If the computer software allows for the "write to disk" feature
and the capacity is available, a daily log of activities should
be prepared. It should include all operation interventions as
well as machine time for each job, reruns, machine halts and
warnings. This will enable the data processing manager to
evaluate the efficiency of computer time.
A validated deposit note should accompany each stores daily
report as evidence that the daily receipts have been
deposited on a timely basis. Store managers should consider
this as an area of their responsibility and follow-up on the
disposition of daily collections.
Unallocated cheques should be kept in a secure location with
restricted access to prevent improper use.

Effect Recommendation
Without standard procedures in place In recent years many companies have established an
inventory
Effect levels can be manipulated "inventory valuation committee" or an "inventory valuation
Recommendation
and physical
A non-automatedinventory
methodis at
ofrisk
datafrom supervisor"
We recommend to establish
the Companyprocedures designed
consider to achieve
authorising a
misappropriation.
processing can decrease the quality and accuracy
feasibility study and cost/benefit analysis of theindividual
in inventory valuations. This group or design,
efficiency of the Company's accounting typically reports
development anddirectly to the corporate
implementation treasurer or
of an accounting and
and financial reporting system. controller and has full responsibility for planning,
financial reporting system that will be more efficient organising,
and
and implementing
responsive than the standard inventory valuation procedures.
current system.
Effect Recommendation
We recommend that consideration be given to assigning
This has led to a decline in profitability responsibility
The following to an individual
general or committee
profit improvement to ensure
concepts arethat
experienced in recent years by the ABC such procedures
offered are established.
for your consideration. The
and XYZ Divisions. Without actively following are among the matters that may be included in
trying to improve profits this, combined standard inventory valuation
Product Development procedures:
And Marketing Plan - The basic
with the prospects of future cost (1) Establishing timetables for
objectives of the Company's productcompletion by each
research and location.
increases at these divisions, will cause (2) Establishing
development andcost accounting
of product responsibility
planning for completion
and engineering should
Effect Recommendation
of physical inventories and inventory valuation.
profits to fall further. be to:
Effect Recommendation
(3) Generate
(1) Establishing detailed instructions
a succession covering
of profitable productsphysical
that provide
Effect
Effect
Effect
Effect
It is important to take the necessary
steps to efficiently manage the
numerous tasks facing the company to
prevent project overruns or loss of
goodwill from customers.
Such programs can prevent an
environment where appropriation
requests reflect unachievable and
overly optimistic results.
Recommendation
Recommendation
Recommendation
Recommendation
Prioritise projects at the corporate level. In this manner, MIS
resources can be applied to the most important project.
Currently, personnel within each application group are
assigned to support their specific application.
Acquire an automated project management system to
Management should consider implementing a program to
support the effective management of the projects. This
evaluate the effectiveness of significant capital additions.
would allow management to centrally track and report the
status of all projects and to efficiently utilise resources to
complete outstanding projects.

Effect Recommendation
Consequently management has no Complete an in-depth analysis of the existing information
assurance that adequate controls have access controls and continue to review the controls on an
been established to protect the annual basis. Controls should be implemented to ensure that
confidentiality of financial information user procedures and controls are designed to identify any
and to restrict access to the liquid discrepancies.
assets held by the Company.
Without a formal structure of To maintain desired standards of credit-granting without
supervision, credit may be given to constant management supervision, a credit scoring system
inappropriate customers and an should be in place. The benefits of which are: fewer write-
increase in bad debts may occur. offs, fewer rejections of potentially good risk customers, more
rejections of potentially poor risk customers, a reduction in
field management's time freeing them up for other
productive uses and reduction in field management concern
Consequently employees are not about credit
Formalise decisions.
a plan to cross-train specific employees so the
trained for a number of responsibilities Company is not dependent on one individual. We also
in the event of illness, dismissal, etc. suggest forcing these employees to take a week long
vacation at a minimum of once a year. This will reduce
numerous risks involved with having limited controls due to
having few employees in the department
Effect Recommendation
This does not provide the ability to This value can be set to provide additional security for those
protect specific files, programs and data objects noted.
on the system.

Reconciliations become increasingly The company should record all adjustments for reconciling
difficult and time-consuming to prepare items during the reconciliation process each month.This will
and review. facilitate subsequent reconciliations and eliminate the risk of
neglecting to adjust the accounts.
As a result, user IDs are not inactivated Continue to focus on developing a method for timely
or removed on a timely basis. Based on notification of changes in access needs for employees,
our review, there still exist significant vendors and contractors. Steps could be implemented to
numbers of IDs that have either never reduce the impact of this problem. For example,
been used or have not been accessed in management could take a risk-based approach to this
180 days or more. As a result, this problem and initially identify departments with access to
Effect Recommendation
creates a risk that these IDs may be sensitive information. For those departments, such as
It is not possible to identify problem
misused. The Company
finance should consider
and information expanding
systems, managers its could
currentnotify data
areas or those areas where efficiency budgeting
security whensystem so that avendors
employees, more detailed comparison
or contract personnel no
must be improved. between the budgeted
longer require expectations and the actual results as
system access.
indicated by monthly financial statements would be
calculated. The budget is a valuable tool which, if used
properly, can result in cost savings from increased efficiency
Effect Recommendation
and from management's ability to more readily identify
Without recording shipments a We recommended
problem the Company
areas. Budgets must be establish
prepared afrom
shipping
futurelog and
company cannot identify whether a use prenumbered
expectations shipping
and past advices.
experience By only
and properly
if thecontrolling
budgets are
shipment has arrived/ is delayed/ is lost shipments,
realistic canthe Company
they can be assured
be an effective of a proper
management cutoff
tool. The new of
etc... In addition items could be sales and that allequipment
data processing sales are properly recorded
the Company plansin to
thepurchase
misappropriated whilst in transit and accounting
could be used records.
to accumulate the required information,
the company has no record as to thereby eliminating any large increase
The Company may be paying excessive We recommend management consider in the workload
engaging of the
a freight
whether the items were originally accounting
freight costs. audit firm tostaff.
examine freight charges. These organisations
included in the shipment. Improper
audit freight invoices to determine that charges are
sales cut off and unrecorded sales may
consistent with the agreed-upon rate schedules. As a fee,
also occur.
they generally charge 50% of the recovered refunds.

Effect Recommendation
As a company grows and increases the To improve the communication of these responsibilities and
number of its employees, the necessityrelationships, we recommend the Company take the following
increases for employees to understand actions:
their personal responsibilities and their
(1) Prepare a graphic and written presentation of the
relationship to other employees to Company's organisation, showing primary functions and
ensure the Company runs smoothly. reporting responsibilities by area.
Greater control and efficiency could be
A review should be made to determine the economic
(2) Clearly establish the individual responsibilities of each
obtained
Effect by a new system. desirability of updating and improving older systems. If
Recommendation
employee.
The lack of segregation of duties improvements
Require are adopted
management theyand
to review could improvethecomputer
(3) Prepare written procedures for allapprove final within
major functions payroll
exposes the Company to the risk that processing
information efficiency
received and flexibility,
from the serviceincrease
bureau physical
the company. These should clearly define the prior to
objectives,
payroll is generated for non-existent security over This
distribution. files review
and also improve
should accounting controls over
berequirements
documented.
standard documentation and time where
systems.
employees or unauthorised changes are applicable.
made to current employees' rate that
may not be detected.

Poor cash management means the We recommend the Company monitor its cash balance to
Company is missing out on interest ensure it is maximising interest income on available funds.
receipts. Investment of these funds in
short-term investments, assuming a 6%
interest rate, could have produced
annual earnings of $10,000.
A formal severance pay policy would Have management formally approve a severance policy.
alleviate any possible litigation
involving potential discrimination
practices resulting from discretionary
severance packages.
Effect Recommendation
The company may not meet reporting Review the current closing and consolidation process, assess
deadlines
Effect and could incur penalties. the impact of consolidating B Company and develop or obtain
Recommendation
Individual note balances are not a
We recommend package
consolidation a separatewhich will enable
general ledger the Company
control accountto be
specifically identified and the ageing of enhance its ability to implement an efficient, timely
established for the balance of trade acceptance notes. A and
outstanding notes is not properly accurate
subsidiaryglobal
ledger reporting
should besystem.
maintained manually and each
controlled. month an ageing should be prepared that is reviewed by the
B Company's
President closing
of the and consolidation processes should be
Company.
reviewed to ensure financial information is reported to the
Information security controls are an Eliminate
Company theon ause of generic
timely basis. login
In ourIDs from the
opinion, thissystem.
will require
integral part of a secure electronic data Consider
the directallowing the capabilities
involvement provided
of individuals from theby the generic ID
Company's
processing environment. to those users
Corporate requiring
Finance group.it for
Oncetheir
thejob function.
closing and consolidation
process at B Company is improved, consideration should be
given to changing B Company's year-end to be consistent
with the Company's.

In addition, intercompany transactions between the Company

It is important to know what the profit and its subsidiaries,
We suggest including
you continue B Company
to develop a full and its for all
costing
margin is on each inventory item. In subsidiaries, should continue to be identified,
inventory items. This will this provide a valuable reconciled and
order to determine which items are properly accounted
management tool. for in the Company's consolidated
most profitable, you must first know the
true cost of the item.
Effect Recommendation
If requests for changes are not written We recommend that formal authorisation procedures be
down there can be confusion if changes adopted for all program change requests. When the program
are not put through accurately and in change has been made, the manager or supervisor of the
accordance with instructions. user department should sign the program change form,
signifying that the program has been changed according to
the original specifications. The program change form should
Effect Recommendation
then be filed in numerical sequence. A copy of the program
Direct deposit may be desired by We recommend
change that be
form should management consider
filed with the implementing a
program's
employees. It may decrease direct payroll deposit program. Direct payroll
documentation such that a record of each program depositchange is
administrative costs and provide better programs are increasing in popularity
kept in chronological sequence. among all types of
cash management and controls over businesses. Direct deposit is a convenience to employees and
payroll. provides assurance that their pay has been deposited on a
timely basis. Employers receive additional benefits because
Verbal agreements could give rise to Negotiate expired leases and sign new written lease
controls are strengthened over the payroll function, clerical
misunderstandings and do not allow agreements.
time is reduced and the problem of security over payroll
consistent corporate records to be
cheques is eliminated.
retained.
There is a risk that the financial Develop procedures that will ensure individuals responsible
statements do not reflect the true for monitoring the carrying value of long-term assets are kept
position of its non-equity investments informed on a timely basis of changes in the underlying
and the financial statements may be asset. This will allow for effective monitoring of the
materially misstated. realisability of such assets and ensure that proper accounting
records are maintained.
Effect Recommendation
An individual trained in personnel We recommend that a study be performed to determine the
management
Effect could provide these feasibility
Recommendation of creating a centralised personnel organisation
services
Lack of control over level
at a higher of quality and
investment within the
The securities Company.
held inThe study should
safekeeping shouldinclude the following
be independently
at a lower cost to the Company.
portfolios will increase the risk that With tasks:
confirmed on a recurring basis. This includes an inspection of
decentralised personnel activities,
errors or fraud will not be prevented or (1) Identify, in of
all certificates detail,
depositthe onvarious
hand.personnel
The results activities
should existing
be
many high-level managers spend their
detected. within the Company and how and where
compared to the detailed security records and reconciled to they are
time on personnel matters that could be administered.
the general ledger. Tests should also be performed on a
delegated to a specialist in the field. (2) Identify
timely basisthose personnel
on detailed activities
security or programs
transactions. that should
For example
Effect Recommendation
be initiated.
tests could include inspection of underlying documentation
The Company and its subsidiaries are (3)
such Determine
Because of thethe
as brokers' specific
complexities
advices responsibilities
and of these quotations
market matters,of the central
their
to ascertain
involved in many varied and complex personnel
interrelationshiporganisation.
with each other and
that securities were purchased or sold through proper with other transactions
tax matters. These matters include: (4) Determine
consummated
channels and that the specific
or being personnel
properlyresponsibilities
contemplated,
they were the Company
recorded and the of the
should
(1) The personal holding company operating
perform a department,
review of the divisions,
tax function
prices, dates and amounts paid were correct. These or subsidiaries.
for purposes of
situation. (5) Determine
evaluating
procedures the
couldthe cost
handling
be ofofoperating
performedtheseby a centralised
matters
the for quality
internal personnel
audit
(2) The return of capital status of organization
assurance.
department. as compared to the cost of operating in the
Effect Recommendation
present decentralised manner.
dividends to stockholders.
Incomplete
(3) Corporate information mayand
liquidations result in The Company should prepare profit and loss statements for
the incorrect business decisions being
Effect
reorganisations. each store. In order not to dilute the value of the information,
Recommendation
made.
(4) Review
Additional workof changes
is creatediniflocal these statements
We recommend should include
establishing only direct
separate store expenses,
intercompany sales
taxation.
intercompany sales are combined with including advertising. Periodic "break-even
accounts in the standard chart of accounts to make point" analysis
the of
(5) Preparation
external of the Company's
on consolidation as the individual store operations would assist
information readily available for consolidation purposes. We management in
consolidated local
intercompany salestax returns.
have to be making decisionsthat
also recommend suchintercompany
as whether toreceivables/payables
close a specific storebe or
The company
separately must ensure the tax
identifiable. possibly to redirect its advertising effort.
reconciled at least monthly so any out-of-balance condition Warehousing costs
function can meet these needs to and
will beadministrative
detailed. Further, costs the should be evaluated
selling division should as separate
initiate
Effect
prevent mismanagement of taxation. Recommendation
cost centre s. The Company's chart of accounts should be
the recording of the accounting entry by both divisions. The
Without a formal e-mail policy abuse revised
Develop
receiving to facilitate
adivision
written shouldsuch regarding
policy expense
be required groupings.
e-mail
to book andthe incorporate
entries fromit
can occur by employees. into the personnel
the selling division guide. An effective
and follow-up e-mail policy
any shortage should
or errors by
Other
address, reports
subsequently such as analyses
at a minimum,
requesting such and comparisons
issues
the selling as an employee's
division to issue of rent andto
a right
credit
square
privacy, footage
or debit memo. to net sales by store would
the personal use of e-mail by employees, third-party provide additional
management
access to e-mail information of the typerights
and the company's needed to make
to access
operating decisions.
electronic messages. The policy should be formulated with
The lack of controls can lead to the Bank account reconciliation procedures can be strengthened
the aid of personnel, information systems, users and possibly
misappropriation of company funds. as follows: management information
In addition, -Reconciliations
would should be
legal counsel. The development of this type be more
of policy valuable
could
performed
if month-end monthly
closings and adjusted
were as appropriate.
accomplished in a more timely
prevent possible conflicts or legal action in the future
manner.- Reconciliations should be prepared by someone who
has no cash duties and should be reviewed and approved by
management. - Terminated employee
Effect Recommendation
names should be removed from the bank accounts and the
Management will not be able to make We
banksrecommend
notified inawriting
job order in acost system
timely be established. At a
manner.
appropriate
Effect decisions without adequate minimum,
Recommendation the materials, actual labour and overhead (at a
product cost information.
Work in progress inventory balances are standard
Although rate) certain should be charged were
new procedures to each project
recently being to
instituted
likely to be misstated. manufactured.
correct this situation, the following additional stepsvariances
Budgets should be established and should be
of actual
taken costs from
to simplify budget explained.
procedures, eliminate Ifduplicate
it is not feasible
record to
establish
keeping and a formal
improve costcontrol
system (fully
over integrated
material costs: with the
general ledger) due to the size and nature of the Company's
operations, we believe the Company would still derive the
Effect Recommendation
Effect Recommendation
Effect Recommendation
Consequently the company has no These closing procedures should include:
assurance as to the accuracy of the (1) Preparing depreciation schedules and making the related
general ledger. adjustments. (We suggest you consider computerising your
depreciation schedules.)
(2) Reconciling detailed subsidiary records, such as cash,
accounts receivable, and accounts payable with control
Effect Recommendation
accounts.
Internal controls are designed to We believe theand
(3) Reviewing following
adjustingimprovements
prepaid andto internalexpense
accrued control
safeguard assets and help prevent can be made without impairing efficiency:
accounts including insurance, taxes, interest and deferred
losses from employee dishonesty or compensation. (We also suggest reviewing these accounts
error. A lack of internal controls [list of detailed
periodically internal control
to determine recommendations]
the reasonableness of the recurring
increases the Company's risk in these entries).
areas. (4) Reviewing transactions subsequent to year and/or
end to other
Misstated accruals can lead to the Develop a policy requiring written agreements
material
Effect misstatement of the financial determine
formal those that should be
documentation to be obtained from the sales
Recommendation recorded in the current year
statements. financial
department statements
to support (e.g.,
the accounts
various payable, professional
incentive rebates
A lack of standardised policies and To help
fees, standardise
interest income theand change
interest management
expense). processand andany
procedures can lead to untested and/or limit other similar
the possibility arrangements. If
of unauthorised it is determined
program that
changes a formal
being
Effect Recommendation
(5) Requesting information astheto the pension liability and
unauthorised agreement is not necessary, Sales department should
As a result, in programs
the event being moved
of a disaster moved
adjusting
We into
recommend
document the
that
the production
accrued
management
the management
environment,
liability develop
arrangement process a management
disaster
was communicated recovery should
to the
into the production environment
affecting the computer systems, the where review
plan the change
that addresses thethat
following: with emphasis being
live transactions are processed customer
placed on in
the a following:
manner will assist the customer, other
Company may be subject to an (1)
SalesIdentification
departmentofpersonnel critical applications
and the accounting department
extended delay before substitute (2)
in Step-by-step
understanding instructions
the terms thatconditions
and define theofresponsibilities
the sales of
processing capabilities become Þ Develop
each written
functional areapolicies and procedures relating to changes
department partytowhere prepare a formal computation of the incentive
available. This could result in significant to (3) third
Locations
rebate accruals
software.
that computer
should be operations
recorded atcan eachbe quarter
re- end
Effect Recommendation
losses to the Company. The most established
supported by andcase continued
sales, rebate rates, payments etc.
This arrangement
effective approachcould lessen
to ensure the
a rapid Þ
We
(4)Current
recommend
Network policies and(ifprocedures
management
back-up necessary) related the
reevaluate to changes
compensation to
incentive for these
recovery from salesman is
a catastrophe software
toto have arrangement written
(5) Specific security in-house
for salesmen. should be emphasised
controls that will be needed during the to
increase
a written their sales volume.
and tested recovery plan. programmers.
recovery process In addition, management should perform
periodic reviews
(6) Alternative to determine
manual procedures adherence
requiredto to
established
maintain the
policies.
records and continue operations
Proper segregation of duties is not in (7)
We Impact
recommend of disruptions
the following on customers
procedures andbealternative
implemented in
place.
Effect This could give rise to systems
the bank
Recommendationfor continued
reconciliation contact
process:
unauthorised
As the company transactions
is growingthat
it is are notto (1)
going A The responsibility
stock appreciation for bank
plan could reconciliations
provide such the should be
incentive
identified as part of review procedures. As part of
assigned to the an recovery
individual plan,
not we recommend
having cash Company
need to retain key employees. A lack of through investigate participation
and negotiatein the a Company's
back-up success without
agreement. Many
incentive policies for staff may lead to receipts/disbursements
requiring anwith immediate duties or access
cashequipment
outlay. Underto the
unissued cheques;
provisions
companies
(2) A log should compatible
be established to assureare willing
that all to enterof a
their departure. stock
into appreciation
reciprocal back-upplan,agreements
an officer isto granted
ensure the right of of
continuity
reconciliations
payment for thehave been performed
increased value of and
the reviewed
Company's by an from
stock
operations
official on a intimely
the eventbasis; of a disaster. If such equipment is
the grant to
available, exercise
it will be date. The Company's cost would be
Consequently debt collection We
(3) recommend
Since only onethesignature
companyisconsiderrequired adopting
on the the following
Company
equal to the salary expense associated with the incremental
procedures are not performed on a policies
account, tothe improve
activityitsincollections
this account efforts:
should be reviewed by
appreciation.
timely basis and there is an increase in the - Use a collection
treasurer on a agency
regular to reduce
basis; andadministration costs.
bad and doubtful accounts. - Charge
(4) interest should
The treasurer on over-due
reviewaccounts
all bank to speed collection
reconciliations
- Standardise
monthly and this collection
review shouldcorrespondence
be evidenced in writing.
- Consider filing lawsuits for all overdue accounts
Effect Recommendation
- Separate very old account balances from normal accounting
routine.
This does allow additional time for We recommend the Company evaluate the cost of having the
employees to perform other functions. service bureau also prepare the general ledger and financial
statements.

Effect Recommendation
The purpose of an incentive bonus plan Performance bonuses are a better incentive for employees in
is to reward important employees with
Effect all phases of the business, regardless of company size. For
Recommendation
cash
Errorsorindeferred compensation
the journals that
are unlikely to becertain employee
We recommend positions,
that the plan
the Controller becan be basedfor
responsible upon
thea
varies with the success
identified promptly of the business pre-established goal for net earnings determined
approval and review of all general journal entries and that by the
or the level of their performance. Company's
general ledger Board of Directors
balances be agreedprior to
to supporting
the beginning of each
detail on a
year.
regular basis. Such a procedure would strengthen control and
Targeted net earnings is generally set aggressively
bonuses
over the are calculated
accounting (as a percentage
function and facilitate ofprompt
participant salary)
based upon actual financial
identification and correction of errors.results as compared to the pre-
Effect Recommendation
established goal. The Company's Board of Directors would
This may promote the inconsistent budget an amount
Often smaller for bonuses
companies delegate andthis
establish
task toits incentive
the end of a
performance
Effect of critical duties. structure
"to do" accordingly.
list
Recommendation and then put it off again if it happens to surface.
Employees classified as accounting personnelpolicy,
(controller,
No segregation of duties increases the A well-organised
Transfers between manual
accounts is like an insurance
should be authorised byhowever,
2 or
cost has
accountant, bookkeeper, etc.) should not beandplaced on
risk of collusion and misappropriation of more responsible officials. The bank advices of the resolve
and proved to be well worth the time, effort
an incentive
necessary to program
put it based upon net earnings. Such an
together.
the company's assets. transactions should be directed to a responsible person other
incentive program could negate the effectiveness of
than the person initiating the transaction.
established
A manual ofinternal
accounting controls.
policies Forand
these individuals,
procedures is aanwritten
incentive plan based upon formal evaluations,
record of how the Company's internal accounting function which
Where transactions are not recorded on Allobjectively
transactions
operates. assess
Such the quality
should
a manual and efficiency
be encompasses
recorded in the of
accounting
everything system
from the
a timely basis, the company may be on a timely
chart basis. to information about how a cheque is
of accounts
unable to make an adequate handled once it comes in the door. Day to day, the manual
assessment of performance or liquidity serves as a valuable reference and training tool, ensuring
at any point in time. Also there may be consistency in accounting operations. In an emergency, it is
misstatement of interim information, an invaluable record and resource for thatallguides management
The Company's interests will not be Prepare a formal lease agreement leases.
loss of relevant facts and information in maintaining or re-establishing the Company's operations.
protected in the event of
needed to record transactions and the A mid-size business relying on the expertise and experiences
noncompliance with lease terms.
risk of neglecting to record transaction of one or two accountants should be especially concerned
all together. about developing such a manual (to be utilised in the event

Effect Recommendation
Without control and monitoring of job We recommend a formal detailed cost estimate form be
performance at interim dates, prepared for each phase of a project and used subsequently
management are unable to make to monitor performance at interim dates. This form should
informed decisions and judgments on a contain, at a minimum, estimates for materials and supplies,
timely basis. labour cost, freight and subcontracted costs. The form should
be updated periodically, to reflect changes in project scope
Effect Recommendation
(change orders, deletions, etc.).
The economic impact of these leases We believe a policy should be adopted requiring prior
did not appear to be as favorable as approval of all long-term
Implementation leases exceeding
of this procedure a specified
should provide greater
certain Company purchases. amount.
control over job costs and enable management to better
monitor such costs by identifying potential overruns on a
more timely basis. Additionally, other business decisions such
as those relating to the timing for billing customers and
requests for additional fees can be made on a more
informative basis with this information available.
One of the many ways to conceal We recommend that this reconciliation be made at the end of
defalcations is to record a fictitious each month and any reconciling items be investigated and
entry in the subsidiary ledger. Unless a cleared promptly. The controller should then review the
reconciliation of the detail to the control reconciliation and satisfy himself that it is proper.
account is made, a defalcation may go
undetected.
An inadequate provision can materially An entity should consider writing off the accounts determined
misstate the financial statements so a not collectible instead of increasing the allowance account. A
true and fair view is not reflected. A quarterly or semi-annual meeting should be held to monitor
valid tax deduction may not be taken the status of the accounts receivable aging and to identify
due to the classification of uncollected problem accounts in a more timely manner.
balances.
Effect Recommendation
The company may be breaching the We recommend that a permanent schedule of negative and
loan covenants without realising which affirmative covenants of each loan agreement be maintained
could lead to immediate repayment of by the treasurer or controller. Columns for each compliance
the loan. date should be initialed and dated to indicate that all
covenants were reviewed for compliance on a timely basis.
When a covenant has not been adhered to, an explanation of
Unauthorised payments to fictitious or At a minimum, have a different individual distribute the pay
the action taken should be attached to the schedule.
existing employees could very easily go cheques to employees at a date unknown to the Human
undetected in the present operation of Resource Supervisor. This would include the receipt and
this department. review of the payroll cheques directly from ADP.

Effect Recommendation
Lack of written formal procedures could The use of written policies, procedures and job descriptions in
promote the inconsistent performance conjunction with the assignment of specific responsibilities
of critical duties. generally increases the efficiency of a Company's operations.
The benefits derived from the use of written policies and
procedures include consistency in the manner in which
transactions are handled, formally documented lines of
Effect Recommendation
authority and responsibility, a practical means of evaluating
Effect Recommendation
performance and a reduction of the problems incurred when
No employee has responsibility for an employee
The Companyisshouldabsentemploy
or leaves.
a Controller. This individual's
monitoring and expanding upon the responsibilities would be directed toward the preparation and
Company's accounting systems. We recommend
analysis thatinformation
of financial management andestablish an accounting
statements, the
and operating procedures
implementation manual outlining
and maintenance of internalcorporate
controls, policies
and
to be
the followed
general by all divisions,
supervision as well as additional
of the Company's accountingpolicies
system.
adopted by specific
The controller woulddivisions.
be charged Thewith
preparation and
communicating the
Effect Recommendation
maintenance
necessary of written
procedural standard procedures
instructions is necessary
for all accounting to:
activities
Effect Recommendation
(1)
and facilitate
would have review
the by the corporate
authority staffcompliance.
to enforce for adherence to
This
Effect corporate
person policies;
should
Recommendation report(2)directly
establish consistent
to the corporate
President.
practices;
While not (3)
all aid in
inclusive,communication
the following
The Company may be subject to risk of Evaluate foreign currency cash balances and investigate of
are suggested dutiesthe
and
unfavourable currency fluctuations. responsibilities of the controller:
opportunities, if any, to mitigate the effects of foreign
There may be opportunities to reduce · Functionfluctuations.
currency as an administrative manager with responsibility
this risk through own currency for all office staff.
denominated accounts in the local · Prepare and analyse in-house financial information and
country, hedging instruments to offset statements.
The company is currently not realising We recommend
· Implement andthe Company
maintain consider automating
computerised accountingtheandfixed
the unfavourable currency or
the potential
Effect savings in clerical effort or asset records.
Recommendation
information The Company's
reporting system. data processing system has
repatriation of a portion of the cash.
maximising
There the income tax depreciation the capability
· Increasethe to
theCompanyhandle additional
use of microcomputers applications.
has historicallythroughout We believe
the
Any ofisthese
a riskstrategies
that the new standard
should be Although utilised derivatives
deduction.
will not be with
implemented correctly. automating
Company
and hedging the
(i.e., accounting
activities on a records for property
limited basis, and
management
evaluated the Company's long-
This results in there being no control of
credit chasing and collection of
accounts receivable. Untimely and
irrelevant information may be prepared
which could lead to the accounts being
over-stated as accounts become so old
It would be impracticable for the
they cannot be recovered.
accounting department to attempt to
verify that a reasonably accurate
accounts payable cut-off had been
effected.
Effect
Cause could be due to lack of controls
over scrap. Therefore the company
could be losing profits on scrap that
could be generating a profit.
Poor reconciliation procedures mean
that any unauthorised payments may
be overlooked. Bank errors would also
be unidentified.
Effect
Incorrect valuation amounts are causing
misstatements in the financial
statements
If employees are able to cash their own
cheques this can lead to misuse and the
cashing of cheques for non-business
purposes.
As the use of personal computers
increases in the office place so does the
risk that the capabilities of such
equipment will be misused.
Effect
Without any instructions there is no
formal procedure and therefore errors
can occur resulting in an inaccurate
count.
Unpaid accounts should be reviewed regularly to effect
prompt action on delinquent accounts. The only means to
accomplish this is by preparing an aged listing of the
accounts receivable detail and reconciling the total to the
general ledger.
We recommend that at the end of each accounting period,
the trial balance of accounts payable be prepared in
sequence by vendor with subtotals to facilitate reconciliation
to vendor statements and other verification procedures.
Recommendation
We recommend a study be undertaken to determine the
cause for the increased rate of scrap and to propose solutions
to the scrap problem.
Bank account reconciliation procedures should be
strengthened as follows:
(1) Bank accounts, including imprest accounts should be
reconciled monthly;
(2) All cheque numbers should be accounted for;
Recommendation
(3) Cheques should be examined to determine that the
We recommend
signature that inventory cost standards be reviewed
is proper;
and updated periodically to ensure
(4) The date, payee and amount of that current
cancelled cheques should
manufacturing costs are being used
be compared with the disbursements journal;for financial reporting
purposes and in product pricing decisions.
(5) Bank charges and miscellaneous reconciling items should
be identified in the reconciliation and adjustments should be
made
Deposit onslips
a monthly
should basis;
be periodically reviewed to determine
(6) Reconciliations should be
that no employee cheques prepared
are includedby insomeone having no
bank deposits
cash duties and should be reviewed and approved by the
controller; and
(7) Dormant or inactive accounts should be closed and the
banks notified in writing.
To reduce this risk we recommend the Company establish a
corporate policy on the acquisition and use of personal
computers.
BDO are happy to advise on implementing such a policy.
Recommendation
Internal controls should be strengthened to insure that:
(1) All items are counted and no items are counted twice.
(2) Quantities and descriptions are accurate.
(3) Accurate cut-offs of merchandise shipments and receipts
are obtained.
(4) There is no major shift of inventory between departments
To ensure an accurate physical inventory, we recommend
that detailed written inventory instructions be prepared and
The client may be missing out on We recommend management consider the no-fee consulting
significant freight cost savings. services provided by freight carriers.

Effect
Management information can be
difficult to extract where ledger
accounts are too complex or too simple.
Recommendation
We suggest that a revised chart of accounts be developed.
The various accounts selected should be such that adequate
management information can be derived from the accounts,
but not so detailed as to be cumbersome.

The Company maintains only one revenue account while

Effect Recommendation
there are six specific sources of revenue (merchandise sales,
Valued employees may leave the Considering
franchise fees, theconsultation
Company's continued
fees, survey growth
fees, and increased
fixture sales,
Company to find better benefits. earnings in recentfees).
order processing years,We the Company
believe may want
the detail to consider
of this
adopting
information some formbe
should ofavailable
employee inbenefit plan for
the general its and
ledger
employees and officers.There are numerous employee
that separate accounts should be used for each major source
benefit plans available and the type selected will depend
of revenue.
upon long-range corporate and individual objectives. Many
Effect Recommendation
companies
The expense find thatisprofit
detail sharing
excessive. plansexpense
Some meet their corporate
accounts
A lack of documentation in respect of We recommend
objectives. Suchan evaluation
plans, formstructured,
be developed and incomeutilised
could be combined withifothers
properlywhen the basicprovide
type of
evaluating prospective employees will in
to hiring employees.
their employees upon asretirement
expense is similar, such "utilities"and such
rather thanincome is not
"heat,"
not: taxable to the employee until received.
"electricity," etc. or "office supplies and Profit sharing
expense" plansof
instead
(1) Protect the Company against can
bankprovide
charges, that the company
general supplies, will not be required
postage, etc. to
litigation regarding discrimination in contribute funds unless it obtains some predetermined profit
hiring practices; and
Without the opening reading, there is no level. If the plan the
We recommend is approved by thebe
unit managers Taxation Authority,
instructed the
to include
(2) Highlight the individual's qualities, Company's contributions will be deductible for income tax
evidence the entire activity for the day the opening reading on the register tape so the activity
thereby reducing the subjectivity in purposes. However, there are disadvantages
has been recorded on the tape. shown on the Daily Reports can be verified. to profit sharing
hiring. plans and it is possible that after considering corporate
objectives, a pension, deferred compensation or some other
type of benefit
Idle bank accounts could potentially be Bank accounts should be maintained on a timely basis and
used by others for personal use and any idle accounts should be closed.
increase the risk of fraud.

Effect Recommendation
The company is not able to identify any We recommend a summary of warranty work performed is
patterns in warranty claims and hence maintained for each machine sold.
identify potential problems.
We also recommend that consideration be given to
establishing a budget for warranty expense based upon
sales, product failure and other experience factors. When
Effect Recommendation
used in conjunction with actual costs incurred, the budget
would then serve to identify potential problems as they
develop. The problems could then be identified as defective
parts requiring modification, stricter enforcement of warranty
guarantees, or other areas as they develop. The warranty
The delay in processing invoices
increases the potential for erroneous or
incomplete invoicing in the proper
period. Additionally some companies
may pay incoming invoices based upon
the receipt date of the invoice rather
than the due date.
We recommend the company process invoices daily based
upon the previous day's shipments. The processing of
shipping documentation may be streamlined if the shipping
department submits a copy of shipping documentation
directly to the accounting department. Such a procedure may
also assist in improving internal control over the shipping
function.

Consequently the company is burdened
with obtaining significant short-term
debt in order to finance such tooling
expenditures
Develop and implement policies and procedures whereby
tooling contracts are routinely reviewed in order to bill
customers on a timely basis for completed contracts.
Additionally when negotiating tooling contracts, company
sales representatives should be aware of prior pertinent
issues relating to each particular customer in order to
maximise efficient collection of current tooling contracts.

Effect Recommendation
The company can miss out on key We recommend that the Company consider implementing
sales/ production time if all operations cycle counting procedures to increase productivity, the
are ceased during the annual count. reliability of the inventory records during the year and
This will have an adverse effect on sales eliminate the annual book to physical adjustment.
and profits.
This results in a substantial inventory To make the standards more useful in analysing cost of
write-up at year-end. production and to obtain a better measurement of actual
performance, these loss factors should be set as close to
actual as possible. A separate provision for inventory
shrinkage outside of the standards could be recorded if
deemed necessary.
This increases the risk of an inaccurate The invoice number should be written on the shipping
cut-off being performed at the year end document and vice versa. Pre- numbered bills of lading
and the risk that items can be shipped should also be accounted for regularly.
but not billed.

Effect Recommendation
Effect Recommendation
Effect Recommendation
This increases the risk of theft of stock
certificate books, corporate seals,
validated certificates etc... It facilitates
the process of confidential information
being obtained by unapproved users. In
addition out of date data does not
Effect
provide relevant information for
Errors willinvestment
informed not be prevented or to
decisions detected
be
if work is not reviewed in a timely
made.
manner.
Stock certificate books/ corporate seals/ validated certificates
etc... should be stored in a secure location with restricted
access. In addition marketable securities should be removed
from the safe and held instead by the entity's bank. All
records should be kept up to date to reflect all movements of
such securities.
Recommendation
Review schedules prepared by individuals in the accounting
department in a timely manner in order to help prevent and
detect errors and accurately reflect the financial condition of
the Company.

This resulted in a significant year-end We recommend that unit costs be updated quarterly to more
adjustment to state the inventory at accurately reflect inventory value.
cost.

Labour and overhead standards should be adjusted at least

annually based on a well-planned, executed, and
documented review.

Tax savings may be overlooked or At this time, a detailed analysis of the Company's current and
penalties imposed by not being familiar planned international operations, as well as the related tax
with international tax regulations. structure, would ensure that available tax incentives are
appropriately utilised, and that the Company has maximized
the tax benefits from operating in countries having lower tax
rates.
Effect Recommendation
This results in weaknesses in the The company's control can be strengthened by developing a
Company's control over inventory, standard cost system. A small manufacturer is limited in the
production costs and selling prices. precision of the standards and the degree to which it is
practical to analyse cost deviations. However, there are no
basic complications in the use of pre-established costs that
prevent taking advantage of this management tool. A
Effect Recommendation
standard cost system will enable this individual to focus their
Manual production of reports is time We recommend
efforts thethe
by isolating Company consider attention.
areas requiring conducting a study of
consuming and open to human error. present and future management information needs to
determine which
The first effort in computer
determining programs
standard should
costs be rewritten
depends and
heavily
the additional procedures that could be efficiently
on past experience. The basic steps in making this attempt processed
by
arethe computer.
as follows:
(1) Tabulate
As the volume of data processed by the Consideration costs for past
should periods
be given by elements,
to charging processes,
one person whose
and products.
data processing department increases, sole responsibility is to this important control function. This
the need for control over input and (2) Review should
individual, conditions that have caused
be independent of thechanges from past
data processing
output of data also increases. periods in
department. material, prices, wage rates, material usage, labor
performance, overhead costs and reasonable maximum
production levels.
BDO can advise on the responsibilities with which this person
Effect Recommendation
(3) Adjust
should be actual
tasked.past costs to provide cost standards that will
reflect current conditions and
Controls should be implemented and
applied on a consistent basis to avoid
any confusion
Controls should be established for the development of new
programs and program changes.
BDO can advise on suitable controls to guard against risks in
this area.

The current proposed partial We recommend the Company consider revising the plans to
automation
Effect of the bill of material may include a complete bill of material.
Recommendation
not be maximising the maintained,
If such records are not potential savings We recommend the Company review the controls exercised
in clerical
there is noeffort or providing
guarantee that all important The
by theCompany's data processing
user departments over data system has the
submitted forcapability to
processing.
management
information has with accurate
been and timely
processed handle additional applications. We believe fully
The user department should maintain a record of all errors automating
cost data
correctly. upon which to base pricing the
foundaccounting records
by the system to in the inventory
ensure they are costing
corrected area
andwould
decisions. result in substantial
subsequently reprocessed. savings of clerical time and other
benefits.
User manuals should be provided to the user department
Effect Recommendation
detailing procedures for:
The Company anticipates becoming a To
(1)facilitate
Completion andofstreamline
input forms. the accumulation of data for the
publicly-held corporation through a required statements
(2) Utilisation of output andreports.
closings, we recommend the
proposed merger. In becoming a following be established:
(3) Reconciling output to pre-established control totals
publicly-held corporation, the Company (1) Timetable
prepared - Auser
by the timetable should be established delegating
departments.
will be required to issue timely quarterly responsibility
(4) Correction of errors found by thefor
to specific individuals developing
system the
and procedures
statements in accordance with local necessary
for information and
their subsequent reprocessing. schedules for the statements.
Effect Recommendation
regulations. It will therefore be (2) Pro formas - Pro formas of the required schedules,
Failure to meet
necessary these
for the requirements
quarterly closing Develop
statements comprehensive,
and consolidatingdetailed procedures
entries should be outlining
developedthe to
could result in significant penalties
procedures to be as detailed as the for internal controls and documentation
reduce the time required at each quarter. requirements of the
the Company
annual closingand its officers.
procedures. import function.documented
(3) Procedures Upper management should oversee
- The procedures for the
development
accumulating of thethese
data,procedures
the pro formas and monitor
and the adherence
timetable to
the guidelines.
should be documented in a procedures manual.
This type of documentation and these procedures should
prevent unnecessary delays and errors when issuing the
documents required by the Securities and Exchange
Effect Commission.
Recommendation
A critical element in this integration is Top management should be involved in evaluating the
top management awareness and
This resulted in the existence of an expansion.
Develop polices We recommend
and procedures the following be used
which facilitate in and
timely
knowledge of
unresolved all phases
difference of the the
between evaluating
accurate the potentialofexpansion.
reconciliation the general ledger to the subsidiary
expansion.
general ledger and subsidiary ledgers at ledgers.
year-end. (1) Efficiency of the present warehouse servicing the area
and other locations measured in terms of:
(a) Sales per square foot
Effect Recommendation
(b) Sales per warehouse employee
This causes the individual unit We recommend
(c) Freight a change
cost per $ salesin programming be implemented so
accounts payable balances to be the accounts payable
(d) Warehouse cost per balances
$ sales are properly recorded on the
misstated. individual units' statements.
(2) Demographic considerations:
(a) Potential market beyond that serviced by nearest facility
(b) Competitors in the area
(c) Distance between vendors and location
(3) Product mix consideration:
(a) Related product lines
(b) Metal products unique to the expansion area
(c) Long-range forecasts of product demand and raw
Lack of these entries above will not We recommend the quarterly statements reflect all
fairly present the current status of the adjustments normally made at year end. This should help
Company's financial position. reduce year-end audit adjustments.

Information security controls are an
integral part of a secure electronic data
processing environment. If adequate
compensating controls are not in place,
assets may not be protected.
Remove the system operator capability from any users for
which it is not considered necessary. For those users
performing only back-up operator functions, disable their
system operator ID when not in use.

Production is inefficient where set up Evaluate the entire plant and production process for overhaul
times are long or production is slowed efficiencies. Consider the possibility of utilising an outside
down between processes. consultant in this area to offer a different perspective.

Effect Recommendation
Loose controls in stock records lead to The stock certificates surrendered in connection with the
errors,
This duplication
could of recordsinformation
lead to sensitive and the stockCompany
The split should be clearly
should marked
re-evaluate thisasphilosophy
cancelled in or otherwise
possibility
being
Effectviewedof misappropriation
by unauthorised of stock. defaced to prevent
consideration
Recommendation of thesubsequent
system. Weunauthorised
also suggestuse. thatThea review
personnel. It has typically been to the Company
be should
performed of obtain
the an affidavit
access controls from thetostockholder
related the system to
The Company remains exposed the Develop a formal written contingency plan providing a
philosophy of the Company to allow certifying
ensure thatthat the certificate
access is is lost.
controlled and The
that cancellation
users are of this
only
disruption of information processing framework for restoring critical information services in the
employees unlimited inquiry access to certificate
allowed should be reflected in the minutes of for
thetheir
board of
services. While the likelihood of event of to viewofinformation
a loss processingdeemed necessary
capabilities. job
selected directors. The Company should insure that all stock records of
completeinformation. However,
loss of the data center this
or a function.
new its subsidiaries are complete and up to date.
plantproduct opens
is not high, practically
other all
interruptions of
corporate data to viewing.
processing capabilities exist that could
The Company does not benefit from any We recommend that, at a minimum, two individuals from
have a detrimental effect on
additional management expertise or outside the Company be added to the Board of Directors. This
information processing.
independent analyses of strategies. would provide several benefits to the Company, including:
(1) Access to additional management expertise at little cost;
(2) Added prestige to the Company's name and actions by
association with recognised names in the community;
Effect Recommendation
(3) A mechanism for an independent appraisal of
The Company is not fully realising the Establish
management'sa system that would
decisions enable the
and policies; andCompany to utilise
benefits of incorporating the available bar
(4) Acoding capabilities.
mechanism The for
to provide useinnovative
of a bar code system
solutions to would
information into its controls. enhance
Companysuch items as inventory control - relating to
problems.
inventory movement and stock levels, inventory observation
(i.e., timing and procedures) and current sales information.
Effect Recommendation
Bar code scanning could be utilised to track products through
The Company is losing out on interest To maximise
production tothe use of and
shipping the the
Company's
eventualdaily
salecash
of thebalances
product.in
income or paying excessive interest banks, we recommend the Company investigate the
Scanning could also be used to monitor the level of materials
expenses. possibility of usingand
in work in process the finished
followinggoods.
types of cash
With accounts.
stronger, more
These
reliableaccounts
inventory would require
controls the cooperation
in place, observations of could
the banking
be
Use of a daily cash investment system institution with which only
limited to performing the Company deals.
interim cycle counts, which would
would provide the following benefits: (1) A "concentration"
avoid the shut down of account (checking)
production during into which all
the normal year-
Effect Recommendation
(1) Minimise unproductive or idle cash deposits are made. Preferably, this would be
end inventory. Useful sales data, such as customer, an interest-
product
funds; bearing checking location,
type, geographic account. etc., would be easier to track and
(2) Eliminate the guesswork and error (2) A "zero balance account" (checking) located out-of-town
Without an up to date register the We recommend that the Company maintain a notes payable
company may not be aware of when register including all pertinent data regarding each open note
repayments need to be made. payable (e.g., date, amount, payee, maturities, interest rate,
collateral). Unpaid principal amounts per the register should
be reconciled periodically to the general ledger. In addition,
copies of paid and unpaid notes could be retained in the
Effect Recommendation
register.
The personnel hours needed to The department would benefit by making the bank
reconcile
Effect the accounts are greater than reconciliation
Recommendation function more efficient. A schedule for
necessary.
With no formal process in place and a completing reconciliations
We believe the Company should shouldestablish
be followed and reviewed
a formal system for
lack of controls errors can occur which by the cash manager. Reconciling items
controlling the quantities and movement of materials should be corrected
at
remain undetected and may materially as soon vendors.
outside as possible, tracking
Utilising the any items written
Company's off.
data processing
misstate the financial statements. equipment to maintain perpetual inventory records of all
The outstanding
materials at outside checklist
vendors should
should be be
computerised
considered.for the
However,
general account. Cheques can be cleared
because of the limited capacity of the Company's present on line with an
As a result incorrect entries in recording We recommend
outstanding that modifications
list generated of leaserather
termsthanbe reflected
data processing equipment,automatically,
such application may not using be
paymentswere made requiring immediately
the current in the accounting
cheque records
prepareby updating
practical and, in thisregisters
event, ato simplified and track
manual lists
system
adjustment. amortisation
manually. schedules. This should reduce bookkeeping
should be considered as a means of controlling the
errors and clerical time required to correct the errors
movement of these materials.
As planned, the Company should review their system of lock
boxes, only maintaining those which are necessary. This will
also relieve some of the internal work of reconciling and
maintaining the accounts.
Effect Recommendation
Because of the nature of the Company's To control inventory levels more effectively, consideration
business, inventory control is the should be given to the following matters:
predominate factor in results of (1) All salesmen with specific customer relationships should
operations and cash flow. If the give a quarterly estimate of customer needs to forecast
inventory levels are increasing but sales reasonable inventory levels on specific parts.
are not this could imply the company is (2) A report comparing the salesmen's estimates with actual
Effect Recommendation
overstocking and is therefore at risk sales should be prepared quarterly.
Consequently all errors may not be
from obsolescence. We believe control
(3) Inventory turnoverovershould
payrollbepreparation
one of the would be factors
evaluation
detected
This couldorresult
controls may not
in items be overridden
being improved
We believe
for the if overall
themanager's
district computations
operating made andcould
efficiency
bonus. data be
used by the by
improved
to deliberately manipulate the data.
counted or counted twice during a computer
storing were
(4) Any similar
item not test checked
inventory by
items a
issued during someone
in6-month independent
one location.
period This ofbe
storage
should
physical inventory. This practice also payroll
system preparation
would enable on a
theperiodic
warehouse and
noted by the district manager and considered for limited
manager basis.
to Such
fill sales a
could cause employees to spend procedure
orders would
quickly
obsolescence. and verify
also that
help pay
to rates
ensure used
a by
complete the computer
and
excessive amounts of time filling sales were the physical
accurate
In addition,authorised
we believe pay anrates
inventory and is
count
analysis that deductions
oftaken.
alternative from
uses of gross
cash
orders or sales could be lost because pay
versuswere
theauthorised
current and proper.
investment in This procedure
inventory should would
be also
Effect Recommendation
verify that the computations made by the computer were
various sizes indicated on perpetual prepared.
Reconciling
records could bank
not accounts, even when
be located. We recommend that a person other than one issuing cheques
proper.
completed by the proper person, will or making deposits assume the duties of reconciling the bank
not necessarily disclose irregular accounts.
disbursements, but could reveal fraud
arising in the preparation of the cash
disbursements journal or the payroll
journal. If the reconciliation is not
performed by an independent person
this will not be the case.
Effect Recommendation
Misunderstandings may occur where This presents a good opportunity to prepare a revised
documentation is not kept up to date. organisation chart and to clearly define the duties of each
position in writing. While growth and operating experience
may require changes from time to time, reducing position
descriptions to writing and challenging what is actually being
done should be beneficial.
Effect Recommendation
Effect Recommendation
As a part of this process, each member of management
It is not possible for management to should prepare
Develop a moreadetailed
job description
managementfor his report
own position
package. as well
The
as for theshould
assess the performance of the company package positions reporting
include, to him.
but would notResolution
be limitedofto, any the
and its results throughout the year differences will be valuable to all concerned.
following:
based on such limited information.
The Company
· Monthly should
financial consider defining
statements (balancethe degree
sheet, incomeof
autonomy allowed
statement, statement the of
operating
cash flows) managers at the to
comparative various
the
Effect Recommendation
locations and the
corresponding levelofofthe
period abilities required of the divisional
prior year
A shortage in personnel could prevent We recommendDecisions
·departments.
A comparison that
of a study
actual in be area
to this
budgetmade of have
will
figures,current and a
a bearing
including future
on
the Company from performing critical personnel
comparison requirements
the sizes andofduties actualofcash to facilitate
the flow
corporate the
to thestaff.orderly
This is
projected development
particularly
amount
duties. of
·truequalified people
in the finance
Comparative in allresearch
and
information areas.
fromThe andstudy
outside should
development
the Companybefunctions.
based on
a projection
Lack of strong
(general of
economic anticipated
divisional volume
personnel
indicators and activity over
in thesestatistics)
and industry areas can the
benext
five years,
·offset
Ratio by a and
strong
analysis should be followed by the establishment of a
corporate
program
§ Accounts to receivable
recruit andturnover
develop personnel to meet future
Effect Recommendation
needs.
§ Number of days sales in accounts receivable
This can lead to inappropriate postings Restrict access of credit/ billing clerks to the cash receipts
§ Current ratio
and possible misuse of the sales credit system
In to strengthen
defining controls regarding cash remitted we
§ Return onpresent
investment and future personnel requirements,
account. directly
suggest to the company.
utilising formal Controls
job can include
descriptions that password
include
§ Expense items as a percentage of sales
approval, preparation
responsibilities of batch totals by someone
and experience
§ Ageing categories of accountsrequirements.
receivable and Well-defined
work in
independent
staff from the
positions will aid in person responsible
converting for entering
the projected growththeinto
process
cash amounts, producing
personnel requirements. daily exception reports. If the
Effect Recommendation
customer base is rapidly expanding the time constraints of
The Controller may be over-stretched In addition,
Because the package
of increased should and
workload include explanationswe
responsibilities, for
the accounts receivable supervisor make it important that
significant
due to the additional demands on their believe fluctuations
that anare additional between years, budget and
controller, whose function would be actual
these controls installed.
time. amounts,
separate and and apart
ratio from the treasurer function, should be
employed at either the XYZ Division or at the corporate level.
The controller would be primarily responsible for the design,
installation, operation, and control of a centralised financial
Effect Recommendation
management information system. Such a system would
Accounting staff do not have control All general the
coordinate ledger accounts
financial should
systems of be
thereviewed
divisions,regularly
which for
over amounts that should have been unusual items and cleared as necessary.
should prevent delays resulting from duplication of efforts.
written off over the period. The position should be filled by an individual who
understands how financial systems can be organised to
Where taxation accounts do not zero obtain information to be used by the manufacturing,
out after each payment it indicates that marketing, financial, and engineering functions in making
either the balance in the account is informed and timely decisions.
wrong or that insufficient funds are
being remitted
Although to the
a service depository,may be We recommend that the monthly sales entry be reconciled to
organisation
subjecting the Company to possible
used, reconciliations should be the sales register total for the month before it is recorded.
penalties for failure to comply with the This procedure should be done as part of the approval of the
performed to ensure data is reasonable.
laws.
Otherwise the company may be relying monthly sales journal voucher.
on inaccurate data.
Effect Recommendation
Lack of segregation of duties as the We recommend that signed cheques be forwarded to another
bookkeeper mails and prepares the specified employee for enclosure in an envelope for mailing.
cheques. This procedure would improve segregation of the cash
disbursing and record-keeping functions.

This causes an increase in the risk of Develop and implement policies and procedures whereby the
recording
Effect receiving activity in an receipt of inventory items is posted immediately to the
Recommendation
incorrect period and thus,
A well devised system the
of accumulating inventory
Establish asystem. Thus,
systematic inventory
approach to and accounts
estimating thepayable
reserve for
sequences of receiving documents
warranty claim information would not does records would accurately
future warranty costs. reflect the physical receipt of
not match the order of the
only assist in properly matchingphysical goods. Additionally, periodic analysis of receiving
The amount of such a reserve should include all costs
receipt
revenuesof and
goods.
expenses, but also could documentation should be
expected to be incurred performed
under in orderincluding
the warranty to assurethe
provide management with feedback for adherence to receiving policies by receiving personnel.
cost of materials, labour and overhead based on historical
pricing, reduce costs and the claims experience. The warranty reserve should be based on
Effect Recommendation
themselves by identifying problems detailed information compiled from claims. Such information
The
earlyCompany's
enough to interests
facilitate will not be or
engineering Formalise
should all leases entered into by the Company.
include:
protected
productioninchanges.
the event of
noncompliance of lease terms. · Date unit was sold
· Date and monetary amount of warranty service
· Model number of unit serviced
Without retaining the test library, ·We Detailed description
recommend of reasonrequire
management for service
the retention of test
management cannot be assured what ·libraries
Whether the charge can be recovered from an
for a period of time. This will permit vendor
audit trail to
test criteria were utilised. In addition, the type and quality of testing performed.
there is no verification as to whether In addition, the chart of general ledger accounts should be
production libraries were used, because appropriately revised so warranty expenses are segregated
no active data security exists regarding from non-warranty costs or allowances and classified in the
Effect Recommendation
necessary detail.
programmer access to production
Controlling
libraries. and monitoring job Prepare a formal detailed cost estimate form for each phase
performance at interim dates is of a project and use to monitor actual performance at interim
necessary for management to make dates. This form should contain, at minimum, estimates for
informed decisions and judgements on materials and supplies, labour cost, freight, and
a timely basis. subcontracted costs. The form should be updated
periodically to reflect changes in project scope (change
Unauthorised transactions may occur The preparation of bank reconciliations should be assigned to
orders, deletions, etc.).
leading to misappropriation of company a person independent of the cash disbursements function.
funds. Reconciliations should be reviewed and approved on a
Implementation of this procedure should provide greater
monthly basis by a level of management higher than that of
control over job costs and enable management to better
preparer.
monitor them by identifying potential overruns on a more
Effect timely basis. Additionally, other business decisions, such as
Recommendation
Lack of documentation of procedures those
An audit stamptoshould
relating the timing for billing
be used when ancustomers
invoice isand requests
prepared
results in errors not being rectified
Continued growth is difficult to control for
for additional
payment. fees,
The can
stamp be better
should informed
have a place
We recommend the Company develop a formal strategic with
forthis
the
easily
withoutdue
thetobenefit
lack ofofaudit trail.
a definitive plan information
individual available.
processing
plan, and establish the payment
long-term to initial
operational andas profit
the above
goals. In
for personnel, financial resources and tasks are performed.
developing Thisplan,
the strategic encourages an individual
the following should be to
information system requirements. perform the steps more conscientiously if required to sign
considered:
that procedures were performed. Secondly such a stamp
wouldexamples]
[Give facilitate the review prior to authorising payment.
Effect Recommendation
This process increases the likelihood of
clerical error and increases the
probability that payment transactions
are applied to the wrong account. Also
because these accounts are not
reviewed on a timely basis,
By using the purchase order, the person
reconciliation is a time-consuming and
receiving the goods may rely on the
often inefficient process.
ordered quantities listed and not get an
accurate count of the actual quantities
received.
Effect
Because the Company fails to realise
many purchase discounts, the amount
of the purchase discounts lost is
recorded when invoices are paid. This
results in understating the cost of
purchases until the discounts are
As a result, the Company is at risk in
properly recorded at the date of
the event of disaster or the software
Effect
payment.
vendor
If these company's
reports aredissolution
ordered fromor the
discontinuance of support for the
data processing department or written
product.
to disk to be accessed by the user
departments "as needed," the data
processing department could use that
time for needed systems revision work
Without such procedures an
projects.
unauthorised individual could perform
unauthorised activities using a terminal
that another person has signed on to
and left unattended
This makes identification of disputed
finance charges almost impossible.
Accounts receivable at year end may be that all finance charges be accumulated separately by
overstated by these potentially
uncollectable amounts.
Effect
There is often a lack of assurance that All cash disbursements should be adequately supported by
expenditures are authorised or
payments are proper.
This situation could cause vendors'
accounts to be erroneously adjusted
resulting in incorrect payments to
vendors.
The practice of establishing miscellaneous subsidiary
accounts within the accounts receivable subsidiary ledger
should be discontinued. Each customer should be assigned a
separate account within the detailed accounts receivable
ledger. This procedure should reduce the chance of clerical
error and provide an accurate detailed ageing of all account
Prenumbered receiving reports help to ensure that actual
balances that is not being provided under the present
quantities of goods received are recorded. Purchase orders
system.
should be matched to the receiving report by someone
independent of the receiving function. Numerical sequence
of the receiving reports should also be maintained to ensure
that all goods received are properly recorded. As noted
Recommendation
above, this system of receiving should be computerised. The
We recommend
system purchase discounts
should automatically assign be recordednumber
a receiving in the and
accounting records when they are taken
produce any necessary exception reports. at the time invoices
are paid.
We recommend management initiate efforts to determine
ownership of the software and to secure documentation of
Recommendation
ownership
Considerationin writing.
should In
beaddition,
given to the agreement
determining theshould
possibility
indicate that, in the event of the vendor's going
of reducing the reports prepared by the data processingout of
business,
department theand
Company
therebyowns the software
reducing and will
administrative be
expenses as
supplied with the source code. Also, program documentation
well as providing the data processing department more
should
computerbe time
secured to indicateprojects.
for necessary the input, processing and
output cycles for programs and data files. This will permit the
Terminate
Company to user
makesessions after
changes toasoftware
predefined
andperiod of serve
will also inactivity
as
(often set facility.
a training at 30 minutes). Consider the possibility of
disconnecting the user profile without terminating any active
jobs that the user is running at the time.
Since customers may take exception to these charges, these
amounts are ultimately written off. Therefore we recommend
customer to facilitate identification. These finance charges
should generally be reversed at the year end for accounting
purposes because they are usually not collected.
Recommendation
invoices or other documents that have been properly
approved. Any disbursements initiated from internally
generated documents should be signed by the person
initiating the request for payment and approved by an
appropriate level of management.
We recommend that a pre-numbered form be utilised to
document all adjustments to the vendors' accounts and that
a space be provided on the form for approval by a designated
official.
Large credit balances can indicate a
lack of controls in the credit department
leading to misstated accounts
recievable at the year end.
Effect
There is a risk that filing deadlines mayTo supplement the federal income tax calendar we previously
be missed
If cash and penalties
receipts may be
are not promptly
incurred.
deposited this may cause adverse cash
flows, misappropriated funds,
complicated reconciliations and
improper cut-off.
The company is not deriving any benefit Monitor
from reducing its prices in exchange for reconsider offering a discount to those customers not in
early payment as cash flows have not
improved.
Effect
This presents a difficulty in reconciling
management reports with audited
financial statements. While it is
common for audit adjustments to be
posted in a subsequent period, if they
are never posted the reconciliation
It is difficult to compare sources and
process becomes more extensive. All
uses of cash to the actual results that
other international affiliates record
are presented on an accruals basis.
audit adjustments in their books and
records.
Approval of the record of hours worked
is an important control to help ensure
that employees are paid only for those
hours worked and any invalid hours are
detected.
Effect
With no verification by the company, a
franchise would have the opportunity to
manipulate sales in order to reduce
royalty income due to the company.
Effect
Total credits within the accounts receivable ledger should be
closely observed on a timely basis. Old or potentially unused
credit balances should be purged from the accounts
receivable file periodically.
Recommendation
provided to you and
All cash receipts reduce
should the possibility
be deposited of incurring
promptly (within 3-5
penalties and/or interest charges for late
days) and the permitted period to include cashor missed filings
deposits inof
a
the tax
prior returns,
periods an all-inclusive
records should be tax calendar
shortened to should be
3-5 days.
prepared. The calendar should cover all returns required to be
filed by the Company and its subsidiaries, and should include
the (1) type of return, (2) due date, and (3) assignment of
the discounts
responsibility for. taken when terms are not met and
compliance with the terms of the contract.
Recommendation
Audit adjustments should be posted to the books and
records.
Prepare the budget on an accruals basis for comparability to
the audited financial statements. The budget should also be
presented in a monthly format to allow for interim
comparisons of actual to budget. To facilitate this
comparison, monthly internal financial statements should
reflect changes in accounts receivable, accounts payable and
Such a control can best be achieved by having supervisors
other assets and liabilities.
review and approve time cards in writing prior to their
submission to accounting for payroll processing.
Recommendation
We recommend the company establish a position to verify
sales reported by the franchisees by visiting the franchisees
and testing sales and examining related documentation. This
individual should report directly to the Treasurer so the
results of the review could be processed promptly and any
additional billing could be performed in a timely manner. In
addition this person could be supplied with an operational
questionnaire (prepared by management) that could be used
to produce suggested improvements in the franchisees'
operations, thus providing the franchisee some tangible
benefit from the visits. We believe the benefits derived from
Recommendation
this function will more than offset the cost.
The Company may not be deriving
benefits from the meetings.
Effect
Problems can arise if accounts are not
reconciled regularly and errors are often
not resolved as quickly as they could be
due to the delay in detection of the
error.
During such rapid growth there is a risk
that different areas of the business may
be pulling the Company in different
directions.
Effect
This can lead to improper or
unauthorised credits being issued or to
incorrect information being sent to
customers (which may result in loss of
customer goodwill if errors are not
rectified promptly).
This make the accounts difficult to
analyze
The lack of an up to date fixed asset
register
This can
could lead
lead toto misappropriation
the system being of accurate
assets and materially mistated financial
compromised.
statements at the year end. The
depreciation charge for the year will be identification. Improve the current fixed asset system to
misstated and may have an adverse
effect on profit.
Effect
Fluctuating variables provide inaccurate Overhead rates will vary based on the capacity usage of the
data that cannot be relied upon.
This does not allow for any control to be A great deal of control over the generation of scrap can be
retained over scrap. Reasons for excess exercised by setting the pick-up schedule for each
scrap are not identified and appropriate department such that a fixed number of working days elapse
decisions may not be made.
Effect
We recommend that the directors meet at least annually with
the Company's attorney to write up business decisions made
or proposed. Topics that should be discussed and
documented in corporate minutes include:
(1) Annual salaries of officers and other key personnel.
(2) Amount of contribution to the profit sharing plan.
Recommendation
(3) Ratification of space or equipment leases.
To
(4)prevent these
Financial problems for
statements fromtherecurring, we recommend
current fiscal year.
consideration of theand
(5) Dividend policy following
paymentprocedures:
of preferred dividends.
(1)
(6) Standard monthly
Business needs to interdivisional
support retentioncharges shouldearnings
of retained be made
in the middle of the month to allow for processing by all
divisions by month-end.
(2) A standard form that clearly outlines the amount and
To ensure that all levels of management are working to meet
nature of interdivisional charges should be used.
growth objectives, we recommend the Company formally
(3) Interdivisional accounts should be reconciled at month-
document its corporate objectives and its strategy to meet
end and the controller should be notified of unexplained
those objectives. This document, which would be distributed
differences over a specified dollar amount.
to all managerial levels, would ensure that personnel
understand corporate goals and formulate their personal and
Recommendation
departmental goals/objectives in accordance with corporate
We recommend documentation (ie returned authorisation
objectives.
forms) be attached to credit memos and be approved by an
official before being processed.
Consider creating separate expense and accrual accounts for
each tax agency to which taxes are paid, for ease in tax
planning.
Adopt and implement a formal policy that provides for
Reset therecording of fixed
system values to asset
ensurepurchases,
that userstransfers and
cannot change
disposals.
their This includes modifying present procedures in the
own profiles.
purchasing department, which are critical to initial fixed asset
accurately identify and monitor all fixed asset transactions.
Consider developing a fixed asset addition/deletion form.
Recommendation
divisions. Since past projections have not been consistent
with actual results, the rate used during the year to value
inventory should be reviewed on a semiannual or quarterly
basis for accuracy. More accurate reporting of these costs
will help management in decision making throughout the
year.
between each pick-up. When the scrap is picked up, it should
be weighed and the weight should be recorded. Any definite
trends in the production of scrap at a specific work station
Recommendation
can thus be observed and addressed.
This made it difficult to trace our test
counts into the final inventory listings.
Also, there were instances where the
quantities between the two reports did
not agree.
After X months all unpresented cheques
can no longer be presented at the bank.
State laws require remittance of
unclaimed payroll and disbursement
checks to the state after a period of
time.
The new equipment should be utilised
to the fullest extent possible while
maintaining proper control of all data
entering and leaving the system.
A facsimile signature plate increases
the risk of manipulation of cheques.
Effect
A long credit period has an adverse
affect on the working capital of an
entity to the extent that the entity
becomes less flexible and adaptable
and cannot meet its short term debts.
It is difficult to determine whether or
not all voided sales tickets have been
submitted to sales audit. It might be
possible for a cashier to void a proper
sale and misappropriate the cash.
If the password related to these user The user IDs referred to above should be disabled when not
IDs were compromised, its active status in use by a service technician. This will limit the possibility of
would allow unrestricted access to all unauthorised access with any of these powerful user IDs.
system based files, programs, etc.
Effect
Profits are unlikely to grow where they
are not actively managed. The
Company may be investing in
Effect
unprofitable products at the expense of
Effect
those generating higher margins.
We recommend the Company retain all information and
reports generated from the physical inventory and verify that
it is transferred accurately into the final costed inventory
report.
Periodically review listings of outstanding cheques and
enquire as to why they were not be presented. All
unpresented cheques after X months should be written back,
cancelled or remitted to the state in accordance with state
law.
BDO are able to assist with a complete study of the
Company's data processing system.
Improved control would result if cheques over [amount] were
manually signed by an authorised cheque signer.
Recommendation
The following recommendations are suggested:
1. Automatically send computer bills on matters that have
been completed but not billed within one month;
2. Use progress billings during lengthy matters;
3, Send computer-generated "reminder
statements" each month on all accounts over 60 days old;
To compensate for this lack of numerical control, we
and 4. Identify problem receivables and
recommend all voided sales slips be approved by an official in
assign collection responsibilities to a "collections committee".
writing.
Recommendation
To assist the Company in achieving its desired profit
objectives, we recommend it consider the following:
Recommendation
(1) Analyse gross margin by product line.
Recommendation
(2) Develop and implement a long-term and short-term
There is a lack of control over scrap Control over scrap costs would be more effective if scrap
levels resulting in a loss of Company tickets were coded to indicate the cause (e.g., faulty material,
profits. Reasons for excess scrap are faulty machinery, poor finish and appearance, or material
not identified and addressed. handling) and if monthly scrap reports indicate total units and
costs by cause.
If programs and processes are Duplicates of program documentation should be stored in an
destroyed (eg by fire or flood) it is likely off-premises location to eliminate prolonged reconstruction
that documentation will also be lost. time in the event of fire or other disaster. While we realise
that the development and the continual updating of
duplicates is costly and time consuming, we believe it would
be substantially more costly and difficult to reconstruct these
Effect Recommendation
documents if they are destroyed or stolen.
Lack of a corporate travel account We recommend the Company investigate the use of a
service means the company cannot corporate travel account service provided by major credit
take advantage of the following card companies. Under such a service, employees who travel
benefits: frequently would be given a credit card that would be used to
(1) Reduce the need for cash advances charge expenses. Cash advances could then be limited to
and extend the time required to pay for amounts deemed appropriate for incidental uses. Employees
Effect Recommendation
travel and entertainment expenses (i.e., would still be required to file expense reports for
Without
improve overall
float). systems narrative and A general systems
reimbursement. narrative
They would beshould be written
responsible for for all systems.
paying the
user manuals
Inventory
(2) Improve and there can
Cost of
control be confusion
Sales
travelfigures
expensesmay This
We narrative
recommend
charges need
thatnot
accumulating betheir
a lengthy
inventory
on cost document,
card.standards arebut sufficient
reviewed
over
be procedures and
misstated.
by standardising unnecessary errors to
documentation. andprovide
updatedan periodically
overall viewtoofensure
each ofthat
thecurrent
systems. User
may arise. manuals should be prepared to describe
(3) Reduce the risk of loss of cash that manufacturing costs are being used for financial in detail reporting
the
may otherwise be carried by employees procedures
purposes to
and be
in followed
product by the
pricing user department.
decisions. The
travelling on company business. manuals should include instructions on completing input
(4) Increase convenience for documents,
Inventory correcting
count errorsshould
procedures and reconciling reports.
be formalised in writing
employees. and distributed to all relevant employees prior to the count in
(5) Improve the information available as order to avoid misunderstandings and facilitate an accurate
to how travel money is being spent and count.
how employee accounts are being
settled through management-level
reports provided by the credit card
company. These reports would
summarise
Effect expenses by vendor (e.g., Recommendation
airline, hotel, etc.).
A corporation cannot deduct We recommend the minutes indicate why bonuses are
compensation of officer/stockholders in awarded so they cannot be construed as non-deductible
excess of a "reasonable" amount. dividends. The minutes should also explain the reasons
Proving compensation is "reasonable" officers' salaries were increased.
can be eased by proper documentation
in the corporate minutes.
If computer files or records can be Important computer programs and files should be protected
easily destroyed, the Company could from loss due to fire, theft or accidental damage. This could
suffer a significant financial loss. be accomplished through the utilisation of fireproof storage
facilities for records on the premises and by maintaining
back-up files in another location off the premises. We also
suggest extending your insurance coverage to cover loss of
Effect Recommendation
computer programs and files.
With growth continuing at the planned To position itself to meet these increasing demands, the
pace, the allocation of MIS resources Company should consider the following:
will be a critical factor for success.
Develop a long-term strategic plan for the MIS Department.
This should be based upon corporate goals, expected growth
of the company and outstanding projects
Effect Recommendation
Under these conditions, it is possible for We recommend
Currently, controls
priorities be implemented
are evaluated to prevent
on a corporate level by
unauthorised
Effect program and data file programmer
Recommendation
management access
and users to programs
on a quarterlyand data basis.files.
We One method
emphasis
changes to be
This means that made.
moreThus, the current
and more sales would be
the recommend
We to
importance of restrict programmers
anthis process
analysis from
to ensure
of gross entering
profitresources the
percentages computer
are by
procedures
are needed do
to not
reachreasonably
the limit the
break-even room.
allocated
product If line
programmers
on a timely arefour
basis toasbenewallowed "hands
priorities on"
arise. testing,
Also, if
This process is time consuming and A policy should be established regarding accountingeach
for the past years. The reason for for fixed
exposure
point, andto unauthorised
that changes
profits are less onceofthe test files
significant should
projectsbe provided
are and
identified, the production
holdWe interim files should
management
ineffective. assets and increase
repairs and or decrease
maintenance. should berecommend
identified, such
all as
production
break-even point is surpassed. files
programs and data be
an locked
meetings.
addition into
storage
the$x cabinets
product lineor orthe vault during
a significant periods
increase inofthe
purchases under are expensed. Any expenditure over $x
programmer
cost of be testing.
thecapitalised
product. TheseIn either case, the data processing
should if thestudies could be put
item purchased has into
a lifethe
in form
manager
Examine should review a the
system-produced listing of actual
of a chart,
excess ofthe
one structure
such as
year you
or, ifof
already MIS
a repair, function.
have
it for sales
extends Consider
theand cost
useful of of
life
updates
establishing
sales. made
They to the
"business
should production
then analyst"
be updatedprogram
positions
at library
to
least enhanceand the
quarterly relate
and
the asset beyond its normal life. If the expenditure does not
Effect those
analysed to awith
Recommendation
interface forcontrol
user list
possible of authorised
departments.
corrective changes.
Also,
action. consider establishing
meet either of these criteria, it should be expensed.
If the Company discontinued factoring a an assistant
We recommend to thetheDirector.
CompanyThis position
consider couldof
a study address
the the
considerable amount of receivables, the day-to-day
factoring management
arrangement and issues
analyseandthe allow the Director
related incrementalto
factoring costs would decrease, but concentrate
costs. Analysis on ofstrategic
the daily issues. (This would also
cash requirements provide the
should
certain internal credit and collection Companyfunds
consider with succession
available under management
the existing credit line.
costs would increase.
This gives rise to difficulties should the The new contracts to be written between the Company and
Company ever decide to go elsewhere the service bureau in 2XXX should specifically provide that
for its data processing needs as it does the programs, tapes, etc., which are used to run and store
not retain any records. the Company's information are the sole property of the
Company.
Unauthorised transactions may arise if The credit department should approve customers' accounts
duties are not segregated. from a credit evaluation viewpoint, follow-up on collections,
and prepare adjustments to customers' accounts. Accounts
receivable department personnel should take no part in sales
or collection functions and all credit memos should be
approved by someone independent of the receivable
Effect Recommendation
functions.
This may lead to low staff morale as We recommend that the Company consider establishing a
they feel under-valued and not deferred compensation plan covering executive personnel
appreciated and could lead to high staff and a pension plan covering all employees to provide
turnover. additional retirement benefits.

BDO would be able to advise on the options available to the

A single signature requirement on all
cheques reduces the control over the
company's assets and increases the risk
of misappropriation of company funds.
All cheques over [amount] should require a second signature.
company.
This will improve control over the company's assets and
ensure that large items of expenditure have proper approval.

If no formal system failure plan exists in
the event of a systems failure valuable
data may be lost. In addition there may
be a significant delay in setting up new
systems or repopulating systems with
"lost" data.
Define and document formal contingency plans for each
department. The plan should include the method of
operations to be followed while the system is inoperable, how
data should be collected during system down time for later
recovery and what steps the users must follow once the
system is operational to ensure all data collected is
Effect Recommendation
This policy does not reflect These considerations suggest a marketing policy that
consideration of the nature of the discourages special customer orders, pays full sales
business and its current operating commissions only when salesmen sell what management
environment. Some of these wants sold, and keeps inventory at a minimum level. We
considerations are: recommend the Company establish the policy of marketing
what is currently held in inventory in standard packs. To
Effect Recommendation
(1) It is difficult for the Company to fill implement this policy, salesmen should be provided with
The current system is inefficient
customer orders that specify colour, and Require employees
weekly listings to begin
of items usingthey
for which theirwill
computers to perform
be paid full
allows greater potential for errors.
weight, etc., because the Company's the tasks associated with
commissions for selling. their jobs. Employees should
Using
sources computers
of supply would eliminate
are limited the
to what create linked templates for the schedules that they produce
daily
becomescreation of commonly
available used
on the market. daily to eliminate the need to constantly re-create schedules
schedules
These orders andare
would make the
expensive sharing or perform mathematical procedures by hand. Human error
because:
of
(a)information
They require easier
special handling; can also be minimised and the computer files will create a
Effect Recommendation
(b) They are slower to fill and thus work trail for other employees in the event that an individual
Because actual pick-ups cannot be Management
were to leave should consider implementing a scrap control
the organisation.
maintain inventory at a higher level;
reconciled to the weigh-slips activity at each location that includes a record of all pick-ups.
(c) They often must be filled with the
subsequently received, sales of scrap This might necessitate sending an employee with the scrap
more desirable items in inventory,
may not be reported or the proceeds truck to the location where it is weighed, or use of a shipping
leaving less desirable items unsold
from sales may be misappropriated. notice or log that requires a description of the load size. The
(2) Non-house sales reduce the
record can then be used by accounting personnel to reconcile
Company's
Lack profit by of
of segregation ten percent
duties increases Cheques that have been signed should be mailed by
credits from the scrap dealer to actual pick-ups.
because
the ofmisappropriation
risk of sales commissions. of company individuals with no disbursement responsibilities. Payroll bank
(3) The Company has to finance
funds. reconciliations should be performed by an individual not
inventory by factoring accounts having payroll responsibilities.
receivable - an expensive form of
financing.
The Company is paying higher interest To reduce interest costs and to utilise the best financing
costs than is necessary. available, we recommend the Company pay off the long-term
loans with borrowings on the line of credit or utilise other
cash funds available for this purpose.

Effect
There is no assurance that all sales
transactions have been properly
recorded or are included.
Recommendation
We recommend the numerical sequence of all sales invoices
be accounted for to help ensure the completeness of the
revenue records. Additionally we recommend that credit
invoices be printed on a different colour paper so they are
easily distinguishable from sales invoices for posting
purposes.

Retail unit performance cannot be We recommend this evaluation be expanded to include an

compared effectively between units or
to budgeted data.
analysis of sales, cost of goods sold and operating expense
on a per-square-foot basis. Implementation of such analysis
would allow the Company's retail units to be evaluated on an
equal basis. We also recommend the analysis of retail units
include comparison of budgeted and actual inventory
Effect
Inventory that is purchased and cannot
be sold on is tying
Obsolescence up cash items
of inventory withincan
the
cash operating
result cycle and
in the company will have
having
to make
adverse impact
large write onits
offs of the working balance
inventory capital
position
which willofadversely
the company. Without
affect profit.
sufficient cash in the system the
company becomes less flexible and
Effect
adaptable to meet its short term debts.
The Company therefore cannot benefit
from income tax deduction for
expenditures such as reimbursement to
eligible participants for personal
medical (including dental, if desired)
expenses that aregenerally excludable
Maximum potential cannot be gained if
from the participants' taxable income
the computer software and hardware
are not compatible. Current software
may not be capable of handling
advanced accounting functions
necessary to provide accurate interim
Breach of Company policy may result in
and year end financial statements.
inconsistent data and improper cut off.
Manual adjustments may be complex
and not done on a timely basis.
Effect
Lack of segregation of duties in this
area exposes the Company to the risk
of misappropriated funds or goods.
Consequently when employees depart Implement and enforce a policy requiring all employees to
they are under no contractual obligation sign a confidentiality agreement, including those hired prior
not to divulge information to
competitors.
Effect
The Company may find itself in
unexpected cash flow difficulties or a
state of declining profitability.
Recommendation
Perform research to a desired level before production is
startedafor
Adopt newofitems
policy to ensure
recording there is an
obsolescence onadequate market
a percentage
an
for the product.
write-down In addition,
method based onall
thepurchase
aging oforders should be
inventory.
approved and reviewed for reasonableness in order to
eliminate purchasing inventory that will not be used.
Recommendation
We suggest the Company investigate the merits of a medical
reimbursement plan
Obtain an information system needs analysis and planning
process. This will help determine the proper software needs
of the Company next year and in the future
We believe the involvement of an outside "expert" as a team
leader is key to this process success. Someone who has had
Review intercompany inventory transfers as part of the
experience in selecting and implementing accounting and/or
monthly internal audit by the internal auditor. To ensure
manufacturing systems should be utilised to ensure the
consistent recording, remind all locations of Company
success of such a change. BDO are able to offer this
policies.
expertise.
Recommendation
Segregate the duties of initiating purchase orders from
reviewing and approving invoices to prevent payment and
ordering of goods that the Company does not need or does
not receive.
to the formation of the policy.
Recommendation
We strongly recommend preparing a formal forecast to assist
in improving profitability by establishing goals and objectives
for the management team.
The Company should prepare a five-year projection of sales.
The projection should be made on a product line basis, and
should include potential and desired lines as well as current
lines. Costs and related expenses also should be estimated.
The Company can then determine its cash flow requirements
necessary to support this anticipated program. Once this has
If a company does not adapt with its As the Company grows, there is a greater need to have
growth it will not adequately provide interim accounting reports and financial statements that
timely internal financial statements. accurately portray financial position and results of
operations. Accordingly, it is necessary to have staff
available to generate these reports and ensure their
accuracy. Consider increasing the accounting staff.
Effect Recommendation
If a fire or other disaster occurred on We recommend the Company periodically back up all source
the Company's premises, source programs. These backup files and any related documentation
programs and other documentation should be stored in a secure offsite location
could be destroyed. As a result of such
fire or disaster, recreating files and
other data would be a time-consuming
The asset register is time consuming to Acquire and implement a computer software system that
and costly process.
maintain
Effect and difficult to interrogate. would maintain the following information regarding the
Recommendation
This system allows inaccurate sales Company's
Sales shouldfixed assets:
be recognised only upon shipment of the goods.
figures to be reported and this will A journal entry should be made to record shipments made
impact on management decisions made 1. Asset
but not description
billed, or goods billed but not shipped. Consideration
based on irrelevant data. If adjusting 2. Cost
should be given to updating the system to prevent this from
entries are not made, investors may be 3. Date of purchase
occurring.
misled by improper financial 4. Asset life
The period during which these Accordingly, the expiration
5. Asset depreciation dates should be considered in the
methods
statements.
carryovers may be used is limited Company's
6. Annual overall tax planning.
depreciation Thetax
- book and approximate amounts of
carryovers and their
7. Accumulated expiration -dates
depreciation book are
andas follows:
tax

Consider using the same system purchased by X Company.

Confusion can arise without a formal This may eliminate
We suggest research
you finalise time and
the terms possibly
of the alleviate
agreements andthe
written agreement. expense of outside user training.
have it signed by all interested parties.

This condition does not produce the We recommend that cash management be centralised under
best economic utilisation of the the direction of the corporate treasurer to ensure optimum
Company's available resources. utilisation of available cash funds.

Lack of segregation of duties provides The billing function should be separated from all cash and
an opportunity for employees to recording functions. If segregation is not a viable option due
misappropriate cash and conceal the to the size of the company, close management supervision
fact by manipulation of invoices. should be adopted instead.

Effect
Recording the adjustment in this way
does not identify its cause. The
adjustments in value may be the result
of computer or other errors that could
affect other areas of the company.
Recommendation
Set a priority of identifying the cause of the book to physical
adjustment in order to control and possibly reduce the effect
of the difference. This priority should be communicated to
the designated responsible personnel, increasing the
likelihood of success. The commitment should include
This is not the most effective way of Attach the main system directly to the local area network as
linking in the engineering workstations. a second file server if the hardware is upgraded. This will
simplify system access for the network users, allow backups
for both servers to be done at the same time and allow
access to the engineering file server from other departments
if so desired. If access to the engineering server from other
Effect Recommendation
departments is not desired, this access can be denied via
This can lead to unauthorised access We recommend
network securitythat accessThis
features. to the on-line
would alsosystem and
serve as ancentral
and the accidental or deliberate loss or data files be
important restricted
first to appropriate
step in moving personnel. Integrated
to CIM (Computer Such
corruption of data. restrictions
Manufacturing) could be accomplished
should byof
that be a goal assigning passwords or
the Company.
security codes to employees and by physically locking
unused terminals. Implementation of a logging mechanism
providing documentation of system use should be
If the standard percentage does not Although the percentage used in the calculation is consistent
considered.
reflect the true position, the financial from year to year, past history should be reviewed to justify
statements are at risk of being its accuracy. Unusual write-offs should not be included as
misstated. they can skew the pattern of normal activity.

Although inventory records on this To control inventory at outside locations, a general ledger
material were maintained, accounting account should be established. In addition, we recommend a
controls were not effective. physical count be made of material returned from contractors
to control and account for the shrinkage inherent in certain
processes.
Effect Recommendation
The information produced by cash flow Improved cash forecasting techniques would provide more
forecasts is not detailed enough for accurate determinations of operating cash requirements and
financial planning purposes. would assist in anticipating short-term financing needs. They
also would help in planning for certain discretionary
expenditures such as equipment purchases, bonus payments,
and profit-sharing contributions.
Effect Recommendation
Without conference and evaluations We recommend
Two basic methods themay
Company
be used consider establishing
to forecast a the
cash. First,
that are communicated to the procedure
receipts and whereby each salaried
disbursements employee
approach wouldishave
essentially a a
employees, confusion can arise as to conference
projection ofwiththe an executive
sources of theofCompany
and uses cash. Thetoother
discuss his
method,
agreed salaries and job descriptions, performance for the year and any salary increase.
the adjusted net income approach, projects the changes in These
titles and management's opinion of conferences shouldwith
the balance sheet, be held on theon
emphasis employee's
the workinganniversary
capital
performance. Also if an employee must date
accounts. This approach is useful over a longer maintained
and should be documented in writing and term. in
Effect Recommendation
be dismissed as there is no evidence of the employee's personnel file. We also believe that each
Without formal written
documentation authorisation
supporting the decision. A formal list of billing
employee rates should be established. The list of
Good cashshould receive
forecasting alsoa semiannual
would aid inwritten evaluation
identifying funds
errors or deliberate
Cheques manipulation
made payable to "cash" of
can should
The
his be reviewed
company
performance should periodically
discourage
prepared by his by
theanpractice
appropriate
immediate of level of
drawing
supervisor.
available for investment. To invest excess funds, the
billing
be rates can
presented by occur.
any staff and used for management
cheques to determine that proper rates are utilised. All
Companytomust "cash". Instead
regularly cheques
translate theshould
book be made
balances payable
into the
personal purposes. modifications
to the person to the rates for
responsible should
the be made
funds. only
This uponshould
person receipt
amount of available funds. One way to determine this
of
not written
be theauthorisation.
same person whoImplementation of a formal billing
adjustment is to calculate forwrites the cheques.
a reasonable period of time
rate list will ensure the proper billing rates are used and that
modifications in rates are reflected in billings on a timely
Effect Recommendation
basis.
This makes it difficult to co-ordinate and We recommend that a realistic monthly closing and reporting
standardise data output and impairs schedule (in terms of number of business days from month-
collation of data between departments. end) be established. Standard monthly journal entry
procedures should provide the basis for determining the
closing schedule. With efficient accounting personnel and
procedures, it should be possible to have financial
Effect Recommendation
Inventory valuation may be misstated. As a result of the change to the LIFO method of determining
inventory cost, formal inventory procedures should be
developed and included in the Company's procedures
manual. In developing these procedures, the following areas
should be considered:
(1) Procedures to be used to build-up LIFO (base-year)
Effect Recommendation
standards for new parts with previously-used raw materials.
As more inventory flows through the Consider upgrading
(2) Procedures to bethe
usedCompany's
to build up inventory system in the
LIFO (base-year)
production
This process
increases and newerofversions
the possibility near
Chequefuture and developing guidelines regarding
standards for new parts with new raw materials.reduce
writing days should be implemented to what
of products are not
disbursements released, this process
being properly information
clerical time,users
(3) Procedures thatwould
reduce the like to receive
contoller's
prescribe when time from the system.
for approving
base-year and
standards
will become
recorded more
in the difficultand
accounts andcould
prone to Minimum
signing
should be requirements
cheques forwould
and improve
developed include
control
new parts usage,
over
and minimum
manual
when cheques.
the index
error. in unauthorised disbursements
result reorder
method points
shouldand costing. Also, review procedures for
be used.
maintaining
(4) Procedures current inventory
for retention of reserve analyses.
base-year standard cost decks
The financial statements may be and records
Record the liability for accrued vacation payable to
materially misstated if all liabilities are employees and evaluate on an annual basis.
not recorded.

Without the implementation of these We recommend consideration be given to forming a

resources efficiencies will not be corporate-wide steering committee to coordinate systems
achieved by coordinated development development efforts, back-up plans and allocation of
efforts and allocation of resources. information system resources. Affiliate systems could be
used as potential back-up and recovery sites.
Effect Recommendation
If inventory records are not regularly Inventory quantities should be analysed in more detail
updatedcurrency
Foreign stock can become obsolete
transactions may be throughout
Record the currency
foreign year for slow-moving
transactions and
with obsolete inventory.
the exchange rate
and the records will not reflect the
misstated. Consideration
in effect on theshould also
date of thebe given to centralising
transaction. the lumber
The Company should
physical stock levels. This can lead to purchasing
establish functiontofor
a system all divisions
obtain or consolidating
the exchange it with
rates regularly
over-stocking or stock-outs. another
from company in order to obtain the best pricing.
its bank.

If no controls or procedures are The Company has begun to reconcile monthly vendor
implemented to deal with inventory statements. In addition, the locations with material
held at outside locations there is the inventories should be included in the Company's cycle count
potential for stock levels to be procedures.
materially misstated and the financial
statements not to reflect a true and fair
view.

Effect
The integrity of the computer system
could
Effectbe affected by unauthorised
access due to weak systems controls.
Recommendation
We recommend the following activities are undertaken:
Recommendation
-Review the security related activity options noted to
determine if they might be set in a more restrictive manner.

-The security level on the A Company AS\400 is set at 20,

A division could therefore approve We recommend a formal system of communication be
credit to a customer with overdue established among the credit departments. Such
balances to another division. This communication could be achieved through a periodic
increases the risk of uncollectable summary of significant problem accounts that would be
accounts. circulated to each division. We believe this would help
minimise the risk of extending credit to customers with
This condition indicates that a review of A review of this nature should be completed as soon as
overdue balances with other divisions.
the labour cost standards should be possible.
made to determine whether the large
variances are actually the result of
inefficiencies or whether the standards
are not attainable and need to be
Lack of a list can lead to errors A list should be prepared and maintained of who should be
adjusted.
occurring. Personnel time may be receiving copies of computer print-outs and the internal
wasted generating reports that are not auditor should periodically check to see if actual distribution
needed or duplicate reports that were conforms to the list.
not received by the appropriate person.
Confidential information may be
Effect Recommendation
delivered to an unauthorised person.
The company may inadvertently have Establish a formalised policy regarding potential conflicts of
conflicts of interests. interest. Annually, all employees in decision-making
positions should read and sign a written conflict of interest
questionnaire. These should be returned to a responsible
person who will then summarise any potential conflicts and
forward the summary to the Board of Directors for their
Effect Recommendation
review and follow-up.
The company is not benefitting from We recommend that management consider obtaining and
segmental information, which would be reporting segment information from the existing system or
useful to management in evaluating implementing a new system that will provide operating
capital investment and other business results by business segment. Most of the information could
decisions as well as monitoring actual be obtained by manually summarising selected general
vs. budget and other operating results. ledger accounts. Where business segments share common
Effect Recommendation
facilities an analysis could be prepared to properly allocate
Should any of these individuals leave Documentation
the cost of the shared of policies and procedures
expenses offers an of the
based on estimates
their jobs or be indisposed for an opportunity to provide continuity
expense relationships. in the event
In the near-term, of an
management might
extensive period of time, it would be employee's departure or(before
use a sales contribution reassignment. In addition,
fixed overhead) formatas the
until
difficult for someone to step in and Company's
an overheadenterprise
allocationmanagement system isIdeally,
has been developed. rolled outsuch a
continue. In addition, there may be across
systemthe Company's
would operating
also segregate keyunits,
balance uniformity of business
sheet accounts,
some procedures currently being practices
such will
as accounts facilitate the
receivable, accuracy
to enable and quality
the be
Companyof theto
The Company may be incurring A review of the insurance coverage should made to
performed that will be redundant under information
evaluate supplied
return on to management.
assets and net Writtenin
investment policies
the and
business
unnecessary
Effect costs due to multiple simplify coverage and combine various policies to take
the new system and there may be new Recommendation
procedures
segments. will help
These facilitate
amounts maycommon
become practices
very across as
important
coverage
With in some areas.
this approach intense fire in the advantage of possible cost savings from blanket coverage.
procedures that arean
required. Rotate backup
businesses.
the Company files periodically
moves to an
into other business off-site location
segments. to cost
The
building housing the computer ensure
benefit that at all
of implementing times there
this is a historical
suggestion copy
should beto of the data
reviewed
equipment could destroy both the We suggest
off-site. The that insurance
frequency of coverage
the rotation beisreviewed
dependent on the
Begin
carefullyto document policies
before proceeding. and procedures in writing. When
primary files and the backup files. determine
overall riskwhether
ofamount the to
the data Company is adequately
the organisation and protected
the difficulty
a significant has been documented, it can then be
Without this backup data, recreation of from of fire or other
recreating
compiled intoit.
possible
Some
a policies
losses
organisations
and procedures rotate backups daily if
manual.
the records could be very difficult or the risk is high while other organisations rotate data weekly
Interest expenses are high due to the We recommend the Company investigate the possibility of
impossible. since they believe the risk is less.
fact that short term borrowings are long-term institutional or equity financing that would result in
expensive. lower interest expenses related to the permanent needs of
the Company.
This procedure results in decreased Implement semi-monthly payroll for all administrative
cash flow and excessive administrative employees at headquarters and unit managers. A semi-
expenses. monthly payroll would benefit the Company by:

· Improving cash flow management

· Reducing administrative time for processing the weekly
Effect Recommendation
payroll
Without changing passwords, the We recommend
· Reducing that passwords
expenses be changed
for the independent on a service
payroll periodic
possibility exists that unauthorised basis (e.g., every 60 days). Changing passwords on a periodic
persons could more easily obtain basis would strengthen the overall EDP security.
unchanged passwords and access the
system. This could result in
unauthorised data or erroneous
Stock valuation could be enhanced from We recommend the Company maintain a record of increases
transactions entering the system.
the current figure. in raw materials costs. Prior to the end of the current fiscal
year we will again discuss the advisability of changing the
inventory valuation method to LIFO.

Therefore, there is no control that all We recommend that sales return credit slips be numerically
credit slips are properly processed. controlled and any missing documents accounted for. This
control will help provide assurance that sales returns are
accurately reported.

Effect Recommendation
Consequently sales for monthly and We suggest a policy be established for controlling drop
year-end financial statements could be shipments so the date a customer receives drop shipment
distorted if billed in the wrong period. merchandise the company is notified, preferably in writing
and bills the customer as of that date. The written notice of
receipt could then be attached to the invoice as proof of
receipt.
Effect Recommendation
Improperly documented control We recommend the data processing department prepare a
activities
Effect may result in erroneous input standards
Recommendation manual that describes the minimum
and processing, undetected out-of-
A limited and constrained method of documentation
We believe the Company requirements for consider
should a data processing
changing this policy
balance conditions, and misinterpreted
paying overtime results in employees application. This manual should
so employees would have several options include specific definitions,
regarding
output reports
not feeling valued as individuals and standard
overtime. forms, and examples of the required items for the
may lead to unmotivated individuals, following:
low staff morale and high staff turnover. System
This revised Overview,
policy including flowchart
would benefit both and narrative
employees and the
Program Maintenance, including:
Company. Employees typically like receiving a lump-sum
Delays in recording such transactions Record
·payment Program transactions
narrative when all documents and facts are readily
during the year which in effect serves as a "forced"
result in misstatement of interim available.
·savingsFile formats and record layouts
program. Employees may also like the option of
statements, and increase the risk that ·being Data able
element definitions
to take additional time off. The policy would
transactions will not be recorded ·benefit
Explanation of logic and calculations
the Company if employees elected deferral since it
completely. ·would
File topermit
programthe use of the fundstables
cross-reference for an extended period of
·time
Control
and features
payroll expense would be reduced if compensatory
·time
Testoff
data andtaken.
were results
· Program change log
Effect Computer Operator Instructions
Recommendation
User Procedures, including:
As a result: We recommend the use of pre-numbered receiving reports to
- no record of the receipt exists which strengthen the related internal control activities.
could be matched to purchase orders or
invoices
- there is no control over the
completeness of receiving reports as
Lack of controls over incoming mail can A listing should be made of all mail receipts by the person
they are not pre-numbered
lead to misappropriation of company opening the mail. A copy of the listing should be passed to
- there is no control ensuring actual
funds. the cashier for comparison with the items received. This
goods received match those per the
ensures all items are properly processed.
shipping ticket or purchase order
- the condition of goods received is not
noted
Effect Recommendation
-The
there is no evidence
conditions to confirm
above could resultthe
in We recommend all pricing changes be reviewed and signed
date goods
unauthorised are actually
price received
modifications
Informal controls and lack of being by
Wetwo authorised
recommend theofficials.
use of aWe also recommend
shipping that access
clerk with full
processed and
supervision remaining
increases the undetected.
risk of to the maintenance
responsibility fileitems
over the of pricing
beingdata andfor
loaded processing of
delivery or
Proper
impropercontrol over
cut off andthese forms is
misappropriation price changes
pick-up be restricted
by customers. to authorised
No merchandise personnel
should and that
be loaded
essential
of assets.for an effective system all changes
without the be documented.
sales These recommendations
order and shipping documents should
help ensure the proper valuation of inventory.

Differences in cash reconciliations imply Reconciliations should be performed on a timely basis and all
a lack of control in the accounting differences should be fully investigated and resolved.
system and an increased risk in the
misappropriation of assets and errors.

Effect Recommendation
Lack of control over the signature plate The signature plate should be stored in a secure location.
exposes the company to unnecessary Use of the cheque signing plate should be limited to one
risk of misappropriated funds. person. This person should keep a log of its use. The log
should show the numerical sequence of cheques signed and
the date used. The plate and the log should be under key
control. Also, only employees authorised to prepare or
Effect Recommendation
supervise the preparation of cheques should have access to
Lack of controls over user access can Review user profiles on the system and consider making
blank cheques.
lead to unauthorised access and changes as follows:
corruption of data.
Þ Remove unnecessary special authorities from those users
not requiring them for their job function. At most, two users
should be allowed to perform unlimited functions on the
Business interruption insurance can Although the Company's insurance coverage appears to be
system.
provide partial protection to a company adequate in many areas, the Company should evaluate the
in case of "shut downs" due to fires or need for business interruption insurance.
Þ Assess the need for the individuals noted to have multiple
other causes, obviously the Company is
user IDs in addition to access to the predefined profiles.
currently exposed in this area.
Typically, multiple user IDs should not be provided.
Effect Recommendation
Þ The profiles that are used should have the password
changed on a regular basis, as is required of all users, and
access to the password should be strictly limited.
The lack of reserve results in current A reserve for sales returns should be established based upon
assets being over-stated with respect to historical data to provide an adequate matching of returns to
the value of anticipated returns. As recorded sales.
sales continue to grow the absence of
this allowance will continue to have a
larger effect on the interpretation of the
This allows operators, programmers and All production and test tapes in the tape library should be
Company's balance sheet.
systems
Effect analysts access to the tape placed under the control of a tape librarian. This person
Recommendation
library. Sensitive
The company tapes
is not arefully
being locked in a
efficient should normally be the only and
A computerised accounting one information
with access reporting
to the library.
system
vault within the tape library;
in terms of reaching its maximum however, The
would be a tremendous benefit to the Companyaat
librarian should be responsible for keeping record of
this time
this procedure
potential doesall
to ensure not include all
financial the
and tapes
will bethat are innecessity
a virtual the library, in the back-up
managing copies
the of files
business as
production files in the room
reporting requirements are achieved. off-site,
the Company and the retention schedules of all data files. The
grows.
librarian should supply operations personnel with the tapes
needed for processing
A significant based on the
result of automation daily
is the production that will
improvement
Effect Recommendation
schedule. All tapes used for testing should beThecontrolled by
be derived in the area of financial reporting. availability
This practice results in commission the librarian
Consider a and supplied
commissions to the
formula programmers
that accounts
of timely accounting information will enhance the Company's when
not formally
only for
expense
No to the
uniform Company for
capitalisation policywhich requested.
sales,
results We but
believe
efforts also subsequent
a formal
at budgeting, cashand
capitalisation
planning, receipts.
policy This
will
analysing itswill
provide create an
the and
present
there isassets
similar no sales revenue
being or in
treated cash
a incentive
guidelines for
forincreased
future financial the Acollections.
effective
goals. A "billed
and consistent
computerised and collected"
administration
system will provideoffor
collected.manner and some assets may fixed
different system
betterasset mayaccounting
audit be appropriate.
trails matters.
and prompt Consideration
Suchofaimportant
recall policy should
should beinclude
given
historical
not be capitalised at all. Therefore a full to whether
dollar limitsthe
accounting for process
levels ofaccomplishes
information. approval proper
by appropriate
Additionally, financial
operational officials.
efficiencies
charge would go through the profit and reporting and efficient
would be realised by theadministration.
elimination of existing duplicate
loss account in one period and have an manual procedures and an improvement in the general
Effect Recommendation
overly adverse affect on profit for the information flow within and outside of the Company.
There
periodisrather
a riskthan
that spreading
not all errors
thewill
costbe Define and document a formal policy for verification of
picked
over theupuseful
if reliant on human
economic life. checking processing
There are aand reports.
variety If it is toproducts
of hardware be the user's responsibility,
and software
only as inconsistencies may arise. this should be stated in the policy. The policy
packages available to satisfy the needs of similarly-sized, should also
Employees may not be aware of their outline the frequency of verification
fast-growth companies. We would be happy to (daily, weekly, each
responsibilities or the frequency in program run, etc.) and the procedure to be followed if errors
which they should be performed. are detected.
The return on the securities lending Examine the securities lending arrangement and consider
transactions appears low in comparison whether the return is worth the risk involved.
to the assets on loan and the invested
collateral.

Effect Recommendation
The consolidation process is To expedite the interim and year-end consolidation, the use of
unnecessarily time-consuming. a standardised strip statement should be considered. The
statement should be prepared at the various accounting unit
locations, sub-consolidated at the appropriate locations, and
then forwarded, together with consolidating details, to the
corporate office for inclusion in the consolidated financial
Changes to the regular payroll may be We recommend that the payrolls be reviewed by an officer of
statements.
inaccurate or unauthorised. In addition the Company. This review should be evidenced in writing by
without any higher level review the requiring that the reviewer sign or initial the payroll journal.
payroll may be deliberately In addition, any changes to salaried or hourly pay rates
manipulated and company funds should be documented in writing and approved by the officer.
misappropriated through salary costs.
The month end burden of writing these
entries is time consuming and there is
the possibility of omitting an entry.
Effect
This practice results in a large
adjustment to inventory values at the
end of the year.
These items highlight that there are
control weaknesses in the billing
system, which can lead to inefficient
maintenance of revenue recognition
policies, and incorrect cut-off.
Tax savings may be lost if carryovers
are not utilised.
Effect
A lack of formal inventory procedures
and controls can lead to
misunderstandings and prevent an
accurate count of items.
There is a lack of segregation of duties
in the system of internal control which
can give rise to undetected errors,
unauthorised transactions or
misappropriation of assets.
Therefore unnecessary or duplicate
assets may be acquired. Assets could
be acquired for personal use through
the company.
Effect
The audit trail is apparent until the edit
reports are produced. A lack of audit
trail will result in errors not being
resolved on a timely basis as there is no
supporting evidence to.verify the
accuracy of amounts posted to
inventory.
Effect
We recommend such entries be handled as standard journal
entries. The detailed distribution of the entry and the
explanation can be prepared in advance for a number of
months; only the current month's amounts need be inserted.
Recommendation
We recommend management consider adjusting cost
standards on a regular basis throughout the year so that
inventory is valued using more recent costs. This will provide
more accurate reporting during the year and help avoid large
year-end adjustments.
Develop a system or policy that sustains a billing system that
properly accounts for receivables in each financial reporting
period. This will require effective communication between
billing, sales and engineering departments. Timely entry of
hours in the professional service billing system will help to
facilitate more accurate and meaningful financial reporting.
We realise that these carryovers will not be most effectively
Time and expenses should be billed as work is performed or
utilised until the Company begins to operate profitably but
expense incurred.
sound tax planning should give consideration to items to
ensure complete or maximum utilisation of the loss
carryovers prior to expiration.
Recommendation
Procedures for counting should be formalised and approved.
All staff involved in the inventory count should be fully
briefed before counting commences.
All credit approvals over a stated amount should be subject
to final approval by a second appropriate member of the
management team.
Implement a policy of approval, which may require two
signatures, for significant additions and amounts incurred in
excess of vendor quotes.
Recommendation
We recommend the edit report indicate the extended retail
value and batch total that can be compared with the
inventory transfer balance.
Recommendation
The ability to circumvent controls As noted, the Company is currently investigating a couple of
increases key
Providing the risk of error
personnel andprofit
with abuse of different automated
Management should change
considermanagement
having theseproducts.
employees adopt
contols, plans
sharing whichwill
could lead tothem
motivate error to
or an Individual Retirement Account.
fraud.harder and in turn the company
work Continue to investigate an automated change management
will benefit from increased profits. product
Such an and implement
arrangement is itattractive
as soon as possible.
because When
unlike properly
other
implemented,
retirement this would
programs it can provide management
be established for a with a tool for
select
auditing,
number ofmoving and tracking
employees and doesofnot all involve
sources,the
objects, files and
Effect Recommendation
documentation from development and testing libraries into
administrative costs of other programs. Contributions,
The reassessment resulted in over Forward
production
however, all
are future tax to
libraries.
subject amendments
limitation. and reassessments to
$X,XXX of tax plus interest, yet it was BDO to ensure that tax returns have been assessed as filed
never checked for accuracy or or any differences are followed up prior to the expiration of
forwarded to BDO to investigate. When the objection period.
we discovered the reassessment, the
six-month objection period had expired.
In the event of data processing To minimise the disruption to the business of such a change
personnel changes or prolonged illness in data processing personnel, it is essential that the
of data processing personnel, it may be documentation of the Company's programs and data
necessary to engage an individual processing procedures be improved.
unfamiliar with the Company's data
processing programs and procedures to
Effect Recommendation
operate the equipment and to produce
Management is unable
the various reports thatto determine
are essentialthe
to Separate sales return and allowance accounts should be
cause of the reduction
the Company's in gross
business. sales.
This will be established to provide management with information
more difficult if the individual cannot identifying the erosion of gross sales attributable to
easily become familiar with the merchandise returns versus other allowances granted. The
programs and procedures in place. allowances account could be further broken down according
to the primary nature of the allowance (eg accommodation,
This process is very time consuming The variance system should accurately track the standard
freight charges) to enable management to monitor
and should be automated or eliminated and actual costs. The adjustment to actual cost should be
allowances granted.
all together. made based on the variances recorded. Standards for items
that have greater fluctuations from actual costs could be
updated on a quarterly basis, rather than annually, to more
accurately reflect the actual costs.
Effect Recommendation
The company is exposed to the risk of Segregate duties so an employee, who does not have access
misappropriated funds. to the accounting records receives the mail and prepares a
summary of the cash receipts, such as an adding machine
tape. The entries made to the accounting records and the
deposit made by the accounts receivable clerk should then
be balanced to the summary to ensure that all cash receipts
Unauthorised access to company Limit access to the work-in-process system and designate
have been recorded properly.
information
Effect can lead to abuse of the individuals
Recommendationwho are permitted to make rate changes. Require
system and manipulation of data
As a result, the effectiveness of the to authorisation
Implement and forenforce
changes to labour
a policy rates all
whereby that are different
obsolete
improve
obsolete inventory reserve as a means inventory write-offs are charged against the obsolete should
results. than standard labour rates. In addition, management
of valuing inventory is impaired. review individual
inventory reserve.labour rates
This will on a regular
enable basis. to more
management
effectively value and analyse inventory both currently as well
as historically through the use of an accurate obsolete
inventory reserve.
This can lead to confusion, duplication Individuals generally accomplish more and work better as a
of work or lack of work completely. team when they fully understand their responsibilities and
have a common agreement with their superiors as to the job
objectives and performance standards on which they will be
evaluated.
Effect Recommendation
Only certain sales and order processing To effectively plan and control future operations, we
costs are associated with mill sales, recommend that forecasts for mill and warehouse sales be
causing the 5-7% gross margin to related to the respective costs and expenses associated with
become practically all profit. However these two types of sales. In addition, actual sales and
the large reduction in gross margins respective costs by type of sale should be determined and
from
Time the
anddecline in warehouse
resources sales has
are being wasted reported
Establish against
improvedsuch forecasts.
pricing The use
processes andof separate
policies general
in order to
resulted in an inability to cover
on unnecessary actions which could the be ledger
minimise pricing differences and the resulting billing should
accounts to segregate mill sales and costs also
higher
avoided if proper credit control andthe
fixed costs associated with be considered.
adjustments.
warehouse operations.
billing procedures were in place.

Effect Recommendation
By establishing an audit committee, the In anticipation of the Company's initial public offering of
board
Effectof directors may achieve an common
Recommendationstock, we recommend the Company establish an
increased
Effect understanding of (1) the roleaudit committee
Recommendation consisting of a majority of outside directors.
of the independent auditors and the The committee's objectives and responsibilities should be set
Effect
nature and limitations of their work and Recommendation
forth in a written document approved by the board. The
It
(2)isthe
notimportance
possible to of
identify problem
accounting, We recommendof
responsibilities the theCompany
committee maintain
shouldainclude,
formal profit
but not plan;
areas or those
financial areas where
and operating efficiency
controls to the(i.e., a forecast
necessarily of salesto:
be limited (by units), costs and expenses)
must be improved.
successful management of a business. against
(1) Review which
andactual
recommendprofit istomeasured.
the directors A profit plan, if
the appointment
The lack of an audit committee may properly used, canindependent
of the Company's assist in improving auditors. profitability by
hamper this understanding. planning
(2) Meet with salestheactivities,
independent while auditors
controlling andcosts and
financial
expenses.
management of the corporation to review the scope of the
Effect Recommendation
proposed audit for the current year and the audit procedures
When freight bills are received after the We
The
to berecommend
Company
utilised, and consideration
should consider
at the of
the
conclusion the following:
following
thereof guidelines
review suchin
vendor invoice, they are frequently (1) File
developing all freight
audit, including bills
and monitoring with
any comments their respective
the budget: invoices and
or recommendations from the
processed for payment without arrange
(1) for the
Budgeted
independent buyer or
revenue
auditors. the clerk
should be by who does the
customer andfiling to verify
based on
reference to the related invoice that the
anticipated freight
(3) Review with billing
man-hours is correct.
and production
the independent auditors,costs;
the Company's
resulting in the possibility of freight (2)
(2) Do not
A written
internal pay a and
freight
statement
auditor, billassumptions
of
financial until
and it accounting
has beenshouldmatched withthe
be attached;
personnel, the
charges being paid twice or being paid vendor
(3)
adequacy invoice
Operating to which
expenses it relates.
should be analysed
and effectiveness of the accounting and financial by caption;
Effect Recommendation
when the terms call for payment of (4) A forecast of the cash flow and cash position should be
The flow
freight of invoices
charges by theforvendor.
approval by Benefits from such a change include:
included;
buyers
Effect provides little additional control (1) Timely payment by accounts payable without interference
Recommendation
(5) The Board of Directors should approve the original budget
and disrupts the already uneven
This is a breach of international due to buyers'
Develop a policy travel schedules.
to calculate and recognize any gains or
and subsequent revisions; and
workflow
accounting of the accounts
standards. payable (2) Elimination
losses of the use of time to review and approve
The financial statements at the period (6) Thethat
Accrue actual
all areto
bonusesincurred
budget in conjunction
comparison
and commissions atwith
should the
be sale
year-end. madeormonthly
department. invoices
disposal when they have
of any fixed assets already effectively
in accordance with GAAP. them
approved This is
end are misstated. and the responsibility for explanations of significant
via the
exclusive purchase order.
variationsof thebudgeted
from current policy amountson leased
shouldequipment
be in which
(3)
the Elimination of the need
items are returned for accounts
to inventory payable
for future to determine
rental or sale.
if all invoices were returned by buyers.
(4) Better control of invoices through their payment and less
opportunity for misplacement.
(5) Reduced clerical time.
Buyers or the general merchandise manager, however,
Effect Recommendation
should approve the invoices with prices and quantities
differing from the purchase order. Also, as part of the
automation of the accounts payable system, all paid invoices
should be accumulated into a buyer purchases journal
requiring written buyer review.
Lack of control over goods stored for We recommend the Company consider maintaining perpetual
customers could result in "storage" inventory records to the same extent "owned"
overstatement of inventory or improper inventory perpetuals are maintained. The storage perpetuals
recognition of revenue. Significant use should be updated periodically to reflect all processing and
of personnel time spent reconciling other transactions
goods owned by customers, could be
avoided if accurate perpetual records
are maintained on a timely basis.
Effect Recommendation
This does not provide adequate input to A written obsolescence policy that requires comparison of
management for evaluating inventory quantities on hand to actual usage and sales forecasts should
levels and isolating problem areas. be adopted. This would provide a consistent basis for
valuation of inventory for both accounting and physical
retention purposes, and should facilitate the preparation of a
final priced inventory compilation. The policy should include
In order for the annual budget to be an We recommend that management review the current budget
procedures for identification and disposition of material
effective tool for goal setting and process and consider changes that would streamline the
determined to be obsolete.
monitoring progress, it should be information flow enabling completion of the annual budget in
completed early enough to permit a timely manner. Consideration should be given to
departments to implement programs documenting the budget process in writing.
and procedures that will enable goal
Effect Recommendation
accomplishment. Failure to complete
Due to time constraints,
the budgeting process inthe controller
a timely The company should consider employing an individual to
may extend
manner can credit
result to high-risk
in lack of employee assist the controller in cash collections, which would help
customers
commitment or to
failestablished
to follow up on
goals, determine the credit worthiness of new and old customers
collections resulting in bad debts
increased difficulty in performance or and to call and/ or write to those customers who have old
cash flow problems.
evaluation and the increased likelihood outstanding balances.
that problem
Amounts mayareas remain unidentified.
be capitalised in error. We recommend that the Company's accounting policies be
evaluated and modified accordingly. Appropriate procedures
to capture the applicable cost and identify the point of
technological feasibility should be a part of such evaluation.

Effect
With a Local Area Network (LAN) being
installed for the entire department, it
will be increasingly important to
monitor unauthorised access attempts
and changes to sensitive system files.
This will provide management with an
additional level of control for access to
the system.
The taxation authorities may question
the rates used.
Effect
Recommendation
Consider implementing the use of a tool to record additional
security related events such as attempts to access
unauthorised files and changes to system security values.
BDO can advise on suitable tools and software to assist in
this area.
We recommend that Parent Co retain detailed records
indicating that the facts in the adjacent paragraph are
Recommendation
correct. While such records are no guarantee that the
authorities will accept the Company's intercompany pricing
(since they may determine that different quantities, different
markets, or other factors may indicate that apparent
comparable prices are not actually comparable) they will
By using these procedures erroneous We recommend the following procedures be implemented:
information could be submitted and (1) A batch control be established for the number of hours
processed and be undetected. submitted to data processing and compared to the data
processing-generated report.
(2) The payroll clerk should compare hours per the time cards
to the data processing-generated report as opposed to the
Consequently, management relies upon With an effective perpetual inventory system in place, timely
worksheet.
quarterly physical inventory counts for and accurate inventory information would be readily
accurate inventory information. As available. Presently, the Company has in place the necessary
such, during interim periods, the software to fully implement a perpetual inventory system.
Company calculates monthly cost of Thus, the need for routinely significant manual inventory
goods sold amounts based upon raw adjustments will be eliminated. By prioritising this system,
Effect Recommendation
material purchases and monthly and making the necessary investment of set-up time, timely
The advantage in using this facility
finished goods sales. As with any is Consider implementing
and accurate inventory use of the audit
information journal enhance
will greatly to audit
that the audit journal can be activated
manual adjustment, the possibility of specified security-related events. These
management's decision-making capabilities. should include
to record specific
error exists. categories of security- changes to security-related functions, authorisation failures
related events. By segregating and delete operations. In addition, the audit journal should
security-related events, the audit be reviewed on a periodic basis, either daily or weekly and
journal allows the reviewer to easily appropriate follow-up procedures should be developed.
Lack of written guidelines causes We recommend the Company develop and implement a
spot events that require attention and
confusion and can lead to inappropriate written policy covering all construction, servicing, sales and
follow-up action
contracts being awarded or improper purchase contracts, and any other significant contracts or
recording of contract terms. agreements, which includes procedures for their awarding,
processing, and review.

Effect Recommendation
This situation results in increased We recommend the Company adopt a formal inventory policy.
property
This taxes, does
treatment insurance, handling
not allow the Such
We a policy should
recommend be advances
that all based on customer demands and
made to employees thatthe
costs, losses
Company from damage
to maintain and
accountability of Company's
which are toproduct andtocost
be repaid the requirements.
Company be recorded as
obsolescence
the amount the and, more significantly,
employee owes the miscellaneous receivables so the balance and all subsequent
the use of Additionally,
Company. working capital
thiswith no
treatment BDO would be
repayments happy
may to advise on
be accounted for.the procedures to be
immediate expenses
overstates return on investment.
and understates considered in completing an inventory system review.
assets.
Information security controls are an Review those user IDs that do not require mandatory menus.
integral part of a secure electronic data For those users that do not perform security administration or
processing environment. If adequate system operator functions, change the setting to require a
compensating controls are not in place, mandatory menu.
assets may not be protected.
Effect Recommendation
Lack of separation of duties increases To maintain the desirable separation of duties between
the risk of corruption of data and fraud. operators and programmers, the following controls should be
implemented:
(1) Operators should not be permitted to program
applications or make modifications to programs unless a
comprehensive review of their work (i.e., 100% check of
Effect Recommendation
coding) is made by programming personnel.
(2) Operators should be denied access to source program
decks, program listings, and block diagrams so they will be
unable to determine the program logic and make changes for
their own benefit.
A lack of guidance as to the nature and Develop and adhere to an investment policy. This policy may
size of investments permitted may include restrictions on, or Board approval of, purchases and
result in a company/ association holding sales of securities. The policy may include a definition of
a portfolio with too much risk. which investments match the company's/ association's
desired level of risk and return.
The is a risk that assets may be We recommend the following controls be established:
misappropriated
Effect or unauthorised (1) The computer room should be locked at night.
Recommendation
transactions may occur.
If guidelines are not followed quality (2)
We Unissued
recommend cheques should
that the be stored
purchase in a secured area (i.e.,
files contain
products may not be purchased at the safe).
documentation as to why competitive bids are not obtained
best prices. In addition, the Company (3) The cheque
for purchase writer
orders in key should
excess be We
of $X. removed and stored
also believe in a
the files
may be subject to criticism or litigation secured area when not in use.
should contain documentation of the basis of selection.
regarding this policy. The lack of
documentation regarding the selection
could be an indication of fraud
(kickbacks).
By not using the numerical sequence We recommend the numerical sequence of purchase orders
order a company cannot validate and receiving reports be accounted for to assure all
whether all purchase orders have been documents have been processed at the end of each period.
processed, are included or that all items Open or unmatched documents should be periodically
received were authorised. reviewed by a supervisor.
Effect Recommendation
Any system, regardless of its We recommend that the company assign appropriate
fundamental soundness, may personnel to review periodically the accounting and
deteriorate if not reviewed periodically. administrative controls, which include systems and
The system of internal control must be procedures providing for proper segregation of duties. These
monitored continually to determine reviews will help insure the safeguarding of assets and the
whether (1) prescribed policies and receipt of materially accurate and reliable financial data.
Lack of supporting documentation The volume of payments has increased, and an improved
procedures are being carried out
prevents errors from being identified filing system appears necessary for orderly handling of paid
properly, (2) changes in operating
and resolved, such as duplicate invoices. In addition, we recommend adoption of the
conditions have made the procedures
payments. It also increases the risk of following procedures:
cumbersome, obsolete or inadequate,
unauthorised payments to fictitious (1) A follow-up system should be initiated to insure that
and (3) effective corrective measures
payees. proper support is obtained and referenced for disbursements
are taken promptly when breakdowns in
Effect Recommendation
made in advance of normal processing.
the system
There appear. in the risk of
is an increase There
(2) Theare a number
cheque of steps
number that the
and date Company
should mayon
be written take
theto
misappropriation of or damage to safeguard
invoice as aitscross-reference
computer facilities
and and reduceofthe
indication risk of loss.
payment.
computer hardware.
BDO are able to advise on safeguards that the company can
easily follow.
Heading Point

Title Weakness Effect

Financial Management
Use of Lock Box for Cash Receipts
The Company does not implement a lock box
system for cash receipts
Use of this system would (a) strengthen internal
control by removing cash receipts from employees
with access to accounting records until an
independent listing has been prepared, and (b) enable
the Company to have receipts deposited at least one
day earlier and, therefore, improve cash balances.

Cash, Cash Receipts and Excess number of bank accounts The company has a practice of tracking various This makes the monthly reconciliation process
Disbursements projects by establishing separate bank tedious, time consuming and unnecessarily
accounts. complicated. Consequently there is an increased risk
of errors occurring in reconciliations.

Tiền và các khoản tương đương Có quá nhiều TK ngân hàng Công ty theo dõi các dự án khác nhau thông
tiền qua việc sử dụng nhiều tài khoản ngân hàng
tương ứng
Title Weakness
Payroll, Personnel and Adoption of junior stock plan or stock The Company currently offers stock purchase
Compensation purchase plan opportunities to key officers and management
personnel through restricted stock options and
incentive stock options. But these opportunities
are not available to all employees.
điều này dẫn tới việc đối chiếu điều giải số liệu hàng
tháng trở nên phức tạp, mất thời gian. Gia tăng rủi ro
dẫn đên sai sót
Effect
The opportunity to benefit personally from the growth
and success of the Company is a powerful incentive to
employees and promotes teamwork. This is not
currently in place at the company therefore the
company is not achieving its full profit potential.

Accounts payable, purchases
and accrued liabilities
Cash, Cash Receipts and
Disbursements
No formal levels of purchase order There are no formal levels of approval for Purchases can be made without the knowledge of
approval authority purchases management. This can lead to duplication of
purchases or purchases that are made for personal
versus company use.
Title Weakness Effect
Cash Disbursements - access to the All staff have access to the company's blank Staff can potentially use the company's cheque book
cheque book cheque book. to misappropriate funds.

Tiền và các khoản tương đương Chi tiền - access sổ quỹ Tất cả nhân viên đều có thể truy cập vào phiếu Rủi ro nhân viên sẽ lấy tiền công ty chi dùng cá nhân
tiền chi còn để trống (Séc)
Accounting Procedures Written accounting policies and During the course of the audit, we discovered This generally reduces the efficiency of the
procedures that there are no formal policies and procedures Company's operations. Transactions are not
documented for the benefit of accounting processed in a consistent manner, and problems will
personnel. be incurred when an employee leaves or is absent.

Title Weakness Effect

Cash, Cash Receipts and The petty cash fund carries a substantial Lack of control over the petty cash fund as it is not
Disbursements balance and the activity in this fund is being used for its original purpose could lead to
significant. misappropriation of company funds.

Tiền và các khoản tương đương Petty cash có sô dư lớn và có nhiều nghiệp vụ Sai mục đích của quý này. Thiếu kiểm soát quỹ tiền
tiền lớn = tiền mặt mặt sẽ dẫn đến thất thoát.

Title Weakness Effect

Inventory Inventory management technique The Company does not use computer systems Manual systems for monitoring inventory are likely to
not requiring sophisticated computer to manage its inventory. be time consuming and less effective than
system computerised ones.

Title Weakness Effect

Inventory System unable to determine The present standard cost accounting system
individual product costs does not determine individual product costs.
Title Weakness
Accounts payable, purchases Detailed accounts payable listing The accounts payable listing identifies the
and accrued liabilities aggregate balance payable by vendor and does
not provide a detailed listing of outstanding
invoices.
Scrap Scrap levels not accounted for During a plant tour and subsequently reviewing
expenses, we noted a large scrap expense that
was primarily unsupported by detail. Scrap is
considered in the cost builds of each quote as
an estimated expense that is quantified as a
percent of total production
Other Through our audit procedures, we discovered
several transactions were not properly
documented and that adequate support was not
available. Specifically this was noted in relation
to fixed asset disposals and inter-bank
transfers.
Title Weakness
Fixed Assets There is a lack of record keeping procedures in Record keeping procedures for properties and related
place
Internal audit The Company has made acquisitions in recent
years and has expressed an interest in making
additional acquisitions. These operations are
decentralized and receive overall direction from
senior executives and the Board of Directors.
This is in addition to the Company's overseas
operations and joint ventures
Title Weakness
The conditions above could result in unauthorised
price modifications being processed and remaining
undetected.
Effect
Therefore, the detailed components of a vendor
balance at any point in time cannot be determined
without performing an extensive review and search of
all cheque registers and purchase journals prepared
subsequent to the date of inquiry.
Large unaccounted for scrap levels may indicate the
need for modifications in the production process.
Additionally, scrap estimates may not be accurately
reflected when pricing various jobs.
There is a risk that transactions could be misstated.
Effect
accumulated depreciation result in numerous
adjustments, misclassifications, and the need to
"derive" data that should be readily available as a by-
product of the system.
As the number, variety and complexity of these
affiliates increases, it becomes more difficult for
management and the Board of Directors to evaluate
whether these affiliates are operating within
management's guidelines and policies.
Effect
Accounting Procedures Protection of accounting records Current records are not stored in secure There is a risk that the records can be lost or
from fire and water damage locations. damaged.

Cash, Cash Receipts and Unattended open vault/ petty cash The vault/ petty cash tin is easily accessible This can lead to the misappropriation of company's
Disbursements tin and left open and unattended at times. funds.

Tiền và các khoản tương đương Két tiền mặt ko có sự giám sát theo Dễ dàng can thiệp vào két tiền mặt Dễ bị thát thoát
tiền dõi
Accounts Receivable and Sales Authorisation of corrections to cash Unapproved changes may be made to cash This could allow inappropriate changes to be made.
register tapes register tapes. A store employee may prepare
the change forms but they may not be approved
by an appropriate official.

Payroll, Personnel and
Compensation
Enforcing use of vacation time
A number of employees had substantial
amounts of accrued vacation and a history of
taking very little time off.
The purpose of vacation is to give employees a
needed rest. It is also an integral part of internal
control to have people take vacation and have their
duties performed by someone else. The possibility of
concealing fraudulent activity is increased when
employees are constantly at work.

Inventory Physical inventory procedures No inventory tags were prepared for obsolete The financial statements do not reflect the underlying
inventory items that were included in the records and physical count due to differences in the
physical inventory at X company. nature of controlling the inventory.

Title Weakness Effect

Cash, Cash Receipts and Cash Receipts- endorsement of The company does not restrictively endorse Endorsing cheques at a later point increases the risk
Disbursements cheques upon receipt cheques received for customer accounts at the of misappropriation of funds.
point of receipt.

Tiền và các khoản tương đương Nhận tiền - kiểm tra khi nhận Công ty không có quy định về việc phải lập Việc lập phiếu sau đó sẽ làm tiền bị chiếm dụng
tiền phiếu thu hay phiếu đã nhận tiền tại thời điểm
nhận
Accounts Receivable and Sales Approval of corrections to customer Adjustments to customer accounts are often Uncorrected errors will lead to incorrect invoices being
accounts prepared by bookkeeping personnel without sent to customers, which may lead to loss of customer
approval. Many of these adjustments are goodwill.
corrections of improperly entered data. The
controller is not fully aware of the number of
transactions that must be re-entered because of
bookkeeping input errors.
Other Adequate Control and Support for There are no formal procedures for preparing, Errors in the journals are unlikely to be identified
Journal Entries reviewing and controlling journal entries. promptly.

Financial Management Reduction in size of cost centres to The Company's present cost centres are too The selection of cost centres is necessary for the
permit better analysis of variations large to allow for proper cost and revenue purpose of accumulating costs and matching them
allocation. with the related revenues.

Title Weakness Effect

Cash, Cash Receipts and Limiting custody of unissued The majority of the clerks in the accounting Not safeguarding or accounting for unissued cheques
Disbursements cheques department who have disbursement and bank may result in unauthorised disbursements being
reconciliation responsibilities also have access processed.
to unissued cheques.
Tiền và các khoản tương đương Quyền truy cập các sec chưa phát Hầu hết các nhân viên kế toán theo dõi việc chi Cac phiếu sec chưa phát hành ko được bảo quản cẩn
tiền hành tiền hay điều giai chênh lệch đều có thể can thận, có thể dãn đến việc thất thoát
thiệp vào các phiếu sec chưa phát hành
Cash, Cash Receipts and Cheques are being issued out of numerical There is less control over cash disbursements and
Disbursements sequence. recording of cash movements in the general ledger.
This increases the risk of misappropriation of cash.

Tiền và các khoản tương đương
tiền
Financial Management
Phiếu chi không được ghi số theo thứ tự Thiếu kiểm soát trong việc ghi nhận chi tiền - dẽ bị
thát thoát, chiếm dụng vốn
Title Weakness Effect
Implementation of Budgeting Budgets are not regularly used for forecasting Without forecasting the results of operations it is
Process and analysing expected versus actual sales and difficult for management to establish goals and identify
expenses. Where budgets are used potential problems. Forecasts would also help to
information is not taken from all relevant anticipate the need for additional staffing and
sources, such as the production team and sales financing. Regular comparison of actual results with
force. budgeted amounts helps management control the
operations.

Title Weakness Effect

Payroll, Personnel and Internal control in the payroll system is limited
Compensation because of a lack of segregation of duties
among the personnel. For example, payroll
checks are prepared, signed and distributed by
the same person; time reports for hourly
employees are submitted by warehouse
managers who, in turn, distribute the payroll
checks.
The lack of segregation of duties exposes the
Company to the risk that payroll is generated for
nonexistent employees or unauthorized changes are
made to current employees' rate that may not be
detected.

Tax matters Travel and entertainment expense Expense account reporting for travel and
reporting entertainment expenses may not be in
conformity with minimum standards of the tax
authority.
Non compliance with the above requirements could
cause the expense to be nondeductible by the
Company and possibly cause the expense to be
considered as additional compensation to an
employee or a preferential dividend to a stockholder-
employee.
 Title Weakness Effect
Debt/Leases The Corporation has entered into a lease The company may not be holding the most cost
agreement for personal computers which allows effective leasing arrangement available
the Corporation to continuously update its
hardware on a rotational basis over a relatively
short period. However, the terms of the lease
appear more favorable for the lessor, the total
lease payments exceed 90% of the computers'
fair market value and the lease term exceeds
the expected useful life of current computer
technology.

Fixed Assets Physical tracking of property, plant Currently, there are no formal procedures to
and equipment physically track fixed asset items. Physical
control over fixed assets typically involves an
observation and tagging process. The factory
equipment is physically tagged but has not
been reconciled to the accounting records in
several years. Office equipment has not been
physically inventoried and tagged.
Therefore, there is the potential for items that are no
longer being used, to still be recorded on the books;
resulting in additional property taxes being paid. An
accurate fixed asset costing also facilitates the
evaluation of insurance coverage and appraisals, if
necessary.

Cash, Cash Receipts and Cash Receipts- controls over cash Cash registers used at stores do not have This can lead to misappropriation of assets or
Disbursements registers adequate built-in controls. manipulated data if unauthorised access is available
to cash registers

Tiền và các khoản tương đương Kiểm soát = máy tính tiền Máy tính tiền ko tích hợp công cụ kiểm soát cần
tiền thiết
Title Weakness
Investments Reconciliation of investment account Lack of segregation of duties between
authorisation for withdrawals from the
investment account and the preparer of the
monthly bank reconciliations
Dẽ bị chiếm dụng tiền thông qua việc chỉnh sửa hệ
thống điều khiển trong máy tính tiền
Effect
This can lead to potential misappropriation of
company assets.

Title Weakness Effect

Inventory Maintenance of Accurate Inventory The Company presently cycle counts
Balances warehouse inventory on a periodic basis. The
samples picked for counting are selected on a
judgmental basis. In addition, during fiscal year
2XXX, the Company has begun requesting that
physical inventories be taken and reported
monthly for inventory held or produced at
outside locations.
The judgmental method of sampling does not consider
the monetary value of stocks held.
Inventory reports received may vary from the
accounting records, currently these differences are not
considered.

Title Weakness Effect

EDP (Computers)
Accounts payable, purchases
and accrued liabilities
Accounts payable, purchases
and accrued liabilities
Title
Accounts Receivable and Sales Reserve for uncollectable accounts
receivable
Accounts Receivable and Sales
Accounting Procedures
EDP (Computers)
EDP (Computers)
Any processing problems are relayed informally Important errors and processing problems may be
to the Systems Manager by phone or overlooked and solutions not found.
handwritten note. No log of these errors and
their status is kept.
Recording prices on purchase Prices of goods and services are not If the prices do not appear on the purchase order,
orders consistently recorded on the purchase orders. there can be no verification of amounts to be billed.
The purchase order should serve to verify the
terms and prices that should be billed to the
Company on the vendor invoices.
Approval of vendor invoices or Receiving reports are not always attached to Lack of documentation increases the risk of fictitious,
attachment of receiving reports prior vendors' invoices. improper or duplicate payments being made.
to payment
Weakness Effect
There is no formal policy in place to determine This can lead to inadequate provisions for doubtful
general and specific reserves for uncollectable accounts which can potentially misstate the financial
accounts receivable among the companies. statements.
Large customers have contracted for terms or The total net adjustment as a result of these individual
volume discounts. Credits and debits relating to credits and debits exceeds materiality and therefore
these contracts are recorded to the subsidiary the financial statements will be at risk from being
account receivable ledger without proper misstated.
investigation and remain on the ledger without
resolution.
Title Weakness Effect
There is a lack of a central file and related This has caused some difficulty in locating current
index. contracts.
Passwords can be repeated, do not require This could potentially lead to unauthorised access to
users to change their password after a specified the system.
period of time, and allow passwords to be
composed of all one character (such as 1111),
and, therefore, are easily compromised.
Review of data processing We understand that the Company is These types of actions should be contemplated in a
capacities contemplating removing the general ledger data processing plan.
from the X system and installing a new general
ledger package.
Title Weakness Effect
Fixed Assets
Accounts Receivable and Sales
EDP (Computers)
Accounts payable, purchases
and accrued liabilities
EDP (Computers)
Financial Management
Posting of additions through
construction in progress
Title
Upgrading computer systems
Assignment of key functions to other The accounts payable personnel are
than accounts payable personnel
Failure to log off at close of day
Title
Formalisation of Merger and
Acquisition Program
Title
All fixed asset additions are initially recorded in This leads to numerous transfers and depreciation is
the construction-in-progress account regardless not recorded on a timely basis.
of their stage of completion.
Both markdown requests and change-in-selling- By manually changing the forms there is a risk that the
price forms are summarized manually and only process is both inefficient and inaccurate due to the
the summary is sent to data processing. In risk of human error.
addition, the forms are not controlled
numerically.
Weakness Effect
The Company is considering conversion to a The company is currently not realising its full potential
more sophisticated data processing equipment. with the existing data processing equipment.
With this system it would be possible for them to
responsible for processing vendor invoices for process and control payments to fictitious vendors.
payment, including signing and controlling the
chequess.
In order to run the night processing, all users This causes problems in the night processing and also
must be logged off the system. Users provides the opportunity for an unauthorised user to
sometimes forget to log off the system when access certain information.
leaving at the end of the day.
Weakness Effect
The Company is contemplating horizontal Mergers and acquisitions are, by nature, complex
integration of the business through the transactions. The lack of a formal plan may result in
purchase of additional machinery and complications during any transactions.
equipment or through the acquisition of an
existing manufacturing company having
complementary product lines and/or
manufacturing expertise in similar products.
Currently no formal integration plan exists.
Weakness Effect
Accounting Procedures Standard financial reporting policies Currently there is no uniformity in financial This can result in inconsistencies in financial reporting
reporting procedures and compilation of year between years.
end consolidation.

Title Weakness Effect

Fixed Assets Fixed assets- proceeds from During our testing of X Corporation fixed asset
disposals disposals, we noted that the proceeds from
several fixed assets had been recorded in the
general ledger but not in the fixed asset system,
causing the gain/loss to be overstated by
approximately $XXX,XXX.
The effect is that the underlying records do not reflect
accurately the balances in fixed assets, which could
result in additional depreciation expense charged and
property taxes paid.

Shrinkage Shrinkage - parts substitution In the manufacturing of a finished unit, This deviation from the bill of material could result in
production personnel may be substituting parts inventory shrinkage and an unanticipated reduction in
and components that are of a higher quality margins.
than is specified in the bill of material.
Accounting Procedures Records frequently can not be located because An inefficient filing system results in records being
they are either misfiled or misplaced. frequently misplaced or misfiled. This requires more
time by personnel to locate files and may result in a
loss of support needed to collect income or pay
vendors timely.
Cash, Cash Receipts and Evidencing the review of bank The Controller reviews each month's bank It is not possible, in retrospect, to guarantee that every
Disbursements reconciliations reconciliations; however, these reviews are not reconciliation has been reviewed.
evidenced in writing.

Tiền và các khoản tương bằng chứng của việt đối chiếu số với Người quản lý kiểm tra việc đối chiếu với ngân
đương tiền sao kê ngân hàng hàng hàng tháng, tuy nhiên, ko có bằng chứng
về sự kiểm tra = văn bản
Financial Management Analysis of acquired operations The recent acquisition of XYZ Inc. has added a
new division to the Company's operations. The
new operations have not been integrated into
the overall corporate plans and operations as
yet. Top management's awareness and
knowledge of all phases of XYZ's business
operations is limited.
Ko thuận lợi khi kiểm tra lại xem việc đối chiếu đã
được thực hiện hay chưa
Without the involvement of top management the
integration of XYZ is unlikely to be successful. This
could result in a loss of profitability from the
transaction.

Title Weakness Effect

Inventory
Accounts payable, purchases
and accrued liabilities
Fixed Assets
Accounts Receivable and Sales
Inventory
Accounts payable, purchases
and accrued liabilities
Computerisation of inventory All inventory transactions are accounted for
accounting system manually.
Reconciliation of accounts payable At year-end, the detail of trade accounts
detail to general ledger balance payable did not agree with the general ledger
control account. Our review indicated that no
reconciliation was being performed of the
detailed balances to the general ledger control.
Title Weakness
Automation of the fixed asset system The Company's fixed asset subsidiary records
are maintained manually.
The accounts department does not keep a
record over the packing slips sent to shipping.
Title Weakness
Because of the poor organisation of the raw
material storage facilities, too much time is
required by plant personnel to locate material in
the factory and storage yard. Occasionally,
materials are substituted because the proper
size or type listed on the perpetual inventory
listings cannot be located.
Long-term accounts payable During our testing of the accounts payable, we
contracts noted approximately $XX million of invoices
with due dates beyond [date].. The invoices
related primarily to X Corporation for
wholegoods. These amounts should be
reclassified as long-term notes payable rather
than current accounts payable.
Title Weakness
As a result, certain information that could be useful to
management is not readily available because of the
time and cost involved in obtaining it.
Lack of reconciliations does not identify or rectify
errors on a timely basis.
Effect
As the Company has acquired new assets, the time
required to perform this task has increased and now
causes delays in closing the year-end financial
records.
These current procedures give management no
assurance that all shipments are billed.
Effect
Some of these substitutions cost more than the
original bill of material requirements. Inadequate
storage facilities also can cause excessive inventory
investments. The large increase in raw materials on
hand may have resulted, in part, from inadequate
facilities.
Disclosing long-term creditors as short term does not
fully reflect the actual situation and charges to be
made. Investors could potentially make strategic
investment decisions based on misstated information.
Effect
Accounts payable, purchases Use of purchase orders for all Although the company has pre-numbered Consequently many invoices do not bear proof of
and accrued liabilities purchases over a specified amount purchase orders, they are not being used for all receipt of the merchandise, are coded incorrectly or
and other processing procedures. purchases. are misplaced.

Title Weakness Effect

Other Measuring effectiveness of The Company has incurred large advertising The current level and type of advertising expenditure
advertising costs costs during each of the past two years. We may not be adding value to the Company.
recognise the obvious difficulties in judging the
effectiveness of an advertising program, but we
believe that an aggressive cost identification
program would aid management in making
judgements.

Title Weakness Effect

EDP (Computers) A contingency plan to ensure the continued Should the need for backup processing arise,
operation of data processing in the event of a adequate planning can prevent serious delays
localised disaster or hardware failure has not
been developed. The Company plans to rely on
[company] to replace the equipment in the
event of a prolonged failure. However, a time
estimate to replace the equipment has not been
obtained. Two backup locations have tentatively
been identified; however, it has not been
determined that they could provide sufficient
processing time

Title Weakness Effect

Accounts payable, purchases
and accrued liabilities
Debt/Leases
Accounting Procedures
Segregation of duties in accounts Vendor invoices are matched with the Although the controls are in place to ensure a tight
payable procedures warehouse notice of receipt and the open control environment some modifications could be
purchase order by the purchasing department. made to increase effectiveness.
The receiving report, purchase order and
vendor invoice is then given to the accounts
payable department for entry in the purchase
journal. The invoice and supporting documents
are held until the payment date, when the
cheque is prepared and presented to an
authorised cheque signer for approval and
signature. The vendor invoice is stamped "Paid"
prior to review by the cheque signer. The
cheques and supporting detail are returned to
the accounts payable department where the
cheques are mailed and the supporting detail
filed by vendor.
We noted that new real estate leases are not It appears all leases are being recorded as operating
being reviewed by management to determine leases. Generally accepted accounting principles
their proper classification as capital or operating (GAAP) require that leases be treated as capital
leases. leases if they meet any of the four stated criteria.
Title Weakness Effect
Record preparation and retention The company has no procedures or guidance in Local legislation requires documents to be kept for
place in relation to preparation and retention of specified periods. The company may not be adhering
records. to these rules in all areas.
Title Weakness Effect
Title Weakness Effect
Information Systems Functions of a Separate Data
Processing Control Group
There is no control group set up as a separate
function in the data processing department.
Such a function is apparently performed by the
user departments.
There is a higher risk of errors going undetected. A
control group would be responsible for:
(1) Receipt of input.
(2) Recording batch control totals.
(3) Reconciling the output with prior batch controls.
(4) Control over the distribution of the final reports.
(5) Logging errors rejected by the system and
ensuring they are subsequently reprocessed.
(6) Setting up and scheduling jobs for processing
and ensuring that input is set up and processed in the
current sequence.

Title Weakness Effect

Systems planning Priorities for updating the reporting The data processing department is currently Without careful consideration of appropriate factors,
system converting the outmoded reporting system to the new system may not meet the current and future
one that is more appropriate to an operation the needs of the Company.
size of your company.

Cash, Cash Receipts and Authorised cheque signatories Authorised signatures on bank accounts are not Former employees who were authorised signatories
Disbursements updated to reflect current management are still able to write cheques. Therefore there is a risk
personnel. of misappropriation of cash.

Tiền và các khoản tương đương Ủy quyền ký tên Chữ ký người được ủy quyền trên TK ngân Người đã từng được ủy quyền ký vẫn có thể ký khi ko
tiền hàng ko được update so với người qly hiện tại thực sự ko còn đóng vai trò đó. Điều này dẫn đến việc
dễ thất thoát tiền.
Inventory The Company does not utilise written inventory Errors such as this could have been eliminated by
instructions due to the limited number of proper instruction.
employees and the size of the inventory.
However, we noted inventory tags had been
completed for items without inventory at year
end (i.e., quantity was marked zero) which
reduced the quality of the tag control.

Title Weakness Effect

Internal audit Internal auditing is an independent appraisal Without an internal audit function companies increase
activity within an organisation for the review of the risk of not preventing and detecting fraud and
accounting, financial and other operations. The errors.
overall objective is to provide management with
information as to the effectiveness of
established policies and controls and the extent
to which they are being implemented.
Payroll, Personnel and There is no continuing education programme Consequently the understanding and application of
Compensation accounting principles for personnel in all departments
is not possible and facilitation of continued
improvement is not available.

Financial Management
Accounting Procedures
Accounts payable, purchases
and accrued liabilities
Financing accounts receivable
Title
Failure to follow accounting
standards
Receivable collections are paid into the bank The Company finances accounts receivable at a local
every one or two days. A lock box system is not bank. Under the security agreement, all receivable
operated. collections must be applied directly against the
outstanding debt. Interest accumulates on a daily
basis.
Weakness Effect
Standard X must be adopted by the Company. If the entity does not adopt the standard this is a
breach of legal requirements. Additionally the
standard requires certain financial statement
disclosures.
Currently there is no regular reconciliation of No regular reconciliation increases the risk of errors
the accrued accounts payable general ledger not being identified and resolved.
account to supporting detail. We understand
that the inventory and accounts payable
systems automatically update this account, and
that the resulting ledger balance should
represent the "uncosted receivers" amount.
However, general journal entries are also
posted to this account to accrue for other items
that have not yet been entered in the accounts
payable system.

Title Weakness Effect

EDP (Computers) There is no formal approach for dealing with This could cause problems if, for any reason, the
back-up procedures for important master files. computer was not operating for an extended period of
time or certain master files were damaged or
destroyed.

Title Weakness Effect

General Management
Changing the function and makeup The Company's Board of Directors is comprised The Company is not making use of a proper Board of
of the Company's Board of Directors only of its sole stockholder. Its function is to Directors.
meet the minimum legal requirements of the
law regarding actions that must be taken by a
board of directors.
Accounts Receivable and Sales Acounts receivable recoverability Controls over the aged accounts receivable
ledger are weak causing accounts to remain
outstanding for several months
Title Weakness
Accounts Receivable and Sales Accounts receivable discounts During our examination of receivables received
after the year-end, we noted that many
customers take advantage of the X% discount
offered. However, there is no accrual for
expected discounts provided in the accounts.
Inventory Losses covered by property The Company's property insurance, which also
insurance covers inventory losses, includes a clause that
obligates the Company to maintain detailed
records (e.g., records of transactions and any
supporting documentation, such as purchase
orders, receiving reports, vendor invoices) in
order to recover any inventory losses it may
incur from the insurer.
In a few instances, we observed that invoices
could not be located for certain inventory
purchases. We ultimately obtained the
information we needed to complete our audit
from the vendor.
Title Weakness
Accounts payable, purchases The company does not use an accounts
and accrued liabilities payable system.
Accounts Receivable and Sales Review of sales invoices before Sales invoices are generated and mailed to
processing customers by the accounts receivable clerk
without being reviewed by an official.
From a cash flow perspective the cost of financing
completed and shipped inventory to customers can
become very expensive when compounded over
several months.
Effect
Since it is a certainty that some of the customers in
the accounts receivable subsidiary ledger will take
advantage of the discount, failure to record an accrual
for discounts will result in receivables being
overstated.
Without the documentation held as stated in the
insurance policy, the insurance company may refuse
any request for recovery of inventory losses
submitted.
Effect
Under an accounts payable system, all bills are
entered upon receipt. This process posts the expense
or capital addition to the proper general ledger
account and provides a control over all invoices,
reducing the risk of lost or unentered invoices. This
would also reduce the likelihood of not entering an
invoice on a timely basis. Using an accounts payable
system would also allow management to better
manage its cash payments as, at any point in time,
they could review a current listing of outstanding
invoices and determine which ones to pay.
This may allow invoices to be processed incorrectly
and errors may arise which can result in the loss of
customer goodwill.
EDP (Computers) Development of long term plan The data processing department does not have We believe this is necessary if data processing
a long term data processing plan resources are to keep pace with the Company's
projected growth. This process should be performed in
connection with the Company's overall strategic
planning process.
Title Weakness Effect
Tax matters Tax planning for wholly-owned Currently tax planning issues are not The company cannot benefit from finding a balance
subsidiary considered for the Company's wholly-owned between minimising taxable income and utilising the
subsidiary subsidiary's existing net operating losses.

Other We understand that many contractual If transactions are not properly structured the
agreements are entered into by company company could incur liabilities.
personnel without consultation with the
Company's legal, tax and finance departments
regarding the proper structuring of transactions
and their impact on the Company's financial
statements.

Title Weakness Effect

Inventory Implementation of Standard Cost The Company uses standard costs primarily as
System a means of determining monthly cost of sales.
The XYZ Division maintains a separate set of
standards for customer-quoting purposes.
A standard cost system that is used for both customer-
quoting and accounting purposes can provide
management with timely, meaningful data to identify
operating inefficiencies and problems. Under such a
system, estimated actual costs for inventory items
would be determined and used as standard costs.
Subsequent purchases would be charged to inventory
at such standards and any variations due to price
differences would be charged or credited to an
appropriate cost variance account. Subsequent
usage, including appropriate loss allowances, would
be relieved at standard costs.

Title Weakness Effect

Title
Accounting Procedures Management account analysis
Weakness Effect
Management does not consistently review The accuracy of financial information used by upper
account analyses and control account management cannot always be relied on.
reconciliations prepared by accounting
personnel to ascertain that the detail supports
the general ledger balances. Supporting detail
is not prepared monthly for all balance sheet
accounts.
Financial Management Formalising information related to
cash management
The Company has established a cash flow
budget for fiscal 200X. Periodic comparisons of
actual cash flow results are made against this
budget and the President is provided with this
information. However, these procedures are
performed only on an informal basis.
Money has a high cost. If the actual cash flows of the
Company are not closely tracked and monitored on a
formal basis against the cash flow budget the
Company may make incorrect business decisions.

Title Weakness Effect

Cash, Cash Receipts and Cash Disbursements- holding To prevent bank overdrafts, large
Disbursements cheques disbursements are withheld from the mail from
time to time pending a review of the company's
cash position. In some cases cheques are
withheld for periods up to several weeks.
This practice weakens internal control over cash
disbursements and may result in the loss of cash
discounts.

Tiền và các khoản tương đương Nắm giữ sec Để ngăn chặn việc chi sai, những nghiệp vụ chi
tiền với số tiền lớn được giữ lại hết lần này đến lần
khác mà ko review tồn quỹ. Một vài trường hợp,
được giữ suốt nhiều tuần
Inventory Inventory observation instructions The current version of the inventory observation Inaccurate physical counts may occur due to improper
instructions is several years old and does not cut off during the physical inventory.
detail specific procedures regarding shipping
and receiving cut-off.
Inventory Economic production quantities On several occasions, two small production Small production runs result in costing the company
runs were made within a week or ten days of more as it is not taking advantage of cost savings
each other - generally one for production and derived from bulk ordering.
one for service. Also, production quantities in
19X2 were smaller than the 19X1 quantities. In
some instances, runs of five parts or less
caused labor costs to exceed standard by
600%.

Title Weakness Effect

Payroll, Personnel and Documentation of payroll records In reviewing the personnel files of the Company As a result, improper amounts may be deducted from
Compensation we noted several instances in which or paid to an employee.
authorisation by employees for payroll
deductions could not be located. Additionally,
we noted that authorisations for pay increases
and bonuses were not evidenced in writing and
increases in salary were communicated verbally
to the accounting supervisor.

Payroll, Personnel and Implementation of Employee The Company does not have an incentive Not listening to employees can result in unmotivated
Compensation Incentive Program program, nor does it encourage feedback from individuals and low company morale.
employees via listening programs.

Title Weakness Effect

EDP (Computers) Computer console logs (a detailed record of all Operator actions may be overlooked and errors or
computer activity) are reviewed by the fraud may not be detected.
operations manager daily and retained
indefinitely. The console logs are not pre-
numbered; therefore, it cannot be determined if
all operator actions are reviewed.

EDP (Computers) Computerisation of sales force The Company does not have a computerised If the company does not consider computerising its
sales force. sales force it could potentially lose it competitive edge
and lose it's customer base to its competitiors.

Title Weakness Effect

EDP (Computers) Hardware and software upgrade Management has recognised that the present Problems experienced with the current system have
computer and software are inadequate and resulted in the investment of a considerable amount of
need to be upgraded to support the Company's personnel time to regenerate transaction data, write
current business needs. programs and investigate and resolve input errors.

(1) Storage space is in short supply

necessitating the frequent generation of a hard
copy of transaction data so the files can be
cleared for new transactions.
(2) The computer hardware has malfunctioned
at times, resulting in the loss of recorded data
either during processing or during generation of
a hard copy.
(3) Several programs have been written by the
systems programmer to create needed reports
or solve specific problems that have arisen due
to the growth of the Company.
(4) The present methodology for the input of
data results in numerous errors.
(5) Final monthly accounting reports are not
available until three to four weeks after month
end.

Title Weakness Effect

Accounts Receivable and Sales Control over accounts written off
Title
Accounts are not regularly reviewed to ensure
that balances are collected on a timely basis
and no record is maintained of accounts written
off.
Weakness
There is an enhanced possibility of bad debts and
there is little possibility of eventually recovering debts
that have been written off.
Effect
Inventory When calculating the book-to-physical inventory Identifying open receivers is a time consuming
adjustment, inventory received before the cut process. If cut-off procedures are not performed
off date, but not recorded in the general ledger correctly then inventory valuation, purchases and
until the following period, is accounted for as a trade payables may be incorrect.
reconciling item. At October 31, 2XXX, total
open receivers of approximately $XXX,XXX
was calculated by reviewing the invoices
entered the following month and comparing
them to receiving documentation. Although the
open receivers were not recorded in October
when received, they were recorded in
November; therefore the value of inventory was
not misstated at year-end. However, because
this process is not a monthly procedure, there
was an understatement of inventory of
approximately $XX,XXX from open receivers
not recorded at December 31, 2XXX. This
represents only .5% of total inventory at
December 31, 2XXX and was therefore
considered immaterial.

Title Weakness Effect

EDP (Computers) Performance of security review A general security review has not been Without appropriate data processing security the
performed. processing of unauthorised or erroneous information
may occur and go undetected.

Title Weakness Effect

Inventory Manual obsolescence procedures The X Division manually identifies potentially This is a tedious process and may not provide
slow-moving or obsolete inventory. management with complete information on a timely
basis.

Title Weakness Effect

International During our review of the tax accounts, we
became aware that the royalties paid by the
Company to X Company are accrued in the
accounts on a monthly basis. Furthermore, the
Canadian withholding tax applicable was
remitted on an annual basis in the month
following the end of the fiscal year.
Title Weakness
Inventory Upgrading of cost system to meet The Company's cost records indicate only the
inventory pricing requirements material costs of an item. They are also based
on the standard usage of raw materials required
to manufacture a given product.
Title Weakness
Payroll, Personnel and Patent rights on innovations created by
Compensation employees are not secured by the Company.
Tax matters The Company has available state net economic By not developing a plan to utilise these assets,
loss carryovers which can be used to reduce valuable benefits may be lost.
taxable income in future years.
Title Weakness
Generally, Canadian withholding tax on the payment
to non-residents is due at the point in time when the
amount is paid or credited. Accordingly, the applicable
withholding tax on the payment of royalties by the
Company is due in the month subsequent to it being
accrued in the accounts. As such, the withholding tax
is being remitted late.
Furthermore, interest at the prescribed rate is
applicable on the amount remitted late, and a penalty
of 10% of the amount withheld and not remitted plus
interest on such penalty at the prescribed rate.
Accordingly, it is exposed to the interest on late
remittances and the penalty plus interest on the
amount withheld and not remitted by the date it is due.
Effect
The current cost accounting system prevents interim
financial statements from being more informative and
accurate, and does not allow management to analyse
gross profit by product lines.
Effect
When employees leave they can take the rights to
new ideas/ innovations they have invented.
Effect
Payroll, Personnel and
Compensation
Lack of segregation of duties in the
data processing payroll system
The data processing department performs
nearly all payroll functions; cheques are
prepared and signed, the amount of money to
be transferred to the payroll bank account is
determined and the payroll bank account is
reconciled.
The lack of segregation of duties exposes the
Company to the risk that payroll is generated for
nonexistent employees or unauthorised changes are
made to current employees' rate that may not be
detected.

Title Weakness Effect

Fixed Assets The Company has several fixed assets with The cost of holding assets may exceed the benefits.
varying lives and levels of usefulness. Some of
these assets are taking up valuable The Company may need to adjust property lives.
plant/production space.

An inventory of fixed assets is not performed.

Cash, Cash Receipts and Cash disbursements- accounting for Some cheques were omitted from the numerical Control over cheques issued may be lost if issued out
Disbursements the numerical sequence of issued
and voided cheques
Title
EDP (Computers) Development of new system and
involvement of IAD
sequence in the cash disbursement journal. of sequence
Others marked void could not be located.
Lack of control over void cheques may allow
unauthorised use.
Weakness Effect
The Company's Internal Audit Department (IAD) The effectiveness of controls can not be measured
is involved in the design of new information without regular periodic reviews.
systems applications. This practice offers an
excellent opportunity to ensure adequate
internal controls are included in new systems.

Accounts payable, purchases
and accrued liabilities
Accounts payable (cash v accruals)
Cash disbursements are done weekly on a
cash basis rather than an accrual basis. Each
week the invoices that are to be paid are
entered into accounts payable. At year-end, to
establish an accounts payable balance, the
Company back-dated a January cheque run for
2XXX invoices to December 31, and then
booked an entry to record the invoices paid and
the cheques written back to accounts payable
and cash.
As a result, there are generally no accounts payable
on the books at any given time, causing a potential
material misstatement of the Company's financial
position. A weekly disbursement schedule may create
additional work for the staff in the accounts payable
department.

Title Weakness Effect

Accounts Receivable and Sales During our detailed testing of certain accounts This practice results in improper revenue and expense
receivable, we noted that some accounts were recognition.
being credited for services in exchange for
other services.
Payroll, Personnel and Supervision and training of new We noted during our fieldwork that a high As a result, the internal control environment is not as
Compensation employees percentage of employees were new within the strong as it could be given better communication and
past year. These employees were unsure of understanding of employee responsibilities.
their job responsibilities and the necessary
procedures required to accomplish their duties.
In addition, it was noted that employees in
general were unaware of the way their
responsibilities impacted others outside of their
department.

Title Weakness Effect

Payroll, Personnel and Non-competition agreements for No steps are currently taken to protect the As the Company continues to grow and add
Compensation employees Company's competitive position. employees who need access to confidential
information, this information can be divulged to
competitors when personnel leave the company and
may go to a competitor.

Inventory Application of overhead to jobs-in- We noted during our testing of jobs-in-progress Inconsistencies between data cause irrelevant
progress that the application of overhead at X% of labor decisions to be made at management level.
differs from actual historical rates of
approximately X%. However, we understand
this difference is mitigated by the under-
application of overhead on equipment, so that
the total difference between actual and applied
overhead is not material.

Title Weakness Effect

General Management Corporate Governance - Executive The Company does not identify and compile the The Company is not fulfilling its reporting obligations.
Perquisites various kinds of management remuneration,
particularly personal benefits (perks) and relies
heavily on estimates for reporting purposes.

Fixed Assets Establishment of a standard The Company determines the estimated lives of This method may result in inconsistencies in policies
depreciation policy new assets on an item-by-item basis. and improper lives being assigned.

Title Weakness Effect

Financial Management Formalisation of cash planning and
reporting
The Company does not have a formal cash
planning procedure.
The Company's growth and related increased
cash requirements and turnover require the
establishment of a formal cash planning
procedure to avoid.
The lack of a formal cash planning procedure could
result in unnecessary and unpredictable borrowing.
Prudent investment of temporary excess cash is likely
to be overlooked.

General Management Assistant Controllership Function
Title
Payroll, Personnel and Reconciliation of production used for
Compensation payroll records to accounting
records
The Company's controller is the only individual
in the accounting department with an
accounting degree. No other individual has the
background and experience to resolve
problems as they arise.
Weakness
No reconciliation is made by the accounting
department between units produced as shown
in the accounting records and units produced
used as the basis for payroll.
Consequently, most issues are not resolved until the
controller addresses them. This creates problems
because of his involvement in special projects and the
daily operations of the Company.
Effect
As a result, improper amounts may be paid to an
employee.

Intercompany Transactions Intercompany receivable and
payable reconciliation
The Company does not have in place a written When these amounts are out of balance it can cause
procedure for reconciling intercompany a misstatement of financial position and results of
receivables and payables. We noted that most operations.
differences were a result of cash payments
being recorded in different periods or inventory
in transit. Occasionally the difference was as a
result of a dispute regarding the amounts
between the affiliates. We understand that a
person from the corporate office will visit the
affiliate locations periodically and review certain
transactions and balances, including
intercompany balances, and make the
necessary adjustments.

Title Weakness Effect

Financial Management Borrowing against cash surrender
value of life insurance
The company has a large amount of bank
borrowings. It has not considered alternative
sources of finance.
The companies have available to them approximately
X of cash surrender value of officers life insurance.
This is available at very low interest rates when
compared to rates being charged by other lending
institutions. Interest expenses would be lower using
this source of financing.
 Title Weakness
EDP (Computers) We believe there are currently weaknesses in
the control features of the remote access
terminals.
Tax matters Analysis of year-end expense While analysing the tax accrual at the
accruals for tax implications Company, we noted several accruals which
were not deductible for tax purposes and had
not been reflected in the current or deferred tax
provision
Title Weakness
Financial Management The company does not formally plan beyond
two years.
Title Weakness
General Management Preparation of an Accounting and The Company's recent growth has been
Administrative Organisational Chart accompanied by increased responsibilities for
most members of management. The distribution
of additional responsibility generally has been
accomplished on an ad hoc basis.
Title Weakness
Effect
Weaknesses in remote access can lead to
unauthorised access and corruption of data.
This can result in misclassification of the tax liability
and provision on the Company's financial statements
if these accruals are not shown as adjustments
Effect
Opportunities may be overlooked if a formal planning
process is not followed. Such a process is likely to
generate even more ideas and develop productive
interaction among the management team.
Effect
This approach may not result in an optimum
distribution of responsibilities.
Effect
EDP (Computers) Documenting standards and The Company maintains a relatively small
procedures Information Systems department. As a result
many of the day to day activities are not
formally documented. Although this is not
unusual for a small department there are
benefits to formally documenting key standards
and procedures.
A standards and procedures manual provides a
central source for management to communicate how it
intends key procedures are to be performed. It can
also provide an excellent reference source for current
employees, new hires, and external contractors.

Cash, Cash Receipts and Cash Disbursements- signatories Individuals signing cheques are often payees. Individuals can potentially misappropriate funds from
Disbursements and beneficiary of cheque identical the company's bank account.

Accounts Receivable and Sales Certain back order items for customers were This causes confusion as to when an item is actually
invoiced with the ship date of the original order shipped and can cause issues with the year end cut
rather than the actual ship date of the shipment off.
of the back order.

Title Weakness Effect

LIFO Conversion There are errors in the Company's LIFO Inventory valuation may be misstated.
calculations for the year.

Title Weakness Effect

Payroll, Personnel and The Company does not have an employee
Compensation handbook that consolidates the Company's
policies related to employee relations.
Consequently benefits and terms of employment are
not communicated to employees as well as
management's expectations of employees. In light of
litigation against businesses brought by employees
questioning "promised" benefits, the lack of an
employee handbook may lead to misunderstandings
of Company policy.

Cash, Cash Receipts and Cash Disbursements- block stamp to Approval of payment/ voucher numbers/ dates A weakness in controls increases the risk of fraud or
Disbursements record approvals of payment/ cheque numbers are not evidenced error occurring in the underlying records.
on purchase invoices.

Title Weakness Effect

EDP (Computers) Internal software development and The accounting software is written in the The low volume of changes may permit an in-house
updates programming language _________. staff member to apply modifications that will reduce
Modifications are usually performed by a costs..
contract programmer at a per-diem/hourly rate
EDP (Computers) Reactivation of data security The Company's computer system provides Without data security in place, unauthorised persons
features different levels of data security. Menu security is can access data files and programs that can result in
used to restrict end users to specific menus. unauthorised transactions or erroneous information
Resource security is used to limit access to entering the system.
libraries, files, and folders. User security limits
access to the system to authorised users.
However, the data security features of the
system have been disabled.

Title Weakness Effect

EDP (Computers) Under the current data processing department Controls that ensure the completeness and accuracy
organisation, documents received from the of input at the initial stages of processing are
stores and the purchasing/accounts payable preferable to controls that rely on the occurrence of
department are placed in a basket and input on some event or a review after the fact. The absence of
a prioritised basis. The individual who inputs the such controls can result in misstated financial records
document is responsible for ensuring that the and additional time and effort to investigate and
document total agrees to the dollar amount correct errors as they are found.
accepted by the computer. In certain instances,
such as for sales orders and cash receipts,
comparison is also made between a computer-
generated control total and a manually
calculated control total. We could not ascertain
any controls that ensured that all documents
were input to the computer although some
controls exist that may detect errors at a later
date, most notably the flexible budget analysis.

Title Weakness Effect

Payroll, Personnel and The Company's insurance program does not Consequently key employees may leave and divulge
Compensation contain a provision for bonding key employees. confidential information to competitors.

Title Weakness Effect

Accounting Procedures The Company's expansion through acquisition
and growth, as well as increased disclosure
requirements for a public company, have
accelerated the need for a more detailed and
uniform system of balance sheet and operating
accounts.
The Company's original standard chart of accounts
does not include new accounts that have been
created for various divisions. Further, many divisions
do not classify expenses comparably.

Title Weakness Effect

Inventory The efficiency rate, standard labour dollars Labour inefficiencies adversely impact on profits and
divided by actual labour dollars, for products sales causing them to fall.
produced was X% and X% for machinery and
converting, respectively. Efficiency rates are
measures of how well workers are producing
compared to a set standard. The current year
and prior year rates indicate that actual
production time is greater than standard
production time which in turn produces labour
inefficiencies. Currently, these inefficiencies are
included in total overhead and proportionately
allocated, based on direct labour dollars, to all
products

Cash, Cash Receipts and Cash disbursements- cancellation of Purchase invoices are not cancelled once paid. Lack of evidence of payment leads to duplicate
Disbursements vendor invoices Copies of the cheques are attached to the payment or no payment.
invoice as evidence of payment but these often
become detached.

Title Weakness Effect

Accounts Receivable and Sales Fulfilling customers' specific orders
The Company's marketing policy is to try to fill These considerations suggest a marketing policy that
any customer order. This policy should be discourages special customer orders, pays full sales
revised to reflect consideration of the nature of commissions only when salesmen sell what
the business and its current operating management wants sold, and keeps inventory at a
environment. Some of these considerations are: minimum level.
(1) It is difficult for the Company to fill customer
orders that specify color, weight, etc., because
the Company's sources of supply are limited to
what becomes available on the market. These
orders are expensive because:
(a) They require special handling.
(b) They are slower to fill and thus maintain
inventory at a higher level.
(c) They often must be filled with the more
desirable items in inventory, leaving less
desirable items unsold.
(2) Non-house sales reduce the Company's
profit by ten percent because of sales
commissions.
(3) The Company has to finance inventory by
factoring accounts receivable - an expensive
form of financing.

Title Weakness Effect

Tax matters Depreciation methods- depreciation No salvage value is assumed to exist on assets Approximately $X of such salvage value is available
of salvage value depreciated on the straight-line method. Assets for further tax deductions.
depreciated using accelerated methods are not
converted to the straight-line method, and the
undepreciated value at the expiration of useful
lives is kept on the books as "salvage value."

Inventory Cycle Count Procedure Over the past few years, the Company's cycle Inconsistent cycle count procedures may be used.
Documentation count procedures have become more This may impact on the effectiveness of the counts
sophisticated with the use of radio frequency performed.
monitors and bar coding systems. This has
made the cycle count procedures more efficient
and effective by allowing additional counts to be
taken in the same amount of time. During our
review of the cycle count plans currently in
effect, and from our discussion with production
inventory control personnel, we noted that not
all facilities have up-to-date written cycle count
procedures. Only five of the eight plants have
made these procedures part of their policies
and procedures manual.

Title Weakness Effect

International The Company and its subsidiaries continue to The Company's exposure to foreign exchange rate
expand globally. As yet no consideration has risk is not actively minimised.
been given to reviewing policies and
procedures on foreign exchange rate risk.

Accounts Receivable and Sales Controller acting as credit manager
The controller also functions as the credit Lack of segregation of duties can increase the risk of
manager. This causes a weakness in the misappropriation of company funds.
system of internal control because the
Controller reviews credit applications and has a
final responsibility for accounts receivable
balances and bad debt write-offs.

Title Weakness Effect

EDP (Computers) Numerous individuals have multiple logon ID's,
some with as many as four. Although many of
the multiple ID's relate to users with separate
ID's for "Company 1" and "Company 2" (for
participating loans), several users still have
multiple ID's with access to only the Company 1
system. This situation provides greater
opportunity for the system to be compromised.
Information security controls are an integral part of a
secure electronic data processing environment (if
management decides not to resolve these situations,
determine whether adequate compensating controls
are in place, thus providing assurance that the
Company's assets are protected).
Inventory Surprise observation of branch There is a lack of segregation of duties in the This can lead to misappropriation of company assets.
inventories inventory function since the plant managers are
solely responsible for inventory custody.
Title Weakness
Inventory Establishment of Perpetual Records The company has procedures in place for
and Cycle Counting Procedures physical inventory counts. However the
accounting and reporting procedures for
inventories are unreliable.
Title Weakness
Fixed Assets Maintaining Detailed Property The company does not maintain a detailed
Records listing of all fixed asset property owned. It is
difficult to match items from the listing to
physical assets.
Investments The company maintains excess cash and
endowment funds in cash equivalents, such as
certificates of deposit.
Title Weakness
Effect
Inventory levels may be misstated where accounting
procedures for monitoring stocks are unreliable. This
may lead to misstatement of stock valuation and
unreliable decision making in respect of stock
ordering.
Effect
Currently it is difficult to ensure the accounting for
property disposals is correct, substantiate insurance
claims, provide information for proper filing of income
and property tax returns, and provide controls to
safeguard the assets.
The company does not hold a balance portfolio that
matches desired risk with return. Liquidity can be an
issue if all excess cash is tied up with investments.
Effect
Financial Management Development of Budgeting Budgeting procedures provide for the
Procedures preparation of an annual budget at the
beginning of the year based on a projected
fixed level of activity for each division. The
Company's practices do not provide for
soliciting data from appropriate divisional
management personnel regarding operational
considerations or for updating the budget for
operational changes or changes in the level of
activity during the year.
Payroll, Personnel and Job rotation for developing the The Company does not rotate job
Compensation workforce responsibilities.
Title Weakness
General Management Improving the Segregation of The job responsibilities assigned to accounting
Accounting Duties department employees results in little
segregation of duties.
EDP (Computers) Restricted access to data processing Access to the computer room is unrestricted
equipment and the computer is situated in an area where
purposeful or accidental damage could easily
occur.
Title Weakness
Fixed Assets A physical inventory of the fixed assets of the
Company has not been performed during the
past several years. Individual assets that may
have been scrapped, misplaced or otherwise
deemed unusable may continue to be
considered in service by the accounting
department.
Financial Management Business Planning and Budgeting The Company does not have a budget or a
formal business plan.
Title Weakness
The current budget may be obsolete due to
inaccuracies in forecasted operating data or may
become obsolete after several months. The
fundamental purpose of budgetary control is to plan
for the most profitable operation, and then maintain
operations according to such plan. Budgets stimulate
early study of operational problems and ensure that
timely decisions are made relating to such problems.
Budgetary control also results in better co-ordination
and control of business efforts and in more effective
use of the Company's resources. Where budgetary
information is out of date this is hampered.
Consequently employees are not trained for a number
of responsibilities in the event of illness, dismissal, etc.
Effect
In many instances, employees responsible for
recording transactions are the same employees
responsible for reviewing the related data for errors.
This gives rise to a greater risk of errors or
manipulation of entries.
The ease of access to the computer room will
increase the risk of accidental or malicious damage
being caused.
Effect
Therefore, depreciation could be taken on assets that
are no longer on the Company's premises or property
tax could be paid on the net book value of these same
assets.
Without forecasting the results of operations it is
difficult for management to establish goals and identify
potential problems. Forecasts would also help to
anticipate the need for additional staffing and
financing. Regular comparison of actual results with
budgeted amounts helps management control the
operations.
Effect
Accounting Procedures The Company does not currently have a record Records may be disposed of erroneously
retention policy mandating the timely
destruction of certain records.

Title Weakness Effect

EDP (Computers) Batching documents before Sales invoices and vendor invoices are posted In the absence of control totals there is no assurance
processing directly to the system without first establishing a that all documents have been posted correctly or at
control total that could be verified against the all.
output
Accounts Receivable and Sales There are a high number of low value invoices The cost of processing these items is high and there is
raised during the year. A large portion of these a risk that the related loss of data processing capacity
shipments result from partial-order shipments to will increase due to expanded volume
customers in an effort to meet their immediate
needs.
Accounts Receivable and Sales Attaching cash register tapes to the During our review of Daily Reports (including Therefore, there is no assurance that all sales for the
daily report reports of units not observed), we noted several day have been recorded.
units which have registers and recorded the
summarised readings of both registers on the
Daily Report; however, only one register tape
(the register utilised) was attached to the Daily
Report. In the absence of both register tapes,
the register readings shown on the Daily Report
cannot be verified.

Title Weakness Effect

EDP (Computers) A log of computer operations is not maintained. Without a printed log, the data processing manager
The console display flashes the commands and cannot properly control the operations of the computer
operations but does not print a log. nor can he adequately evaluate the efficiency of the
data processing staff and equipment.

Cash, Cash Receipts and Cash Receipts- funds deposited by Daily reports from stores do not include deposit Lack of controls over daily reports and deposit slips
Disbursements stores slips. Therefore untimely delays are not can lead to misappropriation of company funds.
identified by head office. Some funds are not
deposited at all.
Cash, Cash Receipts and Cash Receipts- reconciliation of
Disbursements cash receipts to accounts receivable
records and control over unidentified
receipts.
The company does not reconcile monthly bank This leads to unallocated cheques which may be lost
deposits with the cash receipts applied to the or misappropriated and may have an adverse affect
accounts receivable ledger. Cheques received on cash flow.
through the mail that are not identifiable with
any customer's balance are retained in the
cashier's area while being identified. During this
time no control is maintained over these
chequess.

Title Weakness Effect

Inventory Standard inventory valuation The following summarises procedural Without standard procedures in place inventory levels
procedures weaknesses with respect to the physical can be manipulated and physical inventory is at risk
inventories and related inventory valuations at from misappropriation.
each division.
(1) Documentation of inventory tag control and
accounting for the numerical sequence of tags
used was not retained.
(2) An overall timetable for inventory valuation
was not established.
(3) Book to physical adjustments were not
analysed.
(4) Receiving cutoff procedures were not
followed.
(5) Revaluing of prior years' obsolescence
write-offs was not detected.

Title Weakness Effect

EDP (Computers) Utilisation of computers for data The Company and its subsidiaries utilise
processing manual systems, including posting machines,
for all financial recording and reporting
functions.
Title Weakness
Financial Management The Company does not actively pursue and
implement methods of profit improvement.
A non-automated method of data processing can
decrease the quality and efficiency of the Company's
accounting and financial reporting system.
Effect
This has led to a decline in profitability experienced in
recent years by the ABC and XYZ Divisions. Without
actively trying to improve profits this, combined with
the prospects of future cost increases at these
divisions, will cause profits to fall further.

Title Weakness Effect

Information Systems
Fixed Assets
Accounting Procedures
Accounts Receivable and Sales
Payroll, Personnel and
Compensation
EDP (Computers)
Cash, Cash Receipts and
Disbursements
EDP (Computers)
Evaluation of significant plant and
equipment additions
Title
Lack of skills cross over in
accounting department
Title
Bank reconciliations- adjusting cash Reconciling items are not resolved on a timely
accounts for reconciling items on a basis
timely basis
Controls over IDs of terminated and
transferring employees
Title
With the Company growing at a rapid rate, It is important to take the necessary steps to efficiently
there is a corresponding increase in the number manage the numerous tasks facing the company to
of projects with which it is involved. Currently prevent project overruns or loss of goodwill from
limited resources are available to address these customers.
projects.
In preparing appropriation requests, Such programs can prevent an environment where
departments are required to submit information appropriation requests reflect unachievable and overly
related to cost, projected return on investment optimistic results.
and goals to be achieved by the plant and
equipment addition. Subsequent to the
completion of the project, there does not appear
to be a program to evaluate the achievement of
goals for significant additions.
Weakness Effect
Confidential information included in the EDP Consequently management has no assurance that
system is not limited to a clearly defined group adequate controls have been established to protect
of users. the confidentiality of financial information and to
restrict access to the liquid assets held by the
Company.
As the company is growing it is becoming Without a formal structure of supervision, credit may
increasingly difficult for top management to be given to inappropriate customers and an increase
continue to give careful scrutiny to accounts in bad debts may occur.
receivable collections for each location.
There is a dependency on each individual in the Consequently employees are not trained for a number
accounting department to perform their job to of responsibilities in the event of illness, dismissal, etc.
the extent that vacations are limited and work
does not get done if someone is gone.
Weakness Effect
The security level value that defines the degree This does not provide the ability to protect specific
of global level security checking performed by files, programs and data on the system.
the operating system is currently set to check
only sign-on security.
Reconciliations become increasingly difficult and time-
consuming to prepare and review.
Current procedures do not provide data security As a result, user IDs are not inactivated or removed
personnel with timely notification of employee on a timely basis. Based on our review, there still
transfers and terminations, and vendor or exist significant numbers of IDs that have either never
contractor terminations. been used or have not been accessed in 180 days or
more. As a result, this creates a risk that these IDs
may be misused.
Weakness Effect
Financial Management Expansion of budgeting system by The current budgeting system does not provide It is not possible to identify problem areas or those
utilising new data processing detailed analysis of budgeted results to actuals. areas where efficiency must be improved.
equipment

Title Weakness Effect

Inventory The Company does not utilise shipping advices
or a shipping log. The only shipments controlled
are those shipped by courier. Shipments by
Company-owned vehicles are not recorded.
Without recording shipments a company cannot
identify whether a shipment has arrived/ is delayed/ is
lost etc... In addition items could be misappropriated
whilst in transit and the company has no record as to
whether the items were originally included in the
shipment. Improper sales cut off and unrecorded
sales may also occur.

Accounts Receivable and Sales In fiscal 20XX, the Company paid $___ in The Company may be paying excessive freight costs.
outbound transportation charges. Although a
significant portion of these costs was billed
through to customers, it is important to minimise
these costs because they impact the
Company's operations by increasing the cost of
the Company's products to its customers or as
a direct charge to operations. The client does
not review freight costs to ensure they are
consistent with agreed rates.

Title Weakness Effect

General Management
Function and advantage of an
organisational chart
The Company does not have a clearly defined
organisational structure or job descriptions for
staff.
As a company grows and increases the number of its
employees, the necessity increases for employees to
understand their personal responsibilities and their
relationship to other employees to ensure the
Company runs smoothly.

EDP (Computers) The X systems are not sophisticated and Greater control and efficiency could be obtained by a
require a large degree of manual handling. new system.
They do not utilise certain control techniques,
such as using batch header forms and program
edit checks. Most of the reconciliation and
balancing takes place manually by comparing
computer produced runs with predetermined
adding machine tapes.

Title Weakness Effect

Payroll, Personnel and Currently, an accounting clerk is responsible for
Compensation gathering payroll information, reporting the
payroll information to a service bureau and
reviewing the final payroll information from the
service bureau. We understand the personnel
director occasionally reviews the payroll
information but does not document the review.
The lack of segregation of duties exposes the
Company to the risk that payroll is generated for non-
existent employees or unauthorised changes are
made to current employees' rate that may not be
detected.

Financial Management
Payroll, Personnel and
Compensation
International
The Company is holding excessive amounts of Poor cash management means the Company is
cash in its general account. The average missing out on interest receipts. Investment of these
monthly cash balance for the past year in the funds in short-term investments, assuming a 6%
general account was in excess of $175,000, interest rate, could have produced annual earnings of
ranging in one instance to $452,000. $10,000.
It was noted during the current year audit that A formal severance pay policy would alleviate any
the Company does not currently have a formal possible litigation involving potential discrimination
policy regarding severance pay. Currently, any practices resulting from discretionary severance
severance package is at management's packages.
discretion.
Title Weakness Effect
Consolidation and Financial The Company has improved its closing The company may not meet reporting deadlines and
Reporting process, consolidation procedures and financial could incur penalties.
reporting considerably over the past few years.
However continuing global expansion, such as
the acquisition and impending consolidation of
B Company, and the ongoing significant local
reporting requirements (both quarterly and
annually), continue to impact the financial
reporting process.

Title Weakness Effect

Accounts Receivable and Sales Establishing a general ledger control Trade acceptance balances are listed in the Individual note balances are not specifically identified
account for trade acceptance accounts receivable subsidiary ledger of the and the ageing of outstanding notes is not properly
balances Company. controlled.

EDP (Computers) Generic logon ID's, multiple users using a Information security controls are an integral part of a
common ID, are present on the system. This secure electronic data processing environment.
does not provide for individual accountability of
procedures performed. For example, several
generic logon ID's are maintained on the
system for departments to use the XX utility and
the XX department has one generic logon ID to
perform special projects.
Inventory The Company has made good progress in the
past year on developing a general/overall
costing method. However, we feel it still does
not provide you with enough information.
Title Weakness
EDP (Computers) Program change control is not formally
addressed. Requests for changes to programs
are made verbally by user departments.
It is important to know what the profit margin is on
each inventory item. In order to determine which
items are most profitable, you must first know the true
cost of the item.
Effect
If requests for changes are not written down there can
be confusion if changes are not put through accurately
and in accordance with instructions.

Title Weakness Effect

Payroll, Personnel and Payroll costs not paid by direct Employees do not receive payroll via direct Direct deposit may be desired by employees. It may
Compensation deposit deposit. decrease administrative costs and provide better cash
management and controls over payroll.

Debt/Leases We noted several leases for real property with Verbal agreements could give rise to
related parties had expired and the terms were misunderstandings and do not allow consistent
extended verbally on a month-to-month basis. corporate records to be retained.

Investments Monitoring non-equity investments Changes in investments are not communicated There is a risk that the financial statements do not
to accounting staff on a timely basis. reflect the true position of its non-equity investments
and the financial statements may be materially
misstated.
Title Weakness Effect
Payroll, Personnel and Centralised personnel management Since the Company has many divisions, An individual trained in personnel management could
Compensation subsidiaries and locations with substantial provide these services at a higher level of quality and
decentralisation of management, it is important at a lower cost to the Company. With decentralised
that a highly-developed, well-communicated, personnel activities, many high-level managers spend
and consistent personnel program be their time on personnel matters that could be
maintained. Most of the major personnel delegated to a specialist in the field.
functions and activities exist at the Company's
various operating units. However, there is no
assurance that all activities are provided, or that
existing activities are applied in a consistent or
uniform manner.

Title Weakness Effect

Investments Independent verification of The Company has a large volume of Lack of control over investment portfolios will increase
investments transactions and a large amount of investment the risk that errors or fraud will not be prevented or
holdings for which there is no independent detected.
verification.
 Title Weakness
Taxation The company has not reviewed its tax function
for some time to ensure that it is meeting the
company's needs.
Title Weakness
Financial Management Increasing the Usefulness of There are several major variables that
Periodic Reports by Including determine a store's profitability. These include business decisions being made.
Additional Analysis Information the obvious financial considerations of cost of
material, facilities and labour, and other more
subjective variables such as store location, type
of location and amount of advertising. The
Company does not report on these subjective
variables.
Title Weakness
Intercompany Transactions Intercompany sales are combined with
customer sales in the general ledger and a
monthly analysis is prepared to calculate the
consolidating elimination.
Title Weakness
EDP (Computers) Currently, the use of e-mail by the Company is Without a formal e-mail policy abuse can occur by
very limited. However there is likely to be a
significant increase in the number of users and
the quantity of information processed by e-mail.
Cash, Cash Receipts and Bank reconciliations- timely Bank reconciliations are not prepared or
Disbursements preparation and review of bank reviewed on a regular basis.
reconciliations
Title Weakness
Effect
The Company and its subsidiaries are involved in
many varied and complex tax matters. These matters
include:
(1) The personal holding company situation.
(2) The return of capital status of dividends to
stockholders.
(3) Corporate liquidations and reorganisations.
(4) Review of changes in local taxation.
(5) Preparation of the Company's consolidated local
tax returns.
The company must ensure the tax function can meet
these needs to prevent mismanagement of taxation.
Effect
Incomplete information may result in the incorrect
Effect
Additional work is created if intercompany sales are
combined with external on consolidation as
intercompany sales have to be separately identifiable.
Effect
employees.
The lack of controls can lead to the misappropriation
of company funds.
Effect
Work in progress Improving production cost analysis The method of accumulating costs for inventory Management will not be able to make appropriate
items does not provide management with decisions without adequate product cost information.
adequate information to evaluate whether
products are being manufactured profitably.
Costs are accumulated as follows:
(1)Raw materials are expensed directly to cost
of goods sold
(2)Labour is charged to individual products at a
standard rate
(3)Labour in excess of the standard rate is
charged to overhead
(4)Overhead is not allocated to cost of the
product

Title Weakness Effect

Inventory Recommendations for obtaining
more meaningful information from a
job order cost system
Serious weaknesses exist in the area of work- Work in progress inventory balances are likely to be
in-process inventory cost accounting. misstated.
Accounting control over amounts charged to
and transferred from this account is weak, as is
control over quantities of materials.

Title Weakness Effect

Accounting Procedures The Company does not perform certain year Consequently the company has no assurance as to
end closing procedures. the accuracy of the general ledger.

Title Weakness Effect

General Management General Internal Control Practices - The Company is lacking internal controls in Internal controls are designed to safeguard assets
Procedural Matters some areas. and help prevent losses from employee dishonesty or
error. A lack of internal controls increases the
Company's risk in these areas.
Accounts Receivable and Sales Written agreement of rebates and
concessions
The company maintains numerous unique Misstated accruals can lead to the material
agreements with most of its customers that misstatement of the financial statements.
include, but are not limited to, overbill
arrangements, volume rebates and pricing
concessions. During our audit we noted that
signed documentation and/or other formal
agreements did not support most of the
accruals. In several instances, accruals were
based only on conversations between the
accounting department and the salesperson
responsible for the incentive programs.

Title Weakness Effect

EDP (Computers) Adequate policies and procedures are A lack of standardised policies and procedures can
important in promoting a controlled change lead to untested and/or unauthorised programs being
management process. Change management moved into the production environment where live
refers to policies, procedures and products transactions are processed
used to manage and control changes to
production programs, jobs, etc. The following
was noted regarding current policies and
procedures:

· Written policies and procedures relating to

implementing changes to third party software
do not exist.

· Adequate policies and procedures exist for

changes to software written in-house, but are
not followed on a consistent basis.

Title Weakness Effect

EDP (Computers) The Company does not have a written disaster
recovery plan, and there are no formal
arrangements for the use of another computer
system in the event of a fire or other disaster
As a result, in the event of a disaster affecting the
computer systems, the Company may be subject to an
extended delay before substitute processing
capabilities become available. This could result in
significant losses to the Company. The most effective
approach to ensure a rapid recovery from a
catastrophe is to have a written and tested recovery
plan.

Title Weakness Effect

Payroll, Personnel and A number of salesmen are receiving a "salary" This arrangement could lessen the incentive for these
Compensation rather than a true commission. salesman to increase their sales volume.
Cash, Cash Receipts and
Disbursements
Preparation and review of bank
reconciliations
Bank reconciliations are performed by Proper segregation of duties is not in place. This
individuals generating disbursements, and who could give rise to unauthorised transactions that are
have access to unissued cheques. Further, the not identified as part of review procedures.
bank reconciliation for the Company's "petty
cash" fund had not been performed for six
months. This account requires only one
authorised signature and the fund is in the
custody of a person who is an authorised
cheque signatory. Finally, bank reconciliations
are not reviewed by a person other than the
preparer.

Title Weakness Effect

Payroll, Personnel and As the Company continues to grow, As the company is growing it is going to need to retain
Compensation management may wish to consider additional key employees. A lack of incentive policies for staff
officer incentives as currently there are none may lead to their departure.
and employees may leave if they feel
undervalued and non-compensated for their
achievements.

Accounts Receivable and Sales Since the company's invoices are for less than Consequently debt collection procedures are not
$X, collections of delinquent balances is difficult performed on a timely basis and there is an increase
and time consuming. in bad and doubtful accounts.

Title Weakness Effect

EDP (Computers) An outside service bureau is used to prepare This does allow additional time for employees to
certain of the Company's accounting records. perform other functions.
However, the general ledger and financial
statements are prepared by the Company
primarily from the reports received from the
service bureau.

Title Weakness Effect

Other Performance Based Bonus System Presently bonuses are discretionary in nature, The purpose of an incentive bonus plan is to reward
determined without documented consideration important employees with cash or deferred
for the financial performance of the Company. compensation that varies with the success of the
business or the level of their performance.
This is certainly not unusual for smaller
companies, however, as the Company
continues in its growth stages, a more
structured bonus plan is preferred.

Title Weakness Effect

Other Appropriate Approval of General General journal entries are not always
Journal Entries approved prior to posting.
Title Weakness
Accounting Procedures A manual of accounting policies and
procedures, which defines management and
staff responsibilities and identifies critical
internal controls in each major accounting area,
is not maintained. Presently, all policies and
procedures are communicated verbally.
Title Weakness
Cash, Cash Receipts and Authorisation of bank transfers Lack of segregation of duties when authorising
Disbursements bank transfers
Accounting Procedures Recording significant transactions on The Company did not record several significant Where transactions are not recorded on a timely
a timely basis transactions completed during the year.
Debt/Leases X Corporation and Y Corporation are making
monthly lease payments to related parties.
Documentation relating to these leases was not
available.
Title Weakness
Work in progress Developing and monitoring cost The Company does not have an accurate and
estimates for each phase of a formal method of developing cost estimates for
contract each phase of a contract and monitoring
performance as work progresses.
Title Weakness
Errors in the journals are unlikely to be identified
promptly
Effect
This may promote the inconsistent performance of
critical duties.
Effect
No segregation of duties increases the risk of
collusion and misappropriation of the company's
assets.
basis, the company may be unable to make an
adequate assessment of performance or liquidity at
any point in time. Also there may be misstatement of
interim information, loss of relevant facts and
information needed to record transactions and the risk
of neglecting to record transaction all together.
The Company's interests will not be protected in the
event of noncompliance with lease terms.
Effect
Without control and monitoring of job performance at
interim dates, management are unable to make
informed decisions and judgments on a timely basis.
Effect
Debt/Leases The Company requires prior approval for all The economic impact of these leases did not appear
capital expenditures exceeding a specified to be as favorable as certain Company purchases.
amount, but a similar policy does not exist for
leases. During [year], Divisions ABC and XYZ
entered into long-term leases for various
manufacturing equipment.

Accounts Receivable and Sales Reconciliation of accounts The accounts receivable subsidiary ledger has One of the many ways to conceal defalcations is to
receivable detail to control account not been reconciled to the general ledger since record a fictitious entry in the subsidiary ledger.
(date). Unless a reconciliation of the detail to the control
account is made, a defalcation may go undetected.
Accounts Receivable and Sales Accounts receivable charge-offs/ The provision for doubtful accounts decreased An inadequate provision can materially misstate the
provison for doubtful accounts significantly in comparison to the accounts financial statements so a true and fair view is not
receivable ledger reflected. A valid tax deduction may not be taken due
to the classification of uncollected balances.
Title Weakness Effect
Debt/Leases No schedule of loan covenants is maintained. The company may be breaching the loan covenants
without realising which could lead to immediate
repayment of the loan.

Payroll, Personnel and Although the payroll registers are reviewed by Unauthorised payments to fictitious or existing
Compensation X, one individual performs the majority of the employees could very easily go undetected in the
payroll-related functions present operation of this department.

Title Weakness Effect

Accounting Procedures Advantages of an accounting and During the course of the audit, we discovered Lack of written formal procedures could promote the
operating procedures manual that there are no formal written policies and inconsistent performance of critical duties.
procedures documented for the benefit of
accounting personnel.

Title Weakness Effect

General Management The Company has experienced significant No employee has responsibility for monitoring and
growth over the past two years and projects expanding upon the Company's accounting systems.
continued growth over the next five years,
creating the need for an
accounting/administrative manager (controller).
Currently the Company does not employ a
controller.

Title Weakness Effect

International The company has significant cash balances in The Company may be subject to risk of unfavourable
foreign currencies. currency fluctuations. There may be opportunities to
reduce this risk through own currency denominated
accounts in the local country, hedging instruments to
offset the unfavourable currency or repatriation of a
portion of the cash. Any of these strategies should be
evaluated with the Company's long-range and
strategic vision in mind.

Fixed Assets Property and equipment record maintenance The company is currently not realising the potential
and the annual depreciation calculation is savings in clerical effort or maximising the income tax
performed manually. As considerable clerical depreciation deduction.
effort is required to maintain these records, it
has not been practicable to maintain separate
records for tax purposes on a different basis.

Title Weakness Effect

Investments Derivative instruments and hedging Statement of Financial Accounting Standards There is a risk that the new standard will not be
activities (SFAS) No. 133, Accounting for Derivative implemented correctly.
Instruments and Hedging Activities, requires
entities to report all derivatives at fair value in
the balance sheet, and requires recognition in
net income of changes in fair value of
derivatives that are not hedges and in other
comprehensive income for those that qualify as
hedges. The Statement must be adopted by
the Company in the first quarter of fiscal 2002.

Accounts Receivable and Sales The company does not prepare a detailed
listing of accounts receivable.
This results in there being no control of credit chasing
and collection of accounts receivable. Untimely and
irrelevant information may be prepared which could
lead to the accounts being over-stated as accounts
become so old they cannot be recovered.
Accounts payable, purchases Identification of vendor balances in The trial balance of accounts payable prepared It would be impracticable for the accounting
and accrued liabilities the accounts payable trial balance as of December 31, 2XXX, was a chronological department to attempt to verify that a reasonably
listing of unpaid invoices, not in vendor accurate accounts payable cut-off had been effected.
sequence.

Title Weakness Effect

Scrap Scrap as a percent of paper used has been Cause could be due to lack of controls over scrap.
steadily increasing since [date]. Therefore the company could be losing profits on
scrap that could be generating a profit.

Cash, Cash Receipts and Strengthening Bank Account The client's bank reconciliation procedures are Poor reconciliation procedures mean that any
Disbursements Reconciliation Procedures weak. Reconciliations are not regularly unauthorised payments may be overlooked. Bank
produced. errors would also be unidentified.

Title Weakness Effect

Inventory Out of date raw material values Raw material was not always valued using Incorrect valuation amounts are causing
current purchase invoices and bills of material misstatements in the financial statements
for manufactured products were not updated on
a timely basis for current production costs.
Cash, Cash Receipts and Employee cheque cashing policy There are no controls to prevent employees If employees are able to cash their own cheques this
Disbursements from cashing cheques. can lead to misuse and the cashing of cheques for
non-business purposes.

EDP (Computers) Establishment of corporate policy on A number of personal computer requisitions As the use of personal computers increases in the
microcomputer purchases have been placed during the period. office place so does the risk that the capabilities of
such equipment will be misused.

Title Weakness Effect

Inventory Written inventory instructions, setting forth the Without any instructions there is no formal procedure
procedures to be followed in each department and therefore errors can occur resulting in an
are presently not prepared and reviewed with inaccurate count.
the employees prior to the physical count.
Accounts Receivable and Sales Use of freight consulting services Several national motor and air freight carriers The client may be missing out on significant freight
are now providing no-fee consulting services to cost savings.
assist companies in determining the best
method and lowest cost means for shipping
products. These services include reviews,
benchmarks on shipment size and weight and
how that impacts the shipping method and the
use of shipping hubs or zones rather than direct
shipping.

The client is not currently using these services.

Title Weakness Effect

Accounting Procedures Suggested Revisions to Chart of The available ledger accounts are not specific Management information can be difficult to extract
Accounts enough in some areas whilst others are too where ledger accounts are too complex or too simple.
complex.

Title Weakness Effect

Payroll, Personnel and Adoption of profit sharing plan The Company does not contribute to a pension, Valued employees may leave the Company to find
Compensation profit sharing or other retirement plan for the better benefits.
benefit of its employees or officers.

Title Weakness Effect

Payroll, Personnel and
Compensation
Evaluation of prospective employees The Company does not have written
procedures for evaluating prospective
employees. Individuals are evaluated through
interviews with corporate officials; however,
these interviews are not documented and
maintained in the Company's personnel
records.
A lack of documentation in respect of evaluating
prospective employees will not:
(1) Protect the Company against litigation regarding
discrimination in hiring practices; and
(2) Highlight the individual's qualities, thereby
reducing the subjectivity in hiring.
Accounts Receivable and Sales Opening cash register readings The opening cash register readings are not Without the opening reading, there is no evidence the
printed on the register tape used to reconcile entire activity for the day has been recorded on the
the Daily Reports. tape.

Cash, Cash Receipts and Bank accounts no longer used or used Idle bank accounts could potentially be used by others
Disbursements infrequently are left idle. for personal use and increase the risk of fraud.

Title Weakness Effect

Other Warranty Costs-Procedures for early
identification of potential problem
areas
Warranty cost expense has become a The company is not able to identify any patterns in
significant factor in the Company's overall warranty claims and hence identify potential problems.
operations. Currently no summary of warranty
work performed for each machine sold is
maintained.

Title Weakness Effect

Accounts Receivable and Sales Timeliness of billing procedures
Customer invoicing may be delayed several
days as shipping documentation is first routed
to the service department for matching with
sales orders prior to being forwarded to the
accounting department, and the accounting
department may accumulate shipments for
several days prior to invoicing.
The delay in processing invoices increases the
potential for erroneous or incomplete invoicing in the
proper period. Additionally some companies may pay
incoming invoices based upon the receipt date of the
invoice rather than the due date.

Accounts Receivable and Sales Contract accounts receivable aging
The company routinely enters into agreements Consequently the company is burdened with
with its customers to construct or procure obtaining significant short-term debt in order to
various items of machinery necessary to finance such tooling expenditures
produce a particular product in accordance with
the customer's specifications. Typically as is the
custom of the industry, the customer is billed for
product tooling upon completion of the project.
Currently, due to inefficiencies in billing for
these tooling items, and customers' reluctance
to pay, tooling accounts receivable have
increased to approximately $Xm, with $Xm
being 90 days past due.

Title Weakness Effect

Inventory Lengthy year-end inventory counts The Company currently performs annual counts
of physical inventories which generally result in
an immaterial book to physical adjustment.
During the count, shipping is halted for several
days and production time is lost.
The company can miss out on key sales/ production
time if all operations are ceased during the annual
count. This will have an adverse effect on sales and
profits.
Shrinkage Shrinkage factor in cost standards The shrinkage factors provided for in the cost This results in a substantial inventory write-up at year-
standards are excessive. end.

Accounts Receivable and Sales Matching bills of lading to sales Bills of lading and other shipping documents This increases the risk of an inaccurate cut-off being
invoices are not agreed to the invoice to which they performed at the year end and the risk that items can
apply and no control is kept over the bills of be shipped but not billed.
lading.

Title Weakness Effect

Investments Safekeeping of security investments There appears to be little control over security
certificates held in the Secretary's department
safe. Access is not restricted nor monitored.
The records of securities are not updated on a
timely basis.
This increases the risk of theft of stock certificate
books, corporate seals, validated certificates etc... It
facilitates the process of confidential information being
obtained by unapproved users. In addition out of date
data does not provide relevant information for
informed investment decisions to be made.

Title Weakness Effect

Accounting Procedures Review of accounting department Schedules prepared by individuals in the Errors will not be prevented or detected if work is not
staff work accounting department are not reviewed for reviewed in a timely manner.
accuracy, reasonableness and consistency with
Company policy.
Inventory Perpetual inventories are maintained on This resulted in a significant year-end adjustment to
computer for a significant portion of the state the inventory at cost.
inventory items. During the year, unit costs
were not updated in a timely manner.

Labour and overhead standards for a significant

portion of the inventory items were not updated
during the current year for new labour rates and
for changes in overhead.

Tax matters The Company's recent expansion in XX Tax savings may be overlooked or penalties imposed
suggests that additional attention should be by not being familiar with international tax regulations.
focused on international income taxes.

Title Weakness Effect

Inventory Control of production costs for a At present, one individual is almost entirely This results in weaknesses in the Company's control
small manufacturer responsible for controlling production costs. over inventory, production costs and selling prices.
 Title Weakness Effect
Information Systems Under-Utilisation of Computer The Company's equipment is capable of Manual production of reports is time consuming and
Capabilities performing many automatic functions now done open to human error.
manually. There are several areas, such as
customer over- and under-billing reports, that
are done manually that could be done
automatically by the computer.

EDP (Computers) Increasing volume of data The Company is experiencing an increase in As the volume of data processed by the data
processing the levels of data processed. processing department increases, the need for control
over input and output of data also increases.

Title Weakness Effect

EDP (Computers) Systems and program development There are varying degrees of formality of Controls should be implemented and applied on a
controls controls over the development of new systems consistent basis to avoid any confusion
and programs and changes to existing ones. In
some cases requests for program development
and maintenance are oral with little
documentation as to the justification for the
change and a complete lack of formalised
procedures to control the programmer's work; in
other cases, there are relatively formal
procedures for certain aspects of the requests
for data processing effort

Inventory Manual inventory costing records The product cost records used to value the
physical inventories and to determine selling
prices are prepared manually. A computer
application to partially automate the bill of
material for each product is being developed
and the remaining bill of material detail will be
developed in the future as a by-product of
another application.
The current proposed partial automation of the bill of
material may not be maximising the potential savings
in clerical effort or providing management with
accurate and timely cost data upon which to base
pricing decisions.

Title Weakness Effect

EDP (Computers) Data rejected by data processing User departments do not maintain records of
system data errors found by the system. Such records
would ensure that data rejected by the system
is in fact corrected and subsequently
reprocessed.
If such records are not maintained, there is no
guarantee that all important information has been
processed correctly.

Title Weakness Effect

Accounting Procedures
International
Financial Management
Accounting Procedures
Accounts payable, purchases
and accrued liabilities
Improving the Accumulation of
Information for Quarterly Financial
Statements
Title
Compliance With Customs
Regulations
Title
Evaluation of Plant Expansion
General ledger reconciliations
Title
Posting accounts payable balances
to units individually
Currently quarterly closing procedures are not The Company anticipates becoming a publicly-held
followed. corporation through a proposed merger. In becoming
a publicly-held corporation, the Company will be
required to issue timely quarterly statements in
accordance with local regulations. It will therefore be
necessary for the quarterly closing procedures to be
as detailed as the annual closing procedures.
Weakness Effect
The Company imports most of its machinery Failure to meet these requirements could result in
and equipment from Europe. Legislation significant penalties for the Company and its officers.
imposes specific documentation and record
retention requirements which the Company has
to meet. The Company does not have a formal
system in place to assure that the Customs'
requirements are met.
Weakness Effect
The Company is considering expansion of its A critical element in this integration is top
warehouse facilities. Any expansion adds a new management awareness and knowledge of all phases
dimension to operations because the new of the expansion.
operations must be integrated into the overall
corporate plans and operations. Top
management has very little awareness of how
the plans are progressing.
The general ledger is not reconciled to the This resulted in the existence of an unresolved
accounts payable subsidiary ledger in a timely difference between the general ledger and subsidiary
manner. ledgers at year-end.
Weakness Effect
The accounts payable system does not properly This causes the individual unit accounts payable
post invoices that must be allocated to several balances to be misstated.
business units. Instead of posting the allocated
amount to each unit, the system posts the full
amount of the invoice to the first unit.
Accounting Procedures Accurate quarterly statements
EDP (Computers) Large number of high level access
logons
The Company produces quarterly statements Lack of these entries above will not fairly present the
directly from the computer-generated trial current status of the Company's financial position.
balance. These statements do not reflect
eliminating and consolidating entries or the
needed tax adjustments
Thirteen user profiles are provided system Information security controls are an integral part of a
operator capabilities allowing complete control secure electronic data processing environment. If
of all jobs executing on the system. Some of adequate compensating controls are not in place,
these are established for personnel designated assets may not be protected.
as back-up operators. This appears to be an
excessive number of individuals provided with
this capability. These users are also provided
an additional ID to perform typical user
functions.

Other The current production facility layout requires Production is inefficient where set up times are long or
large amounts of time to break down and set up production is slowed down between processes.
different product lines. Also, product is moved
up to 25 feet from one process to the next,
which slows the entire production process.

Title Weakness Effect

Stockholders' Equity In reviewing the stock book we noted that a Loose controls in stock records lead to errors,
stockholder lost a certificate and was re-issued duplication of records and the possibility of
another. In addition during our review of the misappropriation of stock.
subsidiary stock records several discrepancies
were noted, such as cancelled shares not being
marked cancelled, director shares still in the
name of persons no longer with the Company
and missing shares.

EDP (Computers) Access controls with on-line report The Company recently implemented an on-line
viewing software report viewing system. This system provides
the capability to have reports stored on a platter
(similar to a disk) so the information can be
requested later and viewed on-line. We noted
that all users are able to access all information
that is stored on the system. This allows users
to access information that is not applicable to
their job function.
This could lead to sensitive information being viewed
by unauthorised personnel. It has typically been the
philosophy of the Company to allow employees
unlimited inquiry access to selected information.
However, this new product opens practically all
corporate data to viewing.

Title Weakness Effect

Information Systems Disaster Recovery / Contingency
Plan
The Company has started the process of
developing a disaster recovery/contingency
plan, but as yet no formal planning has
occurred.
The Company remains exposed to the disruption of
information processing services. While the likelihood
of complete loss of the data center or a plant is not
high, other interruptions of processing capabilities
exist that could have a detrimental effect on
information processing.
General Management Increasing the number of outside The Company's Board of Directors is comprised The Company does not benefit from any additional
members on the Board of Directors of seven members. Six of these individuals are management expertise or independent analyses of
serving or have served as part of the strategies.
Company's management group.

Title Weakness Effect

Inventory Inventory products contain a bar code on their The Company is not fully realising the benefits of
packaging. Although the products already have incorporating the available information into its
bar coding capabilities, the function is not controls.
utilized internally by the Company.

Title Weakness Effect

Financial Management Use of daily cash investment system The Company does not actively manage its The Company is losing out on interest income or
cash balances to ensure that its interest paying excessive interest expenses.
expense is minimised / income is maximised.
Use of a daily cash investment system would provide
the following benefits:
(1) Minimise unproductive or idle cash funds;
(2) Eliminate the guesswork and error factor of
estimating the Company's disbursement float each
day;
(3) Reduce employee time and involvement in cash
management by shifting a portion of the responsibility
to the Company's banks; and
(4) Increase investment income to the Company.

Title Weakness Effect

Debt/Leases There is no notes payable register in existence. Without an up to date register the company may not
be aware of when repayments need to be made.

Title Weakness Effect

Cash, Cash Receipts and Bank reconciliations and cash The Company has many bank accounts to The personnel hours needed to reconcile the
Disbursements reconcile and delegates these responsibilities to accounts are greater than necessary.
various personnel. Some reconciliations for the
general account were revised twice after being
given to us for our audit testing and still had a
large unreconciled balances remaining after
completion. The outstanding checklists are
also manually prepared. As discussed in the
prior year, there were reconciling items that
should have been written off. Although a
majority of those items have been cleaned up,
we still noted cheques outstanding which date
back several years.

Title Weakness Effect

Inventory Control of materials at outside During the past year the quantity and
vendors movement of materials at outside vendors
significantly increased and there is no formal
system in place to control the increase in
movement.
With no formal process in place and a lack of controls
errors can occur which remain undetected and may
materially misstate the financial statements.

Debt/Leases Updating capitalised lease
amortization schedules
A majority of the Company's rental equipment As a result incorrect entries in recording
packages are classified as capitalised leases. paymentswere made requiring adjustment.
The Company has established amortisation
schedules detailing the monthly principal
reductions. We noted the terms of several
leases had been modified; however, the
amortisation schedules did not reflect the
change in status.

Title Weakness Effect

Inventory Inventory levels have increased substantially
over the past year, with inventory turnover
decreasing at all divisions.
Because of the nature of the Company's business,
inventory control is the predominate factor in results of
operations and cash flow. If the inventory levels are
increasing but sales are not this could imply the
company is overstocking and is therefore at risk from
obsolescence.

Title Weakness Effect

Payroll, Personnel and
Compensation
Inventory Segregation of similar inventory
items
Title
Cash, Cash Receipts and Performance of bank reconciliations
Disbursements by person not having receipts or
disbursements duties
Title
General Management Realigning Responsibilities and the
Organisational Chart
Title
The Company's payroll is prepared by inputting Consequently all errors may not be detected or
employee numbers and hours worked to the controls may be overridden to deliberately manipulate
computer. The computer is relied upon to match the data.
the employee with the payroll master file to
obtain the appropriate pay rate, to determine
gross pay, deductions and net pay, and to
prepare payroll checks. Controls over this
processing include agreement of hours input
with hours paid and a review of the payroll and
deduction registers for obvious errors.
Similar inventory items are stocked in different This could result in items not being counted or
locations within the warehouse. counted twice during a physical inventory. This
practice also could cause employees to spend
excessive amounts of time filling sales orders or sales
could be lost because various sizes indicated on
perpetual records could not be located.
Weakness Effect
Employees with cash receipts and Reconciling bank accounts, even when completed by
disbursements duties perform bank the proper person, will not necessarily disclose
reconciliations. A bank reconciliation, if irregular disbursements, but could reveal fraud arising
effectively carried out, constitutes a partial audit in the preparation of the cash disbursements journal
of cash receipts and disbursements and or the payroll journal. If the reconciliation is not
therefore, should not be made by an employee performed by an independent person this will not be
taking part in those functions (including the case.
preparation of the payroll).
Weakness Effect
A realignment of the duties of management Misunderstandings may occur where documentation
personnel is in process and a management-by- is not kept up to date.
objective program is being instituted.
Organisational documentation has not been
updated as yet.
Weakness Effect
Accounting Procedures
Payroll, Personnel and
Compensation
Accounts Receivable and Sales
General Management
The monthly report package produced for
management includes only monthly financial
statements.
Title Weakness
Future personnel requirements The Company is growing rapidly and we
understand that plans are to accelerate this
growth in the future. Without adequate
planning, such growth could create a shortage
of accounting and management personnel.
Title Weakness
Accounts Receivable clerks have access to all
customer accounts on the system. The
accounts receivable clerks record the cash
receipts without the prior preparation of batch
totals or other mitigating controls.
Title Weakness
The Controller currently works as part of the
treasury function but is involved with the control additional demands on their time.
of management information systems.
Title Weakness
It is not possible for management to assess the
performance of the company and its results
throughout the year based on such limited
information.
Effect
A shortage in personnel could prevent the Company
from performing critical duties.
Effect
This can lead to inappropriate postings and possible
misuse of the sales credit account.
Effect
The Controller may be over-stretched due to the
Effect
Accounting Procedures
Accounts Receivable and Sales Reconciliation of sales register to the The sales entry for the test month posted to the
monthly general ledger sales entry
Cash, Cash Receipts and
Disbursements
Inventory
Monthly review, analysis and timely
correction of errors
Title
Signed cheques mailed by someone The cheques for payment of vendors' invoices Lack of segregation of duties as the bookkeeper mails
other than the preparer
Inventory cut off and receiving
Title
General ledger accounts receive little critical Accounting staff do not have control over amounts
review during the year. For example: that should have been written off over the period.
(1) Accounts are not analysed
(2) Unapplied credits existed in accounts Where taxation accounts do not zero out after each
receivable, deposits and claims accounts at payment it indicates that either the balance in the
year-end; apparently little effort had been made account is wrong or that insufficient funds are being
to match these to unpaid balances. remitted to the depository, subjecting the Company to
(3) Withheld tax accounts do not zero out after possible penalties for failure to comply with the laws.
each payment.
(4)Intercompany accounts were not reconciled
and several erroneous journal entries were
undetected until our audit.
(5) Interest was not accrued on miscellaneous
notes receivable as of year-end.
Although a service organisation may be used,
general ledger was $X higher than the total reconciliations should be performed to ensure data is
shown on the sales register for the month. The reasonable. Otherwise the company may be relying
cause of the difference is not clear because the on inaccurate data.
detailed tapes supporting the sales register
entries from the outside bookkeeping service
are not available.
Weakness Effect
are reported by the bookkeeper and attached to and prepares the cheques.
the vendors' invoices for approval by the
President of the Company. An officer of the
Company signs the cheques and they are
returned to the bookkeeper for mailing.
In a manufacturing environment, accurate This causes an increase in the risk of recording
information relative to the physical receipt of receiving activity in an incorrect period and thus, the
inventory items is critical. The Company does sequences of receiving documents does not match
not have in place procedures necessary to the order of the physical receipt of goods.
ensure accurate receiving cutoff. Presently,
there are no controls requiring prompt posting
of the receipt of goods to the inventory system.
Also, receiving personnel are able to
circumvent the inventory system by backdating
receiving records.
Weakness Effect
Other Calculation of Warranty Reserve Management does not use a systematic
approach to estimating the reserve for future
warranty costs.
A well devised system of accumulating warranty claim
information would not only assist in properly matching
revenues and expenses, but also could provide
management with feedback for pricing, reduce costs
and the claims themselves by identifying problems
early enough to facilitate engineering or production
changes.

Title Weakness Effect

Debt/Leases We noted that there are many leases utilised by The Company's interests will not be protected in the
the Company which are not formally written, or event of noncompliance of lease terms.
which have not been updated once the lease
term has expired, even though the Company
continues to pay rent.
EDP (Computers) When program changes are made, the Without retaining the test library, management cannot
Company contacts the contract programmers be assured what test criteria were utilised. In addition,
and the programmers perform modifications to there is no verification as to whether production
a test library. However, after changes are libraries were used, because no active data security
implemented, the test library is deleted. exists regarding programmer access to production
libraries.

Title Weakness Effect

Accounting Procedures Developing and monitoring cost The Company does not have a formal method Controlling and monitoring job performance at interim
estimates for each phase of a of monitoring performance as work progresses. dates is necessary for management to make informed
contract decisions and judgements on a timely basis.

Cash, Cash Receipts and Bank reconciliations- cash No outside review of bank reconciliations is Unauthorised transactions may occur leading to
Disbursements disbursement reconciliations performed misappropriation of company funds.

Title Weakness Effect

Cash, Cash Receipts and
Disbursements
Financial Management
Title
Accounts Receivable and Sales Detailed accounts receivable ledger The accounts receivable subsidiary ledgers
Inventory
Accounts payable, purchases
and accrued liabilities
EDP (Computers)
EDP (Computers)
Cash disbursements- evidencing
verification of vendor invoices
Development of a strategic plan
Weakness
include miscellaneous accounts. Each account
contains several detailed account balances that
are posted onto one ledger card.
Prenumbered receiving reports
Title
Proper recording of cash discounts
Title
When preparing a vendor invoice for payment,
procedures are not documented to evidence
that the invoice has been agreed to the
purchase order and receiving report if
applicable/ the payment has been approved/
the invoice has been checked to ensure it is
arithmetically accurate/ the invoice is correctly
coded for the general ledger posting.
The Company has experienced substantial
sales growth since 200X. It does not have a
strategic plan to ensure that the growth
continues.
Prenumbered receiving reports are not used for
all inventory receipts. The current system uses
receiving reports for a limited number of
inventory items. Generally, a copy of the
purchase order is used for receiving all other
inventory.
Weakness
Cash discounts are recorded in the accounting
records when the vendor's invoice is entered in
the purchase journal.
The accounting software was developed and
installed by a vendor named X. Data
processing personnel are uncertain whether or
not the source code is resident on the system.
In addition, determination of ownership could
not be ascertained and there is no program
documentation available. The Company
currently relies on the software vendor for
program modification.
Weakness
Departments may receive computer reports
more often than is needed.
Lack of documentation of procedures results in errors
not being rectified easily due to lack of audit trail.
Continued growth is difficult to control without the
benefit of a definitive plan for personnel, financial
resources and information system requirements.
Effect
This process increases the likelihood of clerical error
and increases the probability that payment
transactions are applied to the wrong account. Also
because these accounts are not reviewed on a timely
basis, reconciliation is a time-consuming and often
inefficient process.
By using the purchase order, the person receiving the
goods may rely on the ordered quantities listed and
not get an accurate count of the actual quantities
received.
Effect
Because the Company fails to realise many purchase
discounts, the amount of the purchase discounts lost
is recorded when invoices are paid. This results in
understating the cost of purchases until the discounts
are properly recorded at the date of payment.
As a result, the Company is at risk in the event of
disaster or the software vendor company's dissolution
or discontinuance of support for the product.
Effect
If these reports are ordered from the data processing
department or written to disk to be accessed by the
user departments "as needed," the data processing
department could use that time for needed systems
revision work projects.
EDP (Computers) Facilities to disable the processing capabilities
of an idle computer terminal are not in place.
Accounts Receivable and Sales Identification of finance charges Finance charges are automatically computed
on all overdue account balances. Finance
charges are added to the total balance due
from the customer and are not separately
identified.
Title Weakness
Cash, Cash Receipts and Cash Disbursements- improving Supporting documents do not always
Disbursements documentation accompany cash disbursements.
Without such procedures an unauthorised individual
could perform unauthorised activities using a terminal
that another person has signed on to and left
unattended
This makes identification of disputed finance charges
almost impossible. Accounts receivable at year end
may be overstated by these potentially uncollectable
amounts.
Effect
There is often a lack of assurance that expenditures
are authorised or payments are proper.

Accounts payable, purchases Documentation of adjustments to There is no formal procedure to document This situation could cause vendors' accounts to be
and accrued liabilities vendors' accounts adjustments to vendors' accounts. erroneously adjusted resulting in incorrect payments
to vendors.

Accounts Receivable and Sales
Tax matters
Title
Preparation of a Tax Calendar
There are large credit balances appearing on Large credit balances can indicate a lack of controls in
the accounts receivable ledger due to credit the credit department leading to misstated accounts
memos, partial invoice payments and cash recievable at the year end.
advance payments.
Weakness Effect
As the Company adds accounting units and There is a risk that filing deadlines may be missed and
becomes subject to taxation in additional states, penalties may be incurred.
the number of tax returns required to be filed
increases. Various federal, state, and local tax
laws have different filing requirements that may
change from time to time.

Cash, Cash Receipts and There is a considerable time lag between when If cash receipts are not promptly deposited this may
Disbursements cash deposits are recorded in the ledger and cause adverse cash flows, misappropriated funds,
actually deposited per the bank statement. complicated reconciliations and improper cut-off.

Accounts Receivable and Sales While reviewing accounts receivable, we
discovered that many of the Company's
customers take advantage of the discount
terms even if they do not meet the discount
terms.
Title Weakness
The company is not deriving any benefit from reducing
its prices in exchange for early payment as cash flows
have not improved.
Effect
Accounting Procedures Audit adjustments posted in
subsequent year
Financial Management Comparison of actual financial
results to budget
Payroll, Personnel and Review and approval of employee
Compensation time cards
Title
Accounts Receivable and Sales Accuracy of sales reported by
franchisees
Title
General Management Suggested topics to be covered at
annual meetings of directors
Title
Intercompany Transactions Reconciliation of intercompany
accounts
Financial Management Formalisation of Corporate
Objectives
We noted that X Company had not posted audit This presents a difficulty in reconciling management
adjustments for several years. reports with audited financial statements. While it is
common for audit adjustments to be posted in a
subsequent period, if they are never posted the
reconciliation process becomes more extensive. All
other international affiliates record audit adjustments
in their books and records.
Annually, the Company prepares a budget for It is difficult to compare sources and uses of cash to
the upcoming fiscal year. The budget is the actual results that are presented on an accruals
prepared on a cash basis. basis.
All hourly and salaried clerical employees are Approval of the record of hours worked is an important
required to document hours worked through the control to help ensure that employees are paid only
use of time cards. However, these time cards for those hours worked and any invalid hours are
are not approved by authorised supervisory detected.
personnel.
Weakness Effect
The company's royalty income is based on With no verification by the company, a franchise would
franchise sales as reported by the franchisees. have the opportunity to manipulate sales in order to
There is no verification of these sales by the reduce royalty income due to the company.
company.
Weakness Effect
Director's meetings are held infrequently The Company may not be deriving benefits from the
without a clearly planned agenda. meetings.
Weakness Effect
The Company experienced problems in Problems can arise if accounts are not reconciled
reconciling a number of interdivisional balances regularly and errors are often not resolved as quickly
at year-end. In some instances, large as they could be due to the delay in detection of the
discrepancies were reported. error.
The Company has grown significantly in a very During such rapid growth there is a risk that different
short time and plans to continue at a significant areas of the business may be pulling the Company in
rate of growth. different directions.
 Title Weakness
Accounts Receivable and Sales Credit memos to customer accounts do not
have supporting documentation attached and
are not authorised by an official prior to being
processed.
Accounting Procedures Only a few general ledger accounts for the
various tax expenses and accruals are used.
Fixed Assets Timely and proper recording of fixed Fixed asset additions and deletions are not
assets recorded in a timely manner nor are internal
records maintained to monitor which assets are
acquired and sold. The Company's purchasing
department does not properly code purchases,
rendering the fixed asset system ineffective in
correctly identifying and tracking fixed asset
purchases.
EDP (Computers) Users able to change their own Profiles are set by the computing department to This could lead to the system being compromised.
profiles restrict access to the system. Users have the
ability to make changes to their own profiles.
Title Weakness
Inventory In the past two years, there have been
significant fluctuations between the projected
overhead rates used to value inventory
throughout the year and the actual overhead
rate calculated at year-end.
Inventory Comparison of actual scrap Scrap produced in the plant is not picked up
produced to acceptable standard regularly from the various departments.
allowances
Title Weakness
Effect
This can lead to improper or unauthorised credits
being issued or to incorrect information being sent to
customers (which may result in loss of customer
goodwill if errors are not rectified promptly).
This make the accounts difficult to analyze
The lack of an up to date fixed asset register can lead
to misappropriation of assets and materially mistated
financial statements at the year end. The depreciation
charge for the year will be misstated and may have an
adverse effect on profit.
Effect
Fluctuating variables provide inaccurate data that
cannot be relied upon.
This does not allow for any control to be retained over
scrap. Reasons for excess scrap are not identified and
appropriate decisions may not be made.
Effect
Inventory Separate quantity and cost systems The Company has two computer systems for This made it difficult to trace our test counts into the
maintaining inventory information. One system final inventory listings. Also, there were instances
maintains inventory quantities by warehouse where the quantities between the two reports did not
location and the other system is used to cost agree.
the inventory. Currently, only one location uses
the computer system to track inventory by
warehouse location.

At the time of our audit fieldwork attendance,

there were no reports providing inventory parts
by location information maintained on file.

Cash, Cash Receipts and There are outstanding cheques still After X months all unpresented cheques can no longer
Disbursements unpresented after X months. be presented at the bank. State laws require
remittance of unclaimed payroll and disbursement
checks to the state after a period of time.

EDP (Computers) Study of data processing needs The Company's conversion to a new data The new equipment should be utilised to the fullest
processing system presents an opportune time extent possible while maintaining proper control of all
for a thorough study of the Company's data data entering and leaving the system.
processing needs and methods of operation.

Cash, Cash Receipts and Cash Disbursements-facsimile All cheques are signed with a facsimile A facsimile signature plate increases the risk of
Disbursements signature plate signature plate. manipulation of cheques.

Title Weakness Effect

Accounts Receivable and Sales Billing and collection of accounts Accounts receivable and unbilled A long credit period has an adverse affect on the
receivable disbursements have improved, but there working capital of an entity to the extent that the entity
remains a lengthy delay between delivery, becomes less flexible and adaptable and cannot meet
invoicing and receipt of funds. its short term debts.

Accounts Receivable and Sales Authorisation of voided sales slips Sales slips are not accounted for numerically It is difficult to determine whether or not all voided
sales tickets have been submitted to sales audit. It
might be possible for a cashier to void a proper sale
and misappropriate the cash.
EDP (Computers) Several user IDs with powerful access
capabilities were supplied with the operating
system.
These IDs are used by service technicians for
diagnostics and testing and allow the user to
perform all functions on the system. These IDs
are not required for use on a day-to-day basis,
thus should only be active when service is
required.
Title Weakness
Financial Management Utilisation of profit planning and The Company does not operate a profit
related systems to attain desired planning process. In the past, the Company
profit goals has been successful in attaining its desired
profitability without the use of a formal profit
plan or a budgeting system. However, for the
year just ended, in spite of the sharp increase in
sales volume, profit has not significantly
increased.
Title Weakness
Scrap The Company does not maintain a record of
why scrap is generated.
EDP (Computers) Program documentation kept off site All documentation of programs and processes
is kept on site.
Title Weakness
If the password related to these user IDs were
compromised, its active status would allow
unrestricted access to all system based files,
programs, etc.
Effect
Profits are unlikely to grow where they are not actively
managed. The Company may be investing in
unprofitable products at the expense of those
generating higher margins.
Effect
There is a lack of control over scrap levels resulting in
a loss of Company profits. Reasons for excess scrap
are not identified and addressed.
If programs and processes are destroyed (eg by fire or
flood) it is likely that documentation will also be lost.
Effect
Tax matters Expense reimbursements for The Company provides cash advances to cover Lack of a corporate travel account service means the
individual employees expenses of those employees who travel on company cannot take advantage of the following
business. benefits:
(1) Reduce the need for cash advances and extend
the time required to pay for travel and entertainment
expenses (i.e., improve float).
(2) Improve control of travel expenses by
standardising documentation.
(3) Reduce the risk of loss of cash that may otherwise
be carried by employees travelling on company
business.
(4) Increase convenience for employees.
(5) Improve the information available as to how travel
money is being spent and how employee accounts
are being settled through management-level reports
provided by the credit card company. These reports
would summarise expenses by vendor (e.g., airline,
hotel, etc.).

Title Weakness Effect

EDP (Computers) Systems narratives and user The Company has the basis of good systems Without overall systems narrative and user manuals
manuals documentation, such as record layouts, there can be confusion over procedures and
program listings and operator instructions. unnecessary errors may arise.
However, in general, most of the documentation
does not contain an overall systems narrative
that describes the overall objectives of the
system. Also, user guides are not prepared.
User guides are manuals that inform the user
departments how to complete input documents,
how to deal with errors and how to reconcile the
reports.

Inventory Inventory Valuation and Cost of During the course of audit procedures Inventory and Cost of Sales figures may be misstated.
Sales performed, we noted several shortcomings
relating to X Company's inventory including:
- Inventory count procedures are not formalised
in writing;
- Raw materials are not always valued using
current purchase prices;
- The production costs allocated to
manufactured goods are not updated on a
timely basis.

Title Weakness Effect

General Management Documenting compensation to
officers-stockholders in the corporate
minutes
The Company does not document authorisation
of compensation for officer/stockholders in the
Corporate Minutes.
A corporation cannot deduct compensation of
officer/stockholders in excess of a "reasonable"
amount. Proving compensation is "reasonable" can
be eased by proper documentation in the corporate
minutes.
EDP (Computers) Loss of records due to damage Computer programs and files are not kept
securely. Access is not restricted and files are
not kept in fireproof storage facilities.
Title Weakness
EDP (Computers) Allocation of Management As the Company continues to grow at a rapid
Information Systems resources pace, there are increasing demands upon the
MIS Department and the current systems.
Title Weakness
EDP (Computers) The current policy permits programmers to
operate the system for testing their programs.
They also may have unsupervised access to
the computer room on weekends. While in the
computer room, programmers have access to
production programs and data files stored in on-
line libraries and tape files
Title Weakness
Financial Management Timely Analysis of Changes in Gross The Company made sufficient sales during this
Profit Percentages past year to pass the break-even-point. The
resulting profit represented an outstanding
turnaround from the preceding year and again
established a positive balance in retained
earnings. There is, however, a disturbing trend
that has persisted for the last four years. The
Company's overall gross profit percentage has
declined each year, with a 3.2 percent drop in
the current year.
Fixed Assets Minimums for capitalisation and All invoices for repairs are scrutinised to
periodic inventory of fixed assets determine whether they should be capitalised.
Title Weakness
If computer files or records can be easily destroyed,
the Company could suffer a significant financial loss.
Effect
With growth continuing at the planned pace, the
allocation of MIS resources will be a critical factor for
success.
Effect
Under these conditions, it is possible for unauthorised
program and data file changes to be made. Thus, the
current procedures do not reasonably limit the
exposure to unauthorised changes of production
programs and data files
Effect
This means that more and more sales are needed to
reach the break-even point, and that profits are less
once the break-even point is surpassed.
This process is time consuming and ineffective.
Effect
Accounts Receivable and Sales Study of additional cost and cash if
factoring discontinued
EDP (Computers) Ownership of data stored at service
bureaus
The Company factors substantially all
receivables to maintain a cash position
sufficient to run the day-to-day operations of the
Company.
The Company uses a service bureau for all of
its data processing needs.
If the Company discontinued factoring a considerable
amount of receivables, the factoring costs would
decrease, but certain internal credit and collection
costs would increase.
This gives rise to difficulties should the Company ever
decide to go elsewhere for its data processing needs
as it does not retain any records.

Accounts Receivable and Sales Separation of sales, collection and Segregation of duties within the sales and Unauthorised transactions may arise if duties are not
credit memo approval functions accounts receivable functions is lacking. segregated.

Title Weakness Effect

Payroll, Personnel and Establishing deferred compensation The company does not have any pension plans This may lead to low staff morale as they feel under-
Compensation contracts and pension plans or compensation contracts open to all valued and not appreciated and could lead to high
employees, only to executive personnel. staff turnover.

Cash, Cash Receipts and Cash Disbursements- second The company's procedures require only the A single signature requirement on all cheques reduces
Disbursements signature requirement Controller's signature on each cheque. the control over the company's assets and increases
the risk of misappropriation of company funds.

EDP (Computers) Formal contingency plan for system There is no written contingency plan describing
failure the operating and data collecting steps to be
performed in the case of a system failure. Each
area is assumed to understand what must be
done in the case of failure.
If no formal system failure plan exists in the event of a
systems failure valuable data may be lost. In addition
there may be a significant delay in setting up new
systems or repopulating systems with "lost" data.

Title Weakness Effect

Accounts Receivable and Sales Evaluating the effect of company
policies on profitability
Title
Tax matters
Title
Scrap Lack of documentation of scrap
sales
Cash, Cash Receipts and Cash Disbursements- lack of
Disbursements segregation of duties
Financial Management Retirement of Long-Term Debt
Title
The Company's marketing policy is to try to fill
any customer order.
Weakness
A majority of the work performed by the
Company is done manually rather than on
personal computers.
Weakness
Revenues generated from the sale of scrap
represent sizable dollar amounts and should be
controlled to assure proper credit. At most
locations there is no record prepared when
scrap is picked up.
Lack of segregation of duties within the cash Lack of segregation of duties increases the risk of
disbursements function. Eg cheques are
returned to the accounts payable clerk for
mailing and the individual who reconciles the
payroll bank account also generates the manual
payroll cheques.
The Company has long-term loans on its books The Company is paying higher interest costs than is
in the amounts of B and C that carry interest necessary.
rates of X% and Y%, respectively. The
Company has a Z value line of credit available
at A% that is not utilised.
Weakness
This policy does not reflect consideration of the nature
of the business and its current operating environment.
Some of these considerations are:
(1) It is difficult for the Company to fill customer orders
that specify colour, weight, etc., because the
Company's sources of supply are limited to what
becomes available on the market. These orders are
expensive because:
(a) They require special handling;
(b) They are slower to fill and thus maintain inventory
at a higher level;
(c) They often must be filled with the more desirable
items in inventory, leaving less desirable items unsold
(2) Non-house sales reduce the Company's profit by
ten percent because of sales commissions.
(3) The Company has to finance inventory by factoring
accounts receivable - an expensive form of financing.
Effect
The current system is inefficient and allows greater
potential for errors. Using computers would eliminate
the daily creation of commonly used schedules and
would make the sharing of information easier
Effect
Because actual pick-ups cannot be reconciled to the
weigh-slips subsequently received, sales of scrap may
not be reported or the proceeds from sales may be
misappropriated.
misappropriation of company funds.
Effect
Accounts Receivable and Sales Numerical control of sales invoices Although sales invoices are prenumbered, the There is no assurance that all sales transactions have
company does not account for the numerical been properly recorded or are included.
sequence of these invoices.

Accounts Receivable and Sales Developing Monthly Analysis of Management evaluates the performance of the Retail unit performance cannot be compared
Retail Units retail units on a limited basis periodically. No effectively between units or to budgeted data.
like for like comparison is made between units
nor are variances investigated.

Title Weakness Effect

Inventory Inventory levels should be maintained at a level Inventory that is purchased and cannot be sold on is
consistent with the sales and production. tying up cash within the cash operating cycle and will
Communication between the marketing, have an adverse impact on the working capital
purchasing, accounting and production position of the company. Without sufficient cash in the
departments is essential for maintaining system the company becomes less flexible and
adequate inventory levels. We noted instances adaptable to meet its short term debts.
in which there was little or no communication
and inventory was ordered that was not
needed. One item was noted during our testing
of accounts receivable in which the purchasing
department ordered the wrong quantity. This
item was subsequently reclassified to other
receivables. In addition, discussion with
personnel and review of inventory indicates that
items are being produced without enough
market research to support the production.

Inventory Due to the nature and the changing technology Obsolescence of inventory items can result in the
of the business, inventory obsolescence is an company having to make large write offs of its
ongoing problem from both an operating and inventory balance which will adversely affect profit.
reporting standpoint.
Title Weakness Effect
Tax matters Benefits of a medical reimbursement The company currently does not have a The Company therefore cannot benefit from income
plan medical reimbursement plan tax deduction for expenditures such as reimbursement
to eligible participants for personal medical (including
dental, if desired) expenses that aregenerally
excludable from the participants' taxable income

EDP (Computers) Updating accounting software The Company has recently made a
considerable investment updating its computer
hardware in the accounting department.
Review of the Company's accounting software,
suggests that an upgrade is also desirable now
that the system can support the change.
Maximum potential cannot be gained if the computer
software and hardware are not compatible. Current
software may not be capable of handling advanced
accounting functions necessary to provide accurate
interim and year end financial statements. Manual
adjustments may be complex and not done on a
timely basis.
Inventory Intercompany inventory transfers It was noted during our inventory observation at Breach of Company policy may result in inconsistent
Location X that intercompany inventory data and improper cut off.
transfers are reconciled and posted to inventory
at the end of the month. This is a breach of
Company policy, which requires shipments to
be reconciled and posted on a daily basis.

Title Weakness Effect

Accounts payable, purchases
and accrued liabilities
Payroll, Personnel and
Compensation
Purchasing Procedures-Segregation We noted that an employee in the purchasing Lack of segregation of duties in this area exposes the
of Duties department has the authority to initiate Company to the risk of misappropriated funds or
purchase orders and approve the invoices for goods.
payment.
It is our understanding that the Company has Consequently when employees depart they are under
not formed a policy requiring all new employees no contractual obligation not to divulge information to
to sign an agreement enforcing confidentiality of competitors.
the Corporation's trade secrets.

Title Weakness Effect

Financial Management Long-range planning as a tool for The Company does not use long range The Company may find itself in unexpected cash flow
increasing profitability planning as a tool for considering the direction difficulties or a state of declining profitability.
of its future growth.

Accounting Procedures The Company has experienced significant If a company does not adapt with its growth it will not
growth recently and has not increased its adequately provide timely internal financial
accounting staff accordingly. statements.

Title Weakness Effect

EDP (Computers)
Program backup and related
documentation
The Company is not maintaining an offsite
storage facility for information systems source
programs and associated documentation
If a fire or other disaster occurred on the Company's
premises, source programs and other documentation
could be destroyed. As a result of such fire or disaster,
recreating files and other data would be a time-
consuming and costly process.
Fixed Assets Computerising Property and
Equipment
Title
Accounts Receivable and Sales Invoices recorded for merchandise
not shipped.
Tax matters Summary of available carryovers
Stockholders' Equity Lack of formal documentation
Financial Management Centralisation of treasury function
Accounts Receivable and Sales Separation of cash handling,
receivable and billing functions
Title
It was noted that a computer software package The asset register is time consuming to maintain and
has not yet been purchased to account for difficult to interrogate.
property and equipment. As mentioned in our
prior year comments, detailed listings and cost
records are helpful in reviewing the adequacy of
insurance coverage and helpful in the
preparation of insurance claims in the event of
asset loss or destruction. Also, with the
possible purchase of major additions in the
future, this would be a very useful tool.
Weakness Effect
The company's information system permits This system allows inaccurate sales figures to be
invoices to be recorded as sales, even though reported and this will impact on management
the goods are not shipped until the subsequent decisions made based on irrelevant data. If adjusting
month. entries are not made, investors may be misled by
improper financial statements.
The Company has available certain tax The period during which these carryovers may be
carryovers that can be used to reduce taxable used is limited
income in future years.
We noted that the Company does not have a Confusion can arise without a formal written
fully executed copy of the X stock agreement. agreement.
Periodically one division is required to obtain This condition does not produce the best economic
short-term borrowings to meet immediate cash utilisation of the Company's available resources.
requirements while another division maintains
invested funds.
There is lack of segregation of duties in the Lack of segregation of duties provides an opportunity
accounts receivable department with the for employees to misappropriate cash and conceal the
accounts receivable clerk maintaining the petty fact by manipulation of invoices.
cash fund, preparing sales invoices and
maintaining the sales journal and detailed
accounts receivable subsidiary ledgers.
Weakness Effect
Inventory
Information Systems
EDP (Computers)
Accounts Receivable and Sales
Shrinkage
Financial Management
During the past several years, X Company has
experienced book to physical adjustments of
approximately $XXX,XXX on an annual basis.
This amount represents approximately X% of
sales and X% of cost of goods sold. In 2XXX,
the Company began recording the projected
book to physical adjustment on a monthly basis
in order to spread the effect over the fiscal year.
Linking Engineering Workstations The Systems Manager is currently in the
process of linking all engineering workstations
to the main system via direct cables from the
system to the second serial port of the
engineering workstation.
Title Weakness
Access to the on-line system is not restricted or This can lead to unauthorised access and the
monitored.
The standard percentage applied to calculate
the allowance for doubtful debts does not
necessarily coincide with the past history of
actual accounts written off.
Shrinkage - material at outside A $X adjustment for shrinkage of material at
contractors outside contractors was recorded at year-end.
Title Weakness
The Company uses limited cash flow
forecasting. The forecasts used are fairly
simple.
Title Weakness
Recording the adjustment in this way does not identify
its cause. The adjustments in value may be the result
of computer or other errors that could affect other
areas of the company.
This is not the most effective way of linking in the
engineering workstations.
Effect
accidental or deliberate loss or corruption of data.
If the standard percentage does not reflect the true
position, the financial statements are at risk of being
misstated.
Although inventory records on this material were
maintained, accounting controls were not effective.
Effect
The information produced by cash flow forecasts is
not detailed enough for financial planning purposes.
Effect
Payroll, Personnel and
Compensation
Accounts Receivable and Sales
Cash, Cash Receipts and
Disbursements
Accounting Procedures
LIFO Conversion
The Company does not have a formal
procedure for holding an annual review with
each of its salaried employees.
Title Weakness
There is no written authorisation for changes in Without formal written authorisation errors or
billing rates. For example rates used in
extending labour hours on production jobs are
determined by the production clerk.
Modifications to the list are made by the clerk
upon verbal authorisation by the controller.
Modification to rates may not be reflected on a
timely basis and there is a lack of audit trail.
Cash disbursements- drawing The company is still adopting the policy of
cheques payable to "cash" drawing cheques payable to "cash"
Title Weakness
Use of scheduling and standardised Currently monthly reporting deadlines vary by
reports function. The output produced also varies in
format by function. The output produced also
varies in format between departments.
Title Weakness
Development of LIFO Costing Details of the Company's LIFO costing
Procedures processes are not included in its procedure
manuals.
Title Weakness
Without conference and evaluations that are
communicated to the employees, confusion can arise
as to agreed salaries and job descriptions, titles and
management's opinion of performance. Also if an
employee must be dismissed as there is no evidence
of documentation supporting the decision.
Effect
deliberate manipulation of billing rates can occur.
Cheques made payable to "cash" can be presented by
any staff and used for personal purposes.
Effect
This makes it difficult to co-ordinate and standardise
data output and impairs collation of data between
departments.
Effect
Inventory valuation may be misstated.
Effect
Inventory Management reviews inventory for As more inventory flows through the production
obsolescence and reorder points by manually process and newer versions of products are released,
reviewing the inventory listing. Because the this process will become more difficult and prone to
Company's primary product continues to error.
change and evolve rapidly, maintaining current
analyses of potentially obsolete inventory is
important for the Company. This will become
more critical as inventory levels grow in the
future.

Cash, Cash Receipts and Cash disbursements- establishment There is a high volume of manual cheques This increases the possibility of disbursements not
Disbursements of "cheque write" days written. being properly recorded in the accounts and could
result in unauthorised disbursements

Accounts payable, purchases
and accrued liabilities
EDP (Computers)
Coordination of group information
system resources
The Company's employees are allowed to The financial statements may be materially misstated
accumulate vacation time, which will be paid to if all liabilities are not recorded.
the employee upon termination. The Company
should have recorded a liability for accrued
vacation time at the year end.
We believe there may be some benefits to Without the implementation of these resources
corporate-wide coordination of information efficiencies will not be achieved by coordinated
system resources. The Company has not development efforts and allocation of resources.
considered such coordination.

Title Weakness Effect

Inventory During physical inventory observation at the X If inventory records are not regularly updated stock
Division, it was noted that there were several can become obsolete and the records will not reflect
tags on lumber that had no change in quantity the physical stock levels. This can lead to over-
from the prior year's inventory tags. Upon stocking or stock-outs.
further investigation, it was determined that this
material is no longer used in the manufacturing
process.

International Foreign Currency Transactions The Company has a significant number of Foreign currency transactions may be misstated.
______ denominated transactions. These
transactions are currently recorded at the
average monthly exchange rate. While the
difference is not significant, this method is not in
accordance with local Financial Accounting
Standards

Inventory Inventory held and produced at The amount of inventory held at outside
outside locations locations has increased significantly from prior
years and may continue as more products are
produced outside and overall sales continue to
increase. Outside confirmations were sent to
the warehouses and resulted in several
differences, some of which could not be
explained.
If no controls or procedures are implemented to deal
with inventory held at outside locations there is the
potential for stock levels to be materially misstated
and the financial statements not to reflect a true and
fair view.
 Title Weakness
Information Systems The Company uses multiple IBM AS\400
computers to process its business applications.
The AS\400 provides the ability to select certain
options that determine how the system handles
security related activity. In reviewing the
options selected, we noted certain values that
should be strengthened.
Title Weakness
Accounts Receivable and Sales Communication between divisional The Company's credit review function operates
credit departments on a divisional basis. Credit departments are
located in X, X, X and X. There is no formal
interdivisional communication system regarding
high-risk customers or customers with
significant past due balances.
Inventory Reviewing the cause of variances Labour efficiency variances for the year were
significantly unfavourable in relation to the total cost standards should be made to determine whether
direct labour charges.
EDP (Computers) Distribution of computer reports The distribution of computerised reports is
informally controlled.
Title Weakness
Other It is our understanding that although written
conflict of interest statements are sent to
employees on an annual basis, no formalised
conflict of interest policy exists including follow-
up and documentation of possible conflicts of
interest.
Title Weakness
Effect
The integrity of the computer system could be affected
by unauthorised access due to weak systems
controls.
Effect
A division could therefore approve credit to a customer
with overdue balances to another division. This
increases the risk of uncollectable accounts.
This condition indicates that a review of the labour
the large variances are actually the result of
inefficiencies or whether the standards are not
attainable and need to be adjusted.
Lack of a list can lead to errors occurring. Personnel
time may be wasted generating reports that are not
needed or duplicate reports that were not received by
the appropriate person. Confidential information may
be delivered to an unauthorised person.
Effect
The company may inadvertently have conflicts of
interests.
Effect
Accounting Procedures Reporting results by business
segment
The Company's general ledger system does not The company is not benefitting from segmental
permit the monthly reporting of operating results information, which would be useful to management in
by business segment. evaluating capital investment and other business
decisions as well as monitoring actual vs. budget and
other operating results.

Title Weakness Effect

Accounting Procedures There are several individuals who have
extensive knowledge of their particular area of
the accounting and finance department. Often,
they are the only ones who have detailed
knowledge of "how things work."
Should any of these individuals leave their jobs or be
indisposed for an extensive period of time, it would be
difficult for someone to step in and continue. In
addition, there may be some procedures currently
being performed that will be redundant under the new
system and there may be new procedures that are
required.

General Management Periodic Review of the Adequacy of The Company's various insurance plans are The Company may be incurring unnecessary costs
Insurance Coverage complex. In certain instances, one type of due to multiple coverage in some areas.
coverage is represented by several policies.

In addition, tangible assets are insured for less

than book value. Generally, this amount is not
representative of market or replacement value.

Title Weakness Effect

EDP (Computers) The normal information systems processing With this approach an intense fire in the building
cycle includes backing up computer files nightly. housing the computer equipment could destroy both
These files, along with other backup tapes, are the primary files and the backup files. Without this
stored in a fire resistant locked box on-site. backup data, recreation of the records could be very
difficult or impossible.
Financial Management Conversion of Short-Term Financing Bank note financing has increased over the last Interest expenses are high due to the fact that short
into Long-Term Financing or Equity two years. The use of short-term financing term borrowings are expensive.
should be limited to temporary needs of the
business.

Payroll, Personnel and Adoption of semi-monthly payroll The Company operates a weekly payroll for all This procedure results in decreased cash flow and
Compensation policy employees. excessive administrative expenses.

Title Weakness Effect

EDP (Computers) Access to the system software, including Without changing passwords, the possibility exists that
applications, is gained by entering valid user unauthorised persons could more easily obtain
identifications and passwords to the system; unchanged passwords and access the system. This
however, passwords are not changed on a could result in unauthorised data or erroneous
frequent basis. transactions entering the system.
LIFO Conversion Use of LIFO Inventory Method Inventories are valued at the lower of first-in, Stock valuation could be enhanced from the current
first-out (FIFO) cost or market value. Present figure.
industry conditions may result in substantially
higher prices for components in your inventory.
As a result, conversion to the last-in, first-out
(LIFO) method of inventory valuation may be
desirable. Such a change may result in reduced
taxes. However, the resultant reduction in
earnings must be considered.

Accounts Receivable and Sales Accounting for sales return slips Sales return credit slips are prenumbered but Therefore, there is no control that all credit slips are
not numerically accounted for. properly processed.

Title Weakness Effect

Accounts Receivable and Sales Customer receipt date for drop No determination is made of dates that Consequently sales for monthly and year-end financial
shipment merchandise customers receive the merchandise drop statements could be distorted if billed in the wrong
shipments. The accounts payable is recorded period.
when the customer is billed.
Title Weakness Effect
EDP (Computers) Documentation standards are guidelines that Improperly documented control activities may result in
ensure new systems, as well as changes to erroneous input and processing, undetected out-of-
existing systems, are documented in a thorough balance conditions, and misinterpreted output reports
and consistent manner. Inadequate program
documentation may result in excessive program
maintenance costs and undue reliance upon
"key" individuals.

Title Weakness Effect

Payroll, Personnel and Changing overtime payment policy There are a limited number of ways an A limited and constrained method of paying overtime
Compensation employee can receive overtime. The Company results in employees not feeling valued as individuals
pays overtime to qualified employees on a and may lead to unmotivated individuals, low staff
current basis only. morale and high staff turnover.

Accounting Procedures Timely recording of general ledger
transactions
We noted significant transactions that were not Delays in recording such transactions result in
being recorded in a timely manner and in some misstatement of interim statements, and increase the
cases not at all during the prior fiscal year. For risk that transactions will not be recorded completely.
instance, $XXX,XXX was received from
contributors during the year for the X Project
and was not recorded on the books which
resulted in an understatement of assets and
liabilities.

Title Weakness Effect

Inventory Advantages of Pre-Numbered The Company does not use pre-numbered As a result:
Receiving Reports receiving reports, in some cases no reports are - no record of the receipt exists which could be
used. matched to purchase orders or invoices
- there is no control over the completeness of
receiving reports as they are not pre-numbered
- there is no control ensuring actual goods received
match those per the shipping ticket or purchase order
- the condition of goods received is not noted
- there is no evidence to confirm the date goods are
actually received

Proper control over these forms is essential for an

effective system

Cash, Cash Receipts and Cash Receipts- control listing of Incoming mail is handled by two people before Lack of controls over incoming mail can lead to
Disbursements cash receipts the cash is collected and recorded. A listing of misappropriation of company funds.
mail receipts is not made.

Title Weakness Effect

Inventory Review of inventory pricing system (1) In certain circumstances, the President The conditions above could result in unauthorised
and controls overrode the computer's automatic pricing price modifications being processed and remaining
method (FIFO based on current invoices) by undetected.
processing price changes.
(2) There was no documentation of inventory
price changes (i.e., no maintenance file report).
(3) There is general access to the computer
maintenance file for pricing data; therefore,
pricing changes could be processed by anyone
in the accounting department.
(4) Individuals in the accounting department did
not know the computer's method of calculating
the price and, therefore, were not able to detect
errors in pricing.

Inventory Control over the shipping date could be Informal controls and lack of supervision increases the
improved. Sales orders are filled and checked risk of improper cut off and misappropriation of assets.
and then put on the dock to await pickup. The
pick-up procedure consists of the customer
pcking their own goods off the dock and loading
them for delivery without supervision.

Cash, Cash Receipts and Bank reconciliations- unexplained There are unexplained differences of [amount] Differences in cash reconciliations imply a lack of
Disbursements differences in cash reconciliations and [amount] in two cash account control in the accounting system and an increased risk
reconciliations in the misappropriation of assets and errors.

Title Weakness Effect

Cash, Cash Receipts and Cash Disbursements-signature plate The Signature plate used to sign cheques is Lack of control over the signature plate exposes the
Disbursements kept in an unlocked desk drawer and control of company to unnecessary risk of misappropriated
its use is not maintained. funds.

Title Weakness Effect

EDP (Computers) Some users have a profile (or multiple profiles) Lack of controls over user access can lead to
that allows access to elements of the system unauthorised access and corruption of data.
that they do not require as a result of their day
to day work.

General Management Business interruption insurance The Company does not have business Business interruption insurance can provide partial
interruption insurance. protection to a company in case of "shut downs" due
to fires or other causes, obviously the Company is
currently exposed in this area.

Accounts Receivable and Sales Sales returns and allowances
EDP (Computers)
EDP (Computers)
Payroll, Personnel and
Compensation
Fixed Assets
Title Weakness
The Company does not establish a reserve
reserve allowance for sales returns. In addition the
company does not match returns with
corresponding sales.
The tape library is not maintained under the
control of any one person. The application
supervisor has responsibility for the library, but
tapes are actually taken out of the library by the
control clerk on first shift and the shift
supervisor on second shift. Further, the tape
library is unlocked and is open to all personnel
with access to the computer room
Title Weakness
Computerised accounting and The company does not have a computerised
information reporting system accounting and information reporting system.
Title Weakness
During our review of the accounts receivable
and payroll systems, it was noted that
commissions are being paid based upon
unbilled sales data. In some cases,
subsequent credits were applied to customer
accounts that were not credited to the
salesman's commission account.
Formalisation of fixed asset The Company does not have a fixed asset
capitalisation policy capitalisation policy
Title Weakness
Effect
The lack of reserve results in current assets being
over-stated with respect to the value of anticipated
returns. As sales continue to grow the absence of this
allowance will continue to have a larger effect on the
interpretation of the Company's balance sheet.
This allows operators, programmers and systems
analysts access to the tape library. Sensitive tapes are
locked in a vault within the tape library; however, this
procedure does not include all production files in the
room
Effect
The company is not being fully efficient in terms of
reaching its maximum potential to ensure all financial
reporting requirements are achieved.
Effect
This practice results in commission expense to the
Company for which there is no sales revenue or cash
collected.
No uniform capitalisation policy results similar assets
being treated in a different manner and some assets
may not be capitalised at all. Therefore a full charge
would go through the profit and loss account in one
period and have an overly adverse affect on profit for
the period rather than spreading the cost over the
useful economic life.
Effect
EDP (Computers) Accuracy of computer processing There is no established procedure for verifying
the accuracy and completeness of computer
processing and reports. Users are responsible
for verifying the accuracy of reports and
processing and notifying the Systems Manager
if errors are detected.
There is a risk that not all errors will be picked up if
reliant on human checking only as inconsistencies
may arise. Employees may not be aware of their
responsibilities or the frequency in which they should
be performed.

Investments Return on Retirement System loans The County Employees Retirement System is The return on the securities lending transactions
party to a securities lending arrangement with appears low in comparison to the assets on loan and
Bank X. The Retirement System lends the invested collateral.
securities and receives collateral in the form of
cash, investments or letters of credit form
specified borrowers, with Bank X acting as the
intermediary.

For the year ended December 31, 2XXX, the

County Employees Retirement System earned
approximately $x,xxx, net of bank fees, on
loans made. The value of securities loaned by
the Plan to the broker at December 31, 2XXX
was approximately $x. The average balance of
collateral invested during the year was $y.

Title Weakness Effect

Accounting Procedures Standardised Consolidation Standard consolidation schedules are not used The consolidation process is unnecessarily time-
Statements at each group location. consuming.

Payroll, Personnel and There is no evidence that payrolls are reviewed Changes to the regular payroll may be inaccurate or
Compensation by an appropriate Company official. unauthorised. In addition without any higher level
review the payroll may be deliberately manipulated
and company funds misappropriated through salary
costs.
Other Utilisation of standard journal entries Most of the journal entries recorded in the The month end burden of writing these entries is time
general journal each month are of a recurring consuming and there is the possibility of omitting an
nature, affecting generally the same accounts entry.
each month. Each month the journal entries
are redrafted.
Title Weakness Effect
Inventory Inventory cost standards are adjusted annually This practice results in a large adjustment to inventory
to reflect current material, labour and overhead values at the end of the year.
costs.

Accounts Receivable and Sales Several accounts receivable accounts have These items highlight that there are control
erroneous amounts billed and subsequently weaknesses in the billing system, which can lead to
credited. inefficient maintenance of revenue recognition
policies, and incorrect cut-off.
Tax matters The Company has a significant potential asset Tax savings may be lost if carryovers are not utilised.
in the form of benefits from its operating loss
carryover.

Title Weakness Effect

Inventory Inventory counting procedures Inventory count procedures are not formalised A lack of formal inventory procedures and controls
in writing and distributed to all relevant can lead to misunderstandings and prevent an
employees prior to the count. accurate count of items.

Accounts Receivable and Sales
Fixed Assets
Approval of significant additions
The credit controller is also responsible for There is a lack of segregation of duties in the system
reviewing credit applications and has final of internal control which can give rise to undetected
responsibility for accounts receivable balances errors, unauthorised transactions or misappropriation
and bad debt write-offs of assets.
Currently there is not an established process to Therefore unnecessary or duplicate assets may be
authorise and approve significant fixed asset acquired. Assets could be acquired for personal use
additions. through the company.

Title Weakness Effect

Inventory The Company's procedures for recording The audit trail is apparent until the edit reports are
transfers of inventory involve batching the produced. A lack of audit trail will result in errors not
transfer tickets by the accounting department. being resolved on a timely basis as there is no
These batch totals are sent with the transfer supporting evidence to.verify the accuracy of amounts
tickets to the data processing department. The posted to inventory.
information systems department verifies the
input into the system by comparing transfer edit
reports to the batch totals.
For each transfer ticket, the edit report lists the
number of units and the unit retail price. It does
not list the extended retail amount used to
automatically update the inventory balance
report. No verification of the total transfer
amount in the inventory balance report is made.

Title Weakness Effect

EDP (Computers) During our review, we examined the control The ability to circumvent controls increases the risk of
procedures for managing changes to the error and abuse of contols, which could lead to error
production systems. Procedures are in place or fraud.
that, if complied with, promote a relatively
controlled environment. However, procedures
can be circumvented by programmers making
changes directly to production objects. In
addition, due to the manual nature of the
process, review of changes made is more
difficult.
Payroll, Personnel and Contributions to Individual While the Company has a profit-sharing plan, Providing key personnel with profit sharing plans will
Compensation Retirement Accounts due to its integration with social security, it may motivate them to work harder and in turn the company
not benefit all employees for whom will benefit from increased profits.
management would like to provide retirement
benefits.
Title Weakness Effect
Tax matters Tax assessments/ reassessments on During our review of the tax accounts, we The reassessment resulted in over $X,XXX of tax plus
a timely basis discovered that the authorities had reassessed interest, yet it was never checked for accuracy or
the Company for $XX,XXX of disallowed forwarded to BDO to investigate. When we
expenses for the XXXX year. discovered the reassessment, the six-month objection
period had expired.
EDP (Computers) Lack of procedural documentation Data processing programs and procedures are In the event of data processing personnel changes or
not formally documented. prolonged illness of data processing personnel, it may
be necessary to engage an individual unfamiliar with
the Company's data processing programs and
procedures to operate the equipment and to produce
the various reports that are essential to the
Company's business. This will be more difficult if the
individual cannot easily become familiar with the
programs and procedures in place.

Title Weakness Effect

Accounts Receivable and Sales Sales returns and allowances Sales returns and allowances are not Management is unable to determine the cause of the
separately identified for accounting purposes. reduction in gross sales.

Inventory The adjustment from standard to actual cost is This process is very time consuming and should be
done by an extensive price test performed by automated or eliminated all together.
client personnel.

Title Weakness Effect

Cash, Cash Receipts and
Disbursements
Work in progress
Cash Receipts- control over cash Lack of segregation of duties in the cash The company is exposed to the risk of
receipts receipts process. Eg the accounts receivable misappropriated funds.
clerk who receives cheques in the mail also
makes the bank deposits and has access to the
company's accounting records.
Labour rate access by unauthorised During the walkthrough of the work-in-process Unauthorised access to company information can lead
individuals system, it was noted that the rate for labour on to abuse of the system and manipulation of data to
work orders in the work-in-process report could improve results.
be changed without authorisation and the
change was not limited to authorised personnel.
In addition, rates used by the branches do not
always reflect the standard labour rates as
determined by management.

Title Weakness Effect

Inventory Periodically, production personnel elect to write- As a result, the effectiveness of the obsolete inventory
off obsolete inventory directly to inventory reserve as a means of valuing inventory is impaired.
variance accounts. This activity should all flow
through the obsolete inventory reserve.

Payroll, Personnel and Job objectives and performance Individuals do not appear to understand fully This can lead to confusion, duplication of work or lack
Compensation standards their responsibilities and job descriptions. of work completely.

Title Weakness Effect

Financial Management
Sales analysis and record keeping
The percentage of mill sales and warehouse
sales to total net sales for the past three years
indicates a significant trend toward increased
mill sales, which provide a 5-7% gross margin
compared to warehouse sales which provide an
average gross margin of 30%. It appears that
the lower margin mill sales have replaced
higher margin warehouse sales, yielding an
overall smaller gross margin to cover
warehouse, delivery, selling and administrative
expenses.
Only certain sales and order processing costs are
associated with mill sales, causing the 5-7% gross
margin to become practically all profit. However the
large reduction in gross margins from the decline in
warehouse sales has resulted in an inability to cover
the higher fixed costs associated with the warehouse
operations.

Accounts Receivable and Sales The company and its dealers are spending Time and resources are being wasted on unnecessary
significant time and resources on resolving actions which could be avoided if proper credit control
pricing differences and issuing billing and billing procedures were in place.
adjustments.

Title Weakness Effect

General Management
Role and responsibilities of an audit
committee
The company does not have an audit By establishing an audit committee, the board of
committee. directors may achieve an increased understanding of
(1) the role of the independent auditors and the nature
The establishment of audit committees by and limitations of their work and (2) the importance of
boards of directors of public companies is accounting, financial and operating controls to the
recommended by organisations concerned with successful management of a business. The lack of an
financial reporting and the fiduciary duties of audit committee may hamper this understanding.
directors. In addition, audit committees are
required as a condition of listing by the New
York Stock Exchange and other stock
exchanges.

Title Weakness Effect

Title Weakness Effect
Title Weakness Effect
Financial Management
Accounts payable, purchases
and accrued liabilities
Title
Accounts Receivable and Sales Review of buyer responsibilities
Fixed Assets
Use of budgets to establish goals The Company does not currently use a formal It is not possible to identify problem areas or those
budgeting system to compare actual results areas where efficiency must be improved.
with planned activity. Formal operating budgets
are a valuable tool in the control and
measurement of company activity.
Title Weakness Effect
Freight bills are processed for payment When freight bills are received after the vendor
independently of vendor invoices. invoice, they are frequently processed for payment
without reference to the related invoice resulting in the
possibility of freight charges being paid twice or being
paid when the terms call for payment of freight
charges by the vendor.
Weakness Effect
Consideration should be given to eliminating The flow of invoices for approval by buyers provides
the responsibility for buyers to approve little additional control and disrupts the already
merchandise invoices for payment. All the uneven workflow of the accounts payable department.
controls are in place in the accounts payable
department for the automatic payment of
invoices (i.e., matching of purchase order,
vendor invoice and receiving document).
Title Weakness Effect
Calculation of gains and/or losses on We noted during our review of fixed assets that This is a breach of international accounting standards.
fixed assets disposals there were disposals of various vehicles and
equipment during the year that resulted in book
gains or losses. These gains or losses were
not calculated by accounting and there does not
appear to be a policy for accounting for such
items in the consolidated financial statements.
Payroll, Personnel and Accrued bonuses and commissions During our testing of accrued bonuses and The financial statements at the period end are
Compensation commissions, we noted that bonuses in the misstated.
amount of X, based on the percentage of
market share, general discretionary bonuses for
salaried employees and commissions for
customer service representatives were not
accrued at year-end.

Title Weakness Effect

Inventory The Company stores a considerable amount of Lack of control over goods stored for customers could
goods in the warehouse for customers. At year- result in overstatement of inventory or improper
end, much time was spent by the Company recognition of revenue. Significant use of personnel
reconciling perpetual storage records with the time spent reconciling goods owned by customers,
physical inventory. could be avoided if accurate perpetual records are
maintained on a timely basis.
When goods are purchased by a customer and
stored for future shipment, they are tagged as
stored goods. The goods are often processed
and the processed goods are retagged. The
new tags are seldom key-punched and
substituted for the original tags resulting in the
perpetual inventory records not being updated.

Adequate accounting control over goods stored

for customers should be maintained at all times.
This control includes physical identification or
segregation of stored goods as well as
maintenance of perpetual records enabling
identification of goods owned by customers.

Title Weakness Effect

Inventory Adoption of written obsolescence The Company's obsolescence policy is highly This does not provide adequate input to management
policy subjective for evaluating inventory levels and isolating problem
areas.

Financial Management Timely Preparation of Annual Budget The annual budgets for 20X1 and 20X2 were In order for the annual budget to be an effective tool
not completed prior to the preceding year's end. for goal setting and monitoring progress, it should be
completed early enough to permit departments to
implement programs and procedures that will enable
goal accomplishment. Failure to complete the
budgeting process in a timely manner can result in
lack of employee commitment to established goals,
increased difficulty in performance evaluation and the
increased likelihood that problem areas remain
unidentified.

Title Weakness Effect

Accounts Receivable and Sales Lack of dedicated cash collection The controller has primary responsibility for Due to time constraints, the controller may extend
resource credit and collection. The amount of time the credit to high-risk customers or fail to follow up on
Controller has available to spend in this area is collections resulting in bad debts or cash flow
very limited in relation to the amount of problems.
outstanding receivables
Fixed Assets Evaluation of Capitalisation Policy of Legislation requires that costs incurred to Amounts may be capitalised in error.
Software Costs create a software product be expensed up to
the point that the technological feasibility of the
product is established. Subsequent to
establishing the technological feasibility, the
cost is capitalised and amortised over the
estimated economic life of the product.
The software developed by the Company is
marketed through the services provided to its
customers and therefore is subject to the
requirements.

Title Weakness Effect

EDP (Computers) Reviewing security related events is an integral
part of the data security function. This review
can bring attention to weaknesses which
management is unaware of. Currently, all failed
attempts to login within the authorised number
of attempts are recorded and reviewed. No
other types of security related events are
reviewed.
With a Local Area Network (LAN) being installed for
the entire department, it will be increasingly important
to monitor unauthorised access attempts and changes
to sensitive system files. This will provide
management with an additional level of control for
access to the system.

Taxation ParentCo purchases all of its merchandise, The taxation authorities may question the rates used.
other than ________, from SubCo. We
recommended, in a memorandum dated
_______, that ParentCo have an intercompany
transfer pricing study performed. The Chief
Financial Officer of ParentCo has represented
to us that the prices charged by SubCo to
ParentCo are equal to or lower than prices
charged by SubCo to its uncontrolled
customers, (the "uncontrolled prices") and that
current prices remain equal to or lower than the
uncontrolled prices. The company has no
evidence to substantiate that its transfer pricing
on intercompany transactions is reasonable.

Title Weakness Effect

Payroll, Personnel and
Compensation
Verification of information submitted
to data processing
Control totals of hours worked are not By using these procedures erroneous information
established prior to submission to data could be submitted and processed and be undetected.
processing. In addition, the payroll clerk
compares the time cards to the worksheet
generated at the Company as opposed to the
data processing-generated report.
Inventory Currently, the Company does not yet fully utilise Consequently, management relies upon quarterly
its perpetual inventory system for all inventory physical inventory counts for accurate inventory
categories. information. As such, during interim periods, the
Company calculates monthly cost of goods sold
amounts based upon raw material purchases and
monthly finished goods sales. As with any manual
adjustment, the possibility of error exists.

Title Weakness Effect

Information Systems Monitoring of Security-Related
Violations
During the review, management stated that it
monitors security related activity. However, it
does not use the audit journal facility provided
by the AS\400 to record and report security
events.
The advantage in using this facility is that the audit
journal can be activated to record specific categories
of security-related events. By segregating security-
related events, the audit journal allows the reviewer to
easily spot events that require attention and follow-up
action

Accounting Procedures Guidelines for awarding contracts The Company operates without written Lack of written guidelines causes confusion and can
guidelines for awarding contracts to significant lead to inappropriate contracts being awarded or
contractors and written comprehensive improper recording of contract terms.
guidelines for awarding contracts for the sale of
its products. In addition, there is no requirement
to abstract contracts or to communicate
significant contract terms to the accounting
department and other appropriate departments
to ensure compliance and proper recording.

Title Weakness Effect

Inventory The lack of inventory control is reflected in the
increased inventory of approximately X% from
the prior year, while net sales increased only
approximately X%. Further, the investment in
inventories at [date] amounted to X% of working
capital compared to X% for the preceding year.
This situation results in increased property taxes,
insurance, handling costs, losses from damage and
obsolescence and, more significantly, the use of
working capital with no immediate return on
investment.

Payroll, Personnel and Advances to employees are expensed instead
Compensation of being recorded as miscellaneous
receivables. Subsequent reimbursement of the
advances is offset against the expense
recorded.
EDP (Computers) User ID's, including most of the generic IDs, are
not assigned a mandatory menu. This situation
gives these users the capability to override their
menu assignment and access other data.
This treatment does not allow the Company to
maintain accountability of the amount the employee
owes the Company. Additionally, this treatment
overstates expenses and understates assets.
Information security controls are an integral part of a
secure electronic data processing environment. If
adequate compensating controls are not in place,
assets may not be protected.

Title Weakness Effect

EDP (Computers) One of the basic aspects of internal control is a Lack of separation of duties increases the risk of
separation of duties so no one person controls corruption of data and fraud.
all phases of an operation.

Title Weakness Effect

Investments The review of the minutes of the Board does A lack of guidance as to the nature and size of
not clearly state the type of investments the investments permitted may result in a company/
Company/ Association is allowed to maintain for association holding a portfolio with too much risk.
risk purposes.
General Management Improving the Safeguarding of During our audit we noted that: The is a risk that assets may be misappropriated or
Assets (1) The computer facility is not locked after unauthorised transactions may occur.
daily use.
(2) Unissued cheques are not stored in a
locked safe or other secured area.
(3) Keys are left in the cheque writer
overnight.

These weaknesses in internal control could

result in Company funds being disbursed for
unauthorised purposes.

Title Weakness Effect

Accounting Procedures The Company's policy of obtaining competitive If guidelines are not followed quality products may not
bids for purchases in excess of $X is not being be purchased at the best prices. In addition, the
followed in all cases. In some cases, there was Company may be subject to criticism or litigation
no documentation of the reason competitive regarding this policy. The lack of documentation
bids were not obtained. regarding the selection could be an indication of fraud
(kickbacks).
When competitive bids were received, there
was no documentation of the basis for vendor
selection. For example, in one case, it was
believed that the purchase contract was
awarded on the basis of the low bid. Upon
investigation, we learned that the real basis was
superior specification and performance.
Accounts payable, purchases
and accrued liabilities
General Management
Accounts payable, purchases
and accrued liabilities
EDP (Computers)
Numerical sequence of purchase
orders and receiving reports
Title
Periodic review of internal control
Lack of vendor invoice support for
certain disbursements.
Title
Physical security of IT infrastructure
Purchase orders and receiving reports are
prenumbered; however, the accounting
department does not account for the numerical
sequence of these documents.
Weakness
Management is responsible for designing,
implementing, and monitoring the system of
internal control. Reviews are only performed on
an ad hoc basis.
Although there has been considerable
improvement over last year, vendor invoices
could not be located for 13 of 263
disbursements tested.
Weakness
Computer facilities are not physically secure
By not using the numerical sequence order a
company cannot validate whether all purchase orders
have been processed, are included or that all items
received were authorised.
Effect
Any system, regardless of its fundamental soundness,
may deteriorate if not reviewed periodically. The
system of internal control must be monitored
continually to determine whether (1) prescribed
policies and procedures are being carried out
properly, (2) changes in operating conditions have
made the procedures cumbersome, obsolete or
inadequate, and (3) effective corrective measures are
taken promptly when breakdowns in the system
appear.
Lack of supporting documentation prevents errors
from being identified and resolved, such as duplicate
payments. It also increases the risk of unauthorised
payments to fictitious payees.
Effect
There is an increase in the risk of misappropriation of
or damage to computer hardware.
Recommendation
To improve the utilisation of cash resources, the Company should consider implementing a "lock-box"
system of handling cash receipts for all divisions. Under this system, customer payments are mailed to
the Company in care of a bank. The bank immediately credits the receipts to the Company account and
forwards the details of the deposit.

Consolidate cash/ investment accounts down to a manageable level in order to reduce the burden
associated with monthly reconciliations. Various projects should be analysed separately on the general
ledger through fund accounting.

Hợp nhát một vài tài khoản tới mức có thể quản lý được nhằm giảm bớt sự phức tạp trong việc đối chiếu
hàng tháng. Các dự án khác nhau nên được theo dõi riêng biệt trên sổ cái thông qua các tài khoản con

Recommendation
Through the establishment of a junior stock plan or a stock purchase plan, this opportunity can be
opened to all employees.

The adoption of a formal policy of purchasing authority should specify the dollar limits of approval
authority at each managerial level to assure that larger purchases come to the attention of higher levels
of management before commitments are made.

Recommendation
Unissued cheques should be kept in a secure location with limited access to authorised personnel only.
Additionally a log of all cheques issued or voided should be maintained.

Những phiếu séc chưa phát hành cần được cất giữ cẩn thận và hạn chế quyền truy cập, chỉ cho những
cá nhân được ủy quyền. Ngoài ra cần có sỏ theo dõi séc đã phát hành hay đã hủy
Establish an accounting and operating procedures manual outlining policies to be followed by all
departments, as well as customising the manual to specific departments. The preparation and
maintenance of written standard procedures will facilitate necessary review processes and training of
new employees. We understand that a draft manual exists in the utilities department and that other
departments have not started this process. We encourage the Company to continue this endeavour and
recommend further that you obtain a system that will fulfill current and projected needs as soon as
possible.

Recommendation
Controls should be improved over the petty cash fund by:
- Setting a limit on the amount of disbursement allowed.
- all disbursements should be recorded on vouchers in ink.
- expenses and loans to employees should be made from the general bank account and not from petty
cash.
- Require a responsible employee to approve all disbursements
- Cancel all supporting documents that support the disbursement
- Do not commingle proceeds from cash sales with the petty cash fund
- Someone independent should periodically perform a surprise count of petty cash and examine related
vouchers

Các kiểm soát cần được cải thiện:

- Thiết lập một giới hạn về số tiền giải ngân cho phép.
- Tất cả các khoản giải ngân cần được ghi chép trên chứng từ bằng mực.
- Chi phí và các khoản vay cho người lao động phải được thực hiện từ các tài khoản ngân hàng nói
chung và không phải từ tiền mặt.
- Yêu cầu một nhân viên chịu trách nhiệm phê duyệt tất cả giải ngân
- Hủy bỏ tất cả các tài liệu hỗ trợ hỗ trợ giải ngân
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Recommendation
Certain useful inventory management techniques can be applied without a sophisticated computer
system. Significant reduction in carrying costs and inventory investment can be achieved by
concentrating time and effort on reducing the number of weeks supply of high unit cost/usage items and
allowing an increase in the weeks supply of those items that will add little to inventory investment.
Inventory investment can be reduced by using selective controls as follows:
(1) Categorise inventory items based on their annual monetary usage.
(2) Order items with high annual monetary usage very frequently and in small quantities, maintaining
small safety stocks and making frequent cycle counts and stock status reviews.
(3) Order items with low monetary usage infrequently and in large quantities.
(4) Use economic order quantities to the greatest extent possible.

Recommendation
A cost accounting system based on machine-hour rates should be developed for the manufacturing
operation.Some of the benefits to be derived from a complete standard cost accounting system are:
(1) More effective analysis of inventory and operating costs, including the identification of cost variations
resulting from quantity and efficiency factors.
(2) Provision of basic tools for development and implementation of an operating budget, cost controls,
production scheduling, shop manning, machine utilisation, etc.
(3) Development of important information for management's use in establishing prices and submitting
price quotations on jobs.
(4) Added interim financial reporting integrity.
(5) Quick determination of the effects of inflationary price changes for materials, labour, and overhead
items.

Recommendation
We recommend the accounts payable system be modified to provide a detailed month-end listing of
accounts payable balances by vendor. This listing should identify and age all open invoices.

Consider formulating a policy that involves personnel in each production area to document reasons for
production of scrap and identify by contract. This may result in increased efficiency and more accurate
pricing.

Properly document all transactions and maintain all relevant support to ensure adequate audit trails for
both internal and external accounting inquiries.

Recommendation
To improve this situation we recommend that a formal procedure be implemented across divisions to
ensure that all property records are maintained safely.

All transactions should be analysed at division level to ensure that movements are monitored and
correctly recorded.

Divisions should be reminded of the importance of adhering to the policies concerning property records.

One of the ways that oversight can be enhanced is through the use of an internal audit function. This
group reports to the Board of Directors and is charged with monitoring the operations, including
information systems, for compliance with the Board of Directors directives and policies. The internal audit
function can also help identify areas where productivity and profitability improvements can be made.

We recommend the Company evaluate on an ongoing basis the need for additional oversight, such as an
internal audit function

Recommendation
We recommend that the Company store all current records in closed cabinets. Out of date or otherwise
unused records should be moved to a fireproof storage facility.

The vault/ petty cash tin should be closed and locked at all times unless the manager is in the office and
has a need to withdraw or deposit funds.

Két tiền mặt luôn phải khóa trừ khi có người quản lý cần rút tiền hay bổ sung quỹ

We recommend all changed forms be signed by the preparer and approved by the store manager.

We recommend that the Company require all employees to take their vacations during the period to
which the allowance relates.

All inventory items, including obsolete inventory, should be tagged and counted during the physical
inventory. Tags should be retained to maintain an audit trail for both internal and external audit purposes.

Recommendation
All cheques should be restrictively endorsed at the point of receipt.

Phiếu thu cần được lập ngay tại thời điểm nhận tiền

Bookkeeping personnel should be adequately trained to reduce input errors. In addition the controller
should review and approve all adjustments to customer accounts. This will also provide a basis for
evaluating the bookkeeping department.
To prevent processing erroneous or unauthorised entries, we recommend:
- All entries be reviewed and approved before processing.
- Responsibility for preparing monthly journal entries be restricted to authorised personnel.
- Journal entries should be sequentially numbered and accounted for numerically.
- Supporting documentation for each entry should be attached to the respective entry.
We recommend that cost centres be broken down into smaller geographical areas.

Recommendation
We recommend that access to unissued cheques be restricted to an individual not responsible for
generating disbursements or reconciling bank accounts.

Cần được theo dõi bởi cá nhân ko phải là người hạch toán sổ sách

Cheques should be issued in numerical sequence.

Phiếu chi cần được theo dõi theo số thứ tự

Recommendation
Budgets should be prepared annually and revised periodically as market conditions change. Variances
between budget and actual should be identified monthly and investigated to determine cause and
possible corrective action. The computerised accounting system proposed in this letter accommodates
budgets. A fair amount of time of the proposed controller will be required to establish initial budgets and
to develop routine procedures, therefore, compliance with prescribed procedures must be emphasised
throughout the Company. In addition, effective budgeting involves more than the accounting department.
Individuals responsible for the purchasing, production, and marketing/sales functions are important
contributors to the budgeting process.

Recommendation
The control over payroll disbursements would be strengthened if the duties of payroll preparation,
signature and check distribution were segregated. In addition, surprise distributions of payroll checks by
qualified persons in the accounting department would provide additional control over corporate assets.
We also recommend that officials of the Company periodically review the payroll register for propriety.
These reviews should be evidenced on the register by the official's signature and be performed on a
surprise basis. In addition, input documents initiating changes to the payroll should be approved by an
official prior to being submitted for processing.

To avoid the potential problem of losing a valid business deduction, the Company should improve its
record-keeping system for travel and entertainment expenses. We recommend that a policy be
established requiring expense reports or requests for reimbursement to meet the reporting requirements
of the tax authority and that preprinted expense report forms be used.
Recommendation
Reexamine the lease versus buy option more closely or negotiate more favorable lease terms for future
leases.

Perform a physical inventory to verify the accuracy of the fixed assets recordkeeping. This process
should include both office and factory machinery, equipment, automobiles and leasehold and building
improvements. Physical verification would improve the integrity of the fixed asset records and, more
importantly, ensure that the Company is paying the appropriate property taxes.

The company should ensure at minimum that cash registers have locked in cumulative register totals.
These can also be used to verify store sales and reconciliation of sales.

Kiểm soát hoạt động của máy tính tiền

Recommendation
Strengthen controls over invested funds by assigning the responsibility to reconciled the account to an
employee who is not authorised to make withdrawals from the bank account.

Recommendation
We encourage the inventory quantity verification efforts. Consider cycle count selections on a monetary
volume basis rather than the judgmental selection process currently used. In this manner, high monetary
volume parts would be counted quarterly, medium volume parts would be counted semi-annually, and all
other parts would be counted annually. Parts to be counted could be selected and tracked directly from
an automated database. The code given to each part should be based on monetary volume of the
individual part number to ensure that all parts are counted.

Continue efforts of receiving physical counts from outside vendors on a monthly basis. All reconciling
differences should be addressed in a timely manner. Report results of the reconciliations to Purchasing
to make them aware of vendor's adherence to accuracy. Such procedures may provide indications of the
overall control environment at vendors, including product quality-related

Recommendation
Define and document a formal problem reporting and resolution procedure. This should include
maintenance of a problem resolution log that will identify the problem, the resolution and the time
required to resolve the problem.

We recommend the individuals responsible for preparing purchase orders to record all relevant
information on them.

Invoices should not be processed for payment without adequate documentation that goods have been
received. Those invoices for which receiving reports are not appropriate should be approved for payment
by the appropriate responsible official. We recommend a receiving report be attached to each invoice
regardless of the type or size of receipt. If the invoice is for services, it should be routed to an individual
who can verify that the service was performed.
Recommendation
Implement divisional policies for determining the reserve for uncollectable accounts receivable.The
accounts receivable aging should be analysed to establish a reserve based upon historical accounts
receivable write offs by aging category as well as an overall general reserve component. The reserve
should also have a component for items that have been specifically identified as potentially uncollectable.
Personnel at the company should assist in the development and implementation of a policy appropriate
for each division.

Analyse the nature of customer debits and credits and record or expense them appropriately. Develop a
standardised coding system for open debits and credits for identification on the accounts receivable
subsidiary ledger. Develop a system of monitoring and approving debits and credits.

Recommendation
A copy of all important contracts and leases entered into by any of the divisions or subsidiaries should be
maintained in a central file at the corporate office. To facilitate a review by management and other
interested parties, such a file should contain a current index that includes the following information for
each contract; terms, renewal options and other important provisions. In addition, a tickler file should be
maintained to alert management to important contract terms that require attention such as renewal dates,
rate changes, option dates and expiration dates..

The system should be reconfigured to prevent this from occurring.

The Company should consider a hardware utilisation and capacity review to determine what solutions for
hardware may be available in the future.

BDO can advise on formulating a detailed data processing plan.

Recommendation
We recommend that only those assets that are expected to incur additional costs to complete be posted
to this account. All other assets should be posted directly to the appropriate asset account.

We recommend the entire process of accounting for price changes be computerised to improve both the
efficiency and accuracy of the process. Computerisation of this process could provide the following
benefits:
(1) The computer could numerically control all the forms, provide a listing of missing documents; and
(2) The computer could match changes in selling price forms to their original mark down requests and
provide a listing of those that require buyer approvals.
In addition to providing the benefits described above, the computerisation of price changes could
enhance operating reports and eventually be integrated into the merchandising system.

Recommendation
To assist you in this process, we would be happy to instruct our specialists in the area of computer
system conversion to discuss your requirements.

We believe the possibility of paying fictitious vendors would be reduced if the following were performed
by personnel independent of the accounts payable processing.
(1) Authorisation to information systems for additions and deletions to the vendor number master file (by
general accountant).
(2) Operation of the cheque-signing machine (by treasurer's secretary).
The server should be set to disable terminals after a reasonable time (with sufficient warning for any
users who are still logged on at that time).

Recommendation
We strongly believe that a merger and acquisition program should be formal and comprehensive. The
program should include, among other matters, the following considerations:
Planning
(1) Define external and internal expansion and diversification goals in writing.
(2) Set criteria for prospective acquisitions with reasonable parameters.
(3) Define methods of finding prospects.
Investigation
(1) Prescribe investigation procedures and responsibilities.
(2) Adopt checklists for investigation guidelines based upon the degree of investigation desired.
Financial and operational reviews or audits of significant prospects should be conducted to substantiate
and protect the Company's interest. Other significant areas that should be assessed are non-financial
operations (i.e., production, industrial relations, engineering, purchasing, traffic, etc.), organisation,
marketing, and legal considerations.

Recommendation
To achieve uniformity in financial reporting and to facilitate the compilation of financial information in the
year-end consolidation, the Company should establish the following:

1) An organisation chart clearly defining lines of responsibility and reporting.

2) A uniform chart of accounts, including a description of the nature of items to be recorded in each
account.
3) A written manual of accounting policies and procedures to be followed by employees.
The manual should include:
(a) Company policy on such items as capitalisation of assets, treatment of perishable tools, etc.
(b) A description of the inventory system employed (job cost, etc.), samples of the necessary detailed
records, etc.
(c) An overall master plan for long-range planning which includes a list of priorities.

Recommendation
Reconcile the fixed assets gain/loss per the general ledger to the fixed asset system on a monthly basis.

A system of controls should be established to ensure that finished units are manufactured in accordance
with the bill of material and that any approved substitutions are accounted for in the cost system.

We recommend the Company's filing system be organised to ensure that all documents and records are
properly filed on a timely basis. In addition, employees should be required to sign for records removed
from the files. This practice will reduce the possibility of records being misplaced or misfiled.

To improve the Company's audit trail, we recommend that all reviews be evidenced by the Controller
initialising the item reviewed.

Ký tên trên tất cả các control đã review

We recommend an operations analysis be conducted at XYZ Inc. This would involve a review and
analysis of operations, controls, policies, systems, and financial results, in light of good management
practices, to determine the effectiveness of present practices and to point out areas for improvement.

The objectives of the analysis are:

(1) To determine whether XYZ Inc. and its organisational units are being run effectively.
(2) To reveal deficiencies in business practices; and
(3) To provide an opportunity for early disclosure and correction of problem areas before practices
become firmly established.

Recommendation
The Company should explore the feasibility of computerising its inventory accounting system. The
following are among the benefits of a computerised system:
(1) Provides greater flexibility in production scheduling.
(2) Enables management to install inventory controls, particularly over inventory at outside processors.
(3) Facilitates establishing reliable perpetual inventory records at all locations to improve the integrity of
interim financial reporting and control of inventory levels.
(4) Permits analyses of sales by customer, part or model number, territory, salesman, etc.

Such a reconciliation should be made each month and approved by the appropriate supervisory
employee.

Recommendation
We recommend the Company consider implementing an automated fixed asset system. We believe the
benefits derived far outweigh the costs of automation. These benefits would include:

1. Facilitating the preparation of interim financial statements;

2. Providing more economical processing of transactions;
3. Improving the accuracy and efficiency of accounting personnel;
4. Facilitating detailed fixed asset account analyses; and
5. Providing the Company with sufficient records to elect accelerated depreciation methods for tax
purposes

The accounting department should maintain control over the packing slips so all documents can be
accounted for as part of the billing process.

Recommendation
We recommend that management promptly consider improving the organisation of the raw material
storage facilities.

Reclassify invoices with due dates beyond one year to long-term notes payable.

Recommendation
To provide control over the purchasing function, we recommend the following procedures be
implemented:
(1) Purchase orders should be required for all purchases over a specified amount. Account classification
should be made on the purchase order when prepared.
(2) Receiving documents should be initialed, dated and forwarded to the accounting department by the
person receiving the goods.
(3) Account classifications on both the purchase orders and invoices should be reviewed and initialed by
the department head and the controller.
(4) The accounting department should periodically review and investigate unmatched receivers to
determine if any invoices have been misplaced or not received.

Recommendation
We recommend that all authorised advertising expenditures be assigned to a specific store, region or all
stores. Those expenditures assigned to a specific store should be charged to that store, and other
advertising costs should be allocated to the individual stores within the region or all stores by some ratio
such as prior period sales. In addition to the above, a record of advertising by type (e.g., TV, radio, etc.),
should be maintained for overall budgetary control.

Recommendation
To avoid severe impairment to the Company's computer operations in the event of a prolonged failure or
localised disaster, the Company should:
(1) Establish a priority processing plan based on the impact of the delay expected for equipment
replacement.
(2) Investigate alternate facilities to provide sufficient processing time for critical applications.
(3) Perform periodic test operations at the alternate facility and document the contingency operating
procedures.
(4) Provide for notification of equipment changes at the alternate facility and for updating the plan
periodically

Recommendation
To increase the effectiveness of the internal control over cash disbursements, we recommend the
following changes in procedure:

(1) The matching of purchase order, receiving report and vendor invoice should be performed by the
accounting department.
(2) Cheques should be mailed by a person directly under the check signer's control and not returned to
the accounts payable department after being signed. In addition, all supporting detail, not only the vendor
invoice, should be stamped "Paid" by the person mailing the cheques, or someone under his direct
supervision, to reduce the chance of duplicate payments.

Review all new leases for the proper classification as operating or capital lease. Include documentation
of the decision-making process with the lease documents.

Recommendation
In light of the volume of the Company's records and the costs related to their preparation and retention,
we recommend procedures be adopted to review and evaluate record keeping requirements and the
adherence thereto on a periodic basis (e.g., every one or two years). The following record keeping
considerations should be investigated during such a review:
(1) Local legislation retention requirements for each type of record and document.
(2) Internal retention requirements of certain records and documents not covered by legal dictate (e.g.,
government contract records and other customer contract records).
(3) The type of paper to be used to record data, considering the length of the retention period and the
type of storage facilities.
(4) Availability of storage facilities (microfilmed / scanned records require less space than source
documents).
(5) Cost of microfilming / scanning records versus the cost of storing the original documents.
(6) Frequency of referral to documents (microfilmed

Recommendation
Recommendation
We recommend the Company consider establishing a control group to balance all edit reports and to
correct errors that can be corrected easily such as keypunch errors. Errors that cannot be corrected by
the control group should be referred back the user department. The functions and duties of the control
group should be dove-tailed into the controls exercised by the user departments. A control group manual
should be prepared that should include the following:

- A list of errors and their meaning.

- The types of errors the control group can correct and how correction is to be effected.
- The types of errors that should be referred back to the user departments for their review and
subsequent correction when necessary.
- Types of records that should be maintained to keep control over input and output from the computer
together with other required control information.
- Procedures for setting up jobs for processing.

The introduction of a

Recommendation
BDO are able to provide specific advice on the matters that should be considered in connection with the
project.

Current signatories should be maintained on all accounts.

Cần điều chỉnh cho phù hợp

We therefore recommend at a minimum that the Company have an instruction session for the counters to
detail and discuss inventory procedures before the physical inventory begins. This session should help
eliminate errors and could possibly improve the efficiency of the physical inventory process.

Recommendation
Consider establishing an internal auditing function at the corporate level to strengthen and monitor
Company-wide policies and systems. This function could be outsourced which has become an effective
and cost efficient alternative to using internal staff. Include areas not limited strictly to financial matters,
such as purchasing, production and inventory control, and maintenance. Expansion of the internal audit
function to such areas would provide management with a more objective appraisal of the performance in
these areas.
Provide personnel in all departments with opportunities to participate in longer term continuing education
such as seminars offered by governmental associations

The Company should consider implementing a "lock-box" system of handling cash receipts. As interest is
charged on a daily basis, a lock box would eliminate the one-or-two-day lag between receipt of the cash
and subsequent deposit, with a resulting decrease in interest expense.

Recommendation
Management should assess the impact the new standard will have on the Company's consolidated
financial position and results of the operation.

We recommend that a detail report of "uncosted receivers" is generated and reconciled to the accrued
accounts payable general ledger account on a monthly basis. All reconciling items should be
investigated and properly resolved in a timely manner.

Recommendation
We understand that there is an informal system for backing up certain master files. However, we
recommend the Company review and formalise its back-up procedures. The documentation should
include, but not be limited to, the following:
(1) The physical location of back-up files (master files and systems).
(2) Frequency with which master files are copied for back-up purposes (i.e., weekly, monthly, etc.).
(3) Operating instructions.
(4) Location of source documents that would be used to update the back-up files.
(5) Location of program change forms that would be used to update systems to bring them to a current
status.

Recommendation
Consider establishing a functioning board of directors. Two individuals from the Company's Executive
Committee could be asked to asked to join the Board and an additional two individuals from outside the
Company could be added, with the sole stockholder serving as the fifth member of the Board and its
chairman. This would provide several benefits to the Company, including:
(1) Access to additional management expertise at little cost;
(2) Added prestige to the Company's name and actions by its association with recognised names in the
community;
(3) A mechanism for an independent appraisal of management's decisions and policies; and
(4) A mechanism to provide for innovative solutions to Company problems.
Implement regular procedures that focus on the collection of accounts receivable. As part of, but not
limited to these procedures, management should consider regular credit checks on customers and their
adherence to terms.

Recommendation
Estimate the expected discounts based on customer terms or account history and provide for a year end
accrual.

The Company should ensure that its records comply with the property insurance policy provisions, so that
in the event of a loss, the insurer will not be able to avoid payment for a failure to keep accurate records.

Recommendation
Implement the use of an accounts payable system whereby invoices are formally controlled and recorded
when received rather then when paid.

We recommend that sales invoices be reviewed on a limited basis by the accounting manager. The
review should include the extensions, coding and pricing of the invoices.
We recommend a long term data processing plan be developed detailing the future systems
requirements of the Company and the associated costs of implementing these systems. The plan should
also detail the anticipated dates that the new systems will be put into operation.

Recommendation
Consider tax planning issues for the Company's wholly-owned subsidiary.

The Company should consider implementing a mechanism that would provide for proactive involvement
by the legal, tax and finance departments for all significant contracts being negotiated.

Recommendation
We recommend the Company review the benefits derived from the present standard cost system:

- Reporting material price and usage variances from expected targets (standards) to measure the
effectiveness of the purchasing function;
- Reporting labour, overhead, and scrap variances to measure the effectiveness of the production
function;
- Providing more accurate information to determine product profitability and pricing strategies; and
- Providing a basis for isolating physical inventory shrinkages or pickups.

Also consider the following:

(1) Establish new material standards that are based upon the expected mix of foreign and domestic
purchases.
(2) Review and adopt variance reporting procedures that management believes are critical to the
operating and quoting functions.
(3) Establish a procedure to review reported variances periodically and to follow-up on unusual
fluctuations.

Recommendation
Recommendation
We recommend that all reconciliations and related account analyses be reviewed by the appropriate
management personnel.
We recommend the President of the Company be furnished with an analysis of cash flow at the end of
each month. (Consideration should be given to preparing such an analysis on a weekly basis during peak
cash-flow periods.) These analyses should show cash flow as compared to the budget for the month and
the year to date. In addition, we recommend these analyses show investment income earned to date
against budgeted amounts with all variances explained. By obtaining these formal analyses, the
President should be able to ensure that the excess cash of the Company is being properly utilised and
invested.

Recommendation
This practice should be discontinued. Disbursements should be issued promptly to ensure the control
system is maintained.

Update inventory observation instructions on a regular basis. Inventory observation instructions are an
important part of the year-end physical inventory and can effectively communicate information between
the accounting department and the plant sites. These instructions should specifically detail shipping and
receiving cut-off procedures at year-end.
Better production planning would result in fewer runs and save the cost of additional setup time and
duplication of orders.

Recommendation
We recommend that documentation for all payroll deductions and rate changes be maintained in
employees' files to ensure correct payments are made and that all modifications to salaries are
authorised. In addition, officers' salaries should be approved by the Board of Directors and documented
in the minutes of their meeting.

Management should encourage employees to make recommendations as to how the Company can
improve its operations. A proven method of involving employees in the management of the Company is to
establish an incentive or awards program. Under the program, employees would be given cash awards
for suggestions that resulted in significant savings or additional revenues for the Company. Additionally,
cash awards should be given for identifying potential customer leads or acquiring additional business for
the Company.

Recommendation
To reduce the possibility of unauthorised computer use, we recommend console logs be pre-numbered to
ensure that all activity is accounted for.

We recommend management consider the feasibility, cost and benefits of computerisation of the
Company's field sales reporting. Many companies are now offering low cost portable computer
equipment that can tie into centrally located mainframes. As the costs have decreased and the
capabilities of the portables increased, their use by field salespeople has grown. Computerisation of field
sales reporting can enable salespeople to be in touch with the latest information on inventory levels and
customer order status and permit the placement of orders, expense reporting, customer cost analysis
and the filing of all reports over phone lines. Benefits of computerisation include increasing face-to-face
selling time, better inventory control and reduction of order processing time

Recommendation
We encourage the Company to continue to obtain proposals for the replacement of the existing system
and to obtain a system that fulfils current and projected needs as soon as possible.

BDO is able to act as advisors during the purchasing process to ensure that all factors are considered
when deciding on which new system to implement.

Recommendation
We recommend that a memorandum control account be maintained for accounts written off to provide a
basis for continued collection efforts on these accounts. All accounts should be reviewed for collection
monthly to enhance timely collection. The accounts receivable manager should be relieved of general
office duties to enable him to spend more time on collection efforts.
Recommendation
It is important that monthly inventory be properly valued based on all inventory owned at the end of the
month. When calculating the book-to-physical adjustment, the international inventory shipped before the
cut off date and not yet received should be included in the actual physical inventory as of that date.

Recording open receivers should be done on a monthly basis. Since the Company cannot hold accounts
payable open to record such late invoices, a separate accrual account should be used. Reversing the
accrual in the next month would prevent duplicate recording of the liability.

In addition to setting up the accrual, a better system of calculating the open receivers should be
implemented. The procedure now used requires many hours of comparing receivers to invoices. An
alternate procedure may be that the date received be entered into the computer system at the time the
goods are received. A report listing

Recommendation
We recommend a general security review be performed of the Company's data processing environment
to address the following matters:
(1) Can a sensitive computer program be amended without authorization?
(2) Can computer users gain access to data to which they have no authorization?
(3) Are data processing records and equipment adequately protected against fire, flood or other natural
hazards?
(4) Is too much reliance placed on key members of the data processing department or an external
software house?

We recommend access to the data centre be limited to data processing personnel.

Recommendation
We recommend that management consider implementing automated procedures to identify slow-moving
and obsolete inventory, taking into consideration days inventory on-hand and inventory which is not
currently being sold or used in any of the bills of material. The automated identification process should
be supplemented by manual controls and judgments.
Recommendation
Submit the remittance of withholding tax by the 15th day of the month following the period when royalties
to X Company are accrued in the accounts. This practice should be implemented immediately to avoid
exposure to the interest and penalties described.

Recommendation
We recommend that a study be conducted to determine what type of cost accounting system will better
suit product pricing requirements, inventory valuation needs, cost control and gross profit analysis. The
following items should be considered:
(1) Standard labour requirements should be established for the manufacturing process. The Company
could then initiate a reporting system so actual labour could be measured against these standards to help
measure efficiency.
(2) Similarly, actual material input could be measured against standard material required to determine
usage as well as ensure that the proper materials are being used.
(3) A review should be made of the Company's allocation of direct labour and overhead expenses to cost
of sales. This review is imperative so accurate rates can be established for inventory valuation purposes.

Recommendation
Require each salaried employee to sign a patent agreement that assigns to the Company the rights to all
inventions made in the course of employment as a condition of employment.

Consider expiration dates in overall financial planning as the period during which these carryovers may
be utilised is limited.

Recommendation
The data processing department should not act as a branch of the accounting department nor should it
substitute for a payroll department. The payroll department should receive cheques and payroll registers
from the data processing department and should be held responsible for the accuracy of the registers. A
request for a transfer of funds from the commercial account to the payroll account should be originated
by the payroll department and approved by the Controller. Someone other than data processing or payroll
personnel should be responsible for prompt reconciliation of the payroll bank account.

In addition, we recommend that accounting personnel make periodic distribution of payroll cheques to
employees. It is imperative, however, that all checks are accounted for prior to distribution.

Recommendation
Perform a fixed asset inventory of all items, paying extra attention to the usefulness and current condition
of the items. Based on the results of this inventory, management may choose to shorten the useful lives
of certain fixed assets, or dispose of certain fixed assets as the cost of holding such assets may exceed
the related benefits. Consider in the future scheduling fixed asset inventories periodically as
management deems necessary.

All cheques should be recorded in the cash disbursements journal to ensure all prenumbered cheques
have been accounted for. The signature section of voided checks should be removed and defaced to
prevent their re-use. Voided cheques should be interfiled with cancelled cheques.

Recommendation
The possibility for further strengthening internal controls within the information systems group could be
realised when the IAD extends its procedures to include testing the controls of existing information
systems. Periodic review and testing of all systems by the IAD would help to determine that proper
standards of control are maintained. Because of the increasing importance of information systems,
involvement of the IAD with the information systems group should be expanded. IAD's involvement might
be expanded to include tests of control totals, balancing procedures, and control logs on a periodic basis.

Implement procedures to enter invoices on a due date basis, so that the system will determine when they
become due. Consider paying invoices twice monthly rather than weekly.

Recommendation
Bill and collect for all services, and likewise, all services received in exchange should be invoiced and
paid by the company in order to facilitate more accurate and meaningful financial reporting.
Develop and begin a training program, emphasising individual positions and responsibilities, and the
proper document flow. Prepare specific written job descriptions and procedures necessary to accomplish
a function. Management should develop controls which would enable them to monitor progress in the
above-mentioned areas.

Recommendation
It is important that steps be taken to protect the Company's competitive position. While one alternative is
to strictly limit access to all confidential information, certain of this information must be available to
specific employees to perform their required job functions. As an additional alternative, we suggest
consideration be given to requiring all officers, and possibly other specific employees, to sign non-
competition agreements which effectively prohibit the employee from competing with the Company for a
specified number of years after termination.

Consider using the actual overhead rate incurred in the application of overhead costs to jobs-in-progress
or use a more meaningful estimate that more accurately reflects actual costs.

Recommendation
In view of the reporting obligations for executive perks, the Company should develop methods to identify
specifically the various forms of executive compensation. In addition, the Company should consider
establishing a compensation committee composed primarily of non-management directors. The functions
of the committee may include, amongst others, the following:
(1) Approval, or recommendation to the board of directors, of management's annual compensation,
including bonuses.
(2) Approval of new compensation plans in which officers and directors participate.
(3) Granting options under the existing option plan.

We recommend a standard policy be developed and documented establishing estimated lives by asset
classifications.

Recommendation
The Company should consider developing the following information:
(1) A daily report that summarises changes in cash position, outstanding accounts receivable and
payable, and the borrowing or temporary investment position.
(2) A weekly forecast of cash requirements and receipts projected over the following four-week period.
(3) A monthly status report of unusual billing, collection, or payment backlogs influencing cash flow.
This information can be reported routinely by accounting personnel to management. This should keep
management informed on a current basis of the cash position and trends and the position in accounts
receivable. It would also guide decision-making as it relates to the expenditure of funds, borrowing, and
follow-up of unusual changes in receivables.

We recommend the Company hire an assistant controller with a strong accounting background.

Recommendation
We recommend, as a minimum, production counts used in cost accounting be reconciled to the
production counts used for payroll purposes. We also recommend that a reconciliation be made of time
worked as reported in the cost records to time summaries prepared by the timekeeping function.

Develop and document procedures for local personnel to reconcile intercompany transactions and
balances on a periodic basis. Local personnel should work with their counterparts in the other affiliate
locations to reconcile these amounts throughout the year and at year-end. Corporate personnel should
review the reconciliations and assist in resolving any unreconciled items and disputes that remain
unresolved.

Recommendation
We recommend management consider borrowing on the cash surrender value of the policies. These
funds can be used to invest in short-term interest bearing obligations or to reduce the amount of bank
borrowings. Where funds are to be invested, it is relatively easy to generate earnings on minimal risk
investments in excess of the insurance Company's loan rate and thereby increase corporate earnings.
Similarly, where borrowed funds are necessary, insurance loans generally represent a less expensive
financing alternative.

In addition, cash or investments generated from loans would be classified in the balance sheet as current
assets rather than as a non-current asset as is the case for cash value of life insurance. By increasing net
current assets and reducing net non-current assets, the Company's bonding capacity will be expanded.
Recommendation
We suggest the following recommendations: (1) We noted that the passwords used to obtain
entry into the files are stored in a desk drawer. Better security would involve placing these under a
supervisor's lock and key. In addition, the passwords should be changed periodically, as well as when
personnel leave.
(2) Entries can be made for any date desired. This could lead to back-dating or post-dating transactions.
To strengthen the controls over daily input, we recommend that only transactions with the current date be
accepted into the system or that the system generate a processing date

We recommend year-end expense accruals be reviewed for tax implications and be reflected
appropriately in the tax provision.

Recommendation
With the above in mind, we suggest that management consider developing a formal strategic plan which
will cover a period of three to five years. Such a plan would document the present and anticipated future
marketplace, the Company's goals and objectives, specific steps required to meet such goals and
objectives, and the specific roles of each officer and manager in carrying out the plan. We feel the
Company would benefit in the long run if this planning process were performed and documented. It is
surprising what types of ideas can come out of periodic, unstructured, brainstorming meetings, ideas that
could ultimately shape the Company in the years ahead. Consider:
(1) Is the Company's strategy to build equity or minimise taxes?
(2) What are the trends in the industry?
(3) Are the Company's businesses providing an adequate return on investment?
(4) What are the long-term information systems requirements of the Company?
Once the plan and goals

Recommendation
We recommend that an organisation chart and written descriptions of job responsibilities be prepared for
all personnel in accounting and administrative functions. This will provide management with a basis for
redistributing workloads, evaluating personnel requirements, and judging job performance.

As the Company and its accounting staff grow, efficient organisation and effective controls may require
that individuals in the accounting department become specialists in certain functions. We recommend
that the accounting department policies and procedures be defined to maximise individual efficiency
through specialisation.

In addition, disruptions of established routines (such as that resulting from field assignments) should be
minimised so that efficiency and accuracy will not suffer. Further, so that personnel turnover will have a
minimum effect on the accounting department, department policies and procedures should be
documented in manuals

Recommendation
Establish a framework of standards and procedures for EDP related activity. This would provide a more
structured environment for the EDP department to function and could be extended to satisfy certain ISO
9000 certification requirements, which the Company is currently pursuing.

Individuals who are authorised signatories should not be permitted to sign cheques payable to
themselves.

Management should consider updating their system so that invoices for back order items reflect the
shipping date of the original order and the date the back ordered item was actually shipped. This will
provide more accurate information for shipping and invoicing.

Recommendation
The following illustrate areas where improvements in the Company's annual LIFO calculations may be
necessary:
(1) The double-extension method is used in computing the LIFO inventory value based on the earliest
acquisition cost during the current year. By drawing a relatively small sample the Company determined
that the costs on the perpetual inventories near year-end approximated earliest acquisition prices for
purposes of determining the current year's index. The sample was not statistically valid nor was it
correctly evaluated in reaching the conclusion.
(2) The current year's index was derived by comparing the aggregate inventory value as reflected in the
perpetual records to the aggregate inventory value arrived at by extending current year quantities at base
year prices. A test of these listings revealed that some quantities were not extended on the base year
listing and no provision was made to allow for this effect when the base year run was compared to the
current cost run. It also was determined that the listings

Recommendation
We recommend the Company consider the need for a consolidated Employee handbook.

All required information should be completed on the block stamps to ensure errors do not occur and to
reduce the risk of fraud.

Recommendation
Management should consider training the data processing manager in the use of (programming
language). This would permit more control over the development of the accounting application. However,
if programming is performed internally by the Company, there should be a menu and resource security to
limit programming to a test library.
We recommend that data security features of the system be reactivated. This will improve controls over
access and will safeguard the Company's financial data from unauthorised tampering.

Recommendation
We recommend the development of Prevention controls to improve the accuracy of data input.

BDO will be happy to advise on the implementation of such a control system.

We recognise that at the present level of operations, the addition of personnel to perform a purely control
function may not appear to be cost justified. However, as operations continue to expand and internal
controls increase in importance, resources should be allocated to the enhancement of controls so as to
provide accurate and timely financial information.

Recommendation
While internal controls are designed to safeguard assets and help prevent losses from employee
dishonesty, insurance, such as fidelity bonds, may be a practical, relatively inexpensive supplement to
internal controls.
The following types of coverage are available:
(1) Scheduled bond - used where employer needs to cover only certain named employees.
(2) Blanket bond - covers all employees, including automatic coverage for new employees.
(3) Position bond - covers specific positions rather than certain named employees.

We recommend the Company consider obtaining bonding insurance providing coverage for all key
employees.

Recommendation
We suggest that management review the chart of accounts and make appropriate revisions to include all
accounts currently in use, additional accounts necessary for disclosure requirements, and other accounts
that management believes will aid its review and evaluation of operating performance. In addition, a set
of detailed instructions should be developed to aid each division in making accounting classifications
consistent with the consolidated group. Consistency in reporting among the various locations is essential
to a meaningful review and comparison of operating results.

Recommendation
Adjust machinery labour standards to accurately reflect the actual labour time incurred to produce the
product. Adjusting these standards would result in a higher overall efficiency rate for all machinery
products. Additionally, the labour inefficiency variance, included in overhead, would be reduced resulting
in more accurate product costing.

All purchase invoices should be cancelled on payment either by a "paid" stamp or by the cheque signer
initialling the invoice.

Recommendation
We recommend the Company establish the policy of marketing what is currently held in inventory in
standard packs. To implement this policy, salesmen should be provided with weekly listings of items for
which they will be paid full commissions for selling.

Recommendation
The Company should fully depreciate all assets for tax purposes to benefit from the available tax savings.
No salvage value is normally assumed under accelerated methods, and conversion to the straight-line
method mid-way in the useful life will maximise tax benefits.

We understand that, given the nature of the Company's business and organisational structure, cycle
count procedures may vary between product lines and plants. However, to ensure that the benefits of
cycle counting are consistently achieved throughout the Company, written procedures should be updated
on a timely basis to address any changes and should also be included in the policies and procedures
manuals for each plant.

Recommendation
Review policies and procedures regarding the use of derivatives to minimise foreign exchange rate risk.
The Company should assess the impact of Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities when developing these procedures. This
Statement requires that all derivatives be recognised in the financial statements and measured at fair
value. Gains and losses resulting from changes in fair value would be included in income, or in
comprehensive income, depending on whether the instrument qualifies for hedge accounting.

We recommend all credit approvals over a stated dollar amount be subject to final approval by a higher
level of management.

Recommendation
Eliminate the multiple IDs residing on Company 1. Also, consider including all participating loans on
Company 1, instead of maintaining a separate system for these loans.
We recommend that management direct its staff or engage us to selectively observe the monthly
inventories on a surprise basis. If each plant was visited once or twice a year, management would have
more confidence in the accuracy of inventory quantities listed and, at the same time, demonstrate to the
plant manager that management is interested in the accuracy of the counts.
Recommendation
We recommend that perpetual inventory records are established for substantially all inventories and that
standard cost systems are implemented for all manufacturing operations. The current information system
could be modified by reporting production quantities and, together with sales data already generated, this
information could form the basis for perpetual records of manufactured inventories. Once established,
perpetual records and the use of standard costs would:
(1) Reduce the frequency of physical inventory counts.
(2) Provide better accounting control over the flow of goods and increase the possibility of detecting theft
or unrecorded shipments.
(3) Provide management with more valuable tools to monitor realisation and quickly spot production
inefficiencies.
(4) Provide more reliable cost and accounting data as a basis for determining product profitability and
needed shifts in production and sales emphasis.

Using existing data

Recommendation
We recommend a written procedure statement be prepared that would require:
(1) A detailed property record for each fixed asset.
(2) A property identification number to be assigned and affixed to each asset.
(3) A capitalisation policy under which disbursements below a specified dollar amount would be charged
to operations.

At a minimum, the detailed property records should include the following information:
(1) Description, asset number, and location.
(2) Historical cost and date of acquisition.
(3) Assigned life and method of depreciation.
(4) Depreciation taken on an annual basis with accumulation thereof.

Develop and adhere to an investment policy that combines desired risk with return.

Recommendation
In an effort to evaluate operational performance more accurately, consideration should be given to
revising current budgeting procedures by:
(1) Obtaining forecasted operational data from appropriate divisional sales, manufacturing, and
administrative personnel.
(2) Implementing a flexible budget concept.
(3) Updating the current year's budget at least quarterly for operational changes.
(4) Communicating operational performance to appropriate personnel.

We recommend the Company review the areas where job rotation may be possible and develop and
implement a job rotation plan. It may generate more interest, greater efficiency and higher morale.

Recommendation
We recognise that the accounting department has a limited number of employees and therefore the
Company is somewhat restricted in obtaining maximum segregation of duties. However, we believe the
system could be strengthened by requiring the Controller to review the work of other accounting
department employees. We also recommend that the Controller does not handle the receipt or
disbursement of Company funds - he should only review the results of these processes to ensure these
activities are being handled properly.

Data processing equipment should be adequately safeguarded against vandalism and accidental
damage. This situation could be corrected by installing ceiling-to-floor partitions to isolate the data
processing equipment from the rest of the office and restrict access to authorised personnel only.

Recommendation
We recommend that fixed assets be inventoried at least once every two years. This inventory could be
performed on a rotating basis with a separate group of assets being inventoried each month.

Develop a budget and business plan for the short and medium term with the involvement of all managers.

Recommendation
In light of the volume of the Company's records and the costs related to their preparation and retention,
we recommend procedures be adopted to review and evaluate recordkeeping requirements and the
adherence thereto on a periodic basis (e.g., every one or two years). The following recordkeeping
considerations should be investigated during such a review:
(1) Legal retention requirements for each type of record and document.
(2) Internal retention requirements of certain records and documents not covered by legal dictate (e.g.,
government contract records and other customer contract records).
(3) The type of paper to be used to record data, considering the length of the retention period and the
type of storage facilities.
(4) Availability of storage facilities (microfilmed/scanned records require less space than source
documents).
(5) Cost of microfilming/scanned records versus the cost of storing the original documents.
(6) Frequency of referral to documents (microfilmed /

Recommendation
We recommend that both sales and vendor invoices be batched and totaled prior to being posted to the
system. Subsequently, the control totals should be compared to the output listings to verify the
information was input correctly.

We recommend that both the minimum dollar order criteria and the partial shipment policy should be
reviewed to determine whether an alternative approach is available to meet customer needs or whether a
special fee for such service is appropriate.

We recommend all register tapes be attached to the Daily Report regardless of whether a register is
utilised, so that a verification of the day's sales can be made.

Recommendation
If the computer software allows for the "write to disk" feature and the capacity is available, a daily log of
activities should be prepared. It should include all operation interventions as well as machine time for
each job, reruns, machine halts and warnings. This will enable the data processing manager to evaluate
the efficiency of computer time.

A validated deposit note should accompany each stores daily report as evidence that the daily receipts
have been deposited on a timely basis. Store managers should consider this as an area of their
responsibility and follow-up on the disposition of daily collections.
Monthly reconciliations should be performed

Unallocated cheques should be kept in a secure location with restricted access to prevent improper use.

Recommendation
In recent years many companies have established an "inventory valuation committee" or an "inventory
valuation supervisor" to establish procedures designed to achieve accuracy in inventory valuations. This
group or individual typically reports directly to the corporate treasurer or controller and has full
responsibility for planning, organising, and implementing standard inventory valuation procedures.

We recommend that consideration be given to assigning responsibility to an individual or committee to

ensure that such procedures are established. The following are among the matters that
may be included in standard inventory valuation procedures:
(1) Establishing timetables for completion by each location.
(2) Establishing cost accounting responsibility for completion of physical inventories and inventory
valuation.
(3) Establishing detailed instructions covering physical inventory

Recommendation
We recommend the Company consider authorising a feasibility study and cost/benefit analysis of the
design, development and implementation of an accounting and financial reporting system that will be
more efficient and responsive than the current system.

Recommendation
The following general profit improvement concepts are offered for your consideration.

Product Development And Marketing Plan - The basic objectives of the Company's product research and
development and of product planning and engineering should be to:
(1) Generate a succession of profitable products that provide for continuing growth.
(2) Establish integrated marketing, engineering, and manufacturing plans that can be used as a basis for
planning operating budgets and capital expenditure requirements.
(3) Monitor existing products and modify them so they are both marketable and profitable.
To maximise benefits from the research and development activity and to attain the objectives of such a
program, the following should be prepared and communicated with appropriate management personnel:
(1) A written definition of the Company's marketing policies, objectives, and limitations.

Recommendation
Prioritise projects at the corporate level. In this manner, MIS resources can be applied to the most
important project. Currently, personnel within each application group are assigned to support their
specific application.

Acquire an automated project management system to support the effective management of the projects.
This would allow management to centrally track and report the status of all projects and to efficiently
utilise resources to complete outstanding projects.

Management should consider implementing a program to evaluate the effectiveness of significant capital
additions.

Recommendation
Complete an in-depth analysis of the existing information access controls and continue to review the
controls on an annual basis. Controls should be implemented to ensure that user procedures and
controls are designed to identify any discrepancies.

To maintain desired standards of credit-granting without constant management supervision, a credit

scoring system should be in place. The benefits of which are: fewer write-offs, fewer rejections of
potentially good risk customers, more rejections of potentially poor risk customers, a reduction in field
management's time freeing them up for other productive uses and reduction in field management
concern about credit decisions.
Formalise a plan to cross-train specific employees so the Company is not dependent on one individual.
We also suggest forcing these employees to take a week long vacation at a minimum of once a year.
This will reduce numerous risks involved with having limited controls due to having few employees in the
department

Recommendation
This value can be set to provide additional security for those objects noted.

The company should record all adjustments for reconciling items during the reconciliation process each
month.This will facilitate subsequent reconciliations and eliminate the risk of neglecting to adjust the
accounts.

Continue to focus on developing a method for timely notification of changes in access needs for
employees, vendors and contractors. Steps could be implemented to reduce the impact of this problem.
For example, management could take a risk-based approach to this problem and initially identify
departments with access to sensitive information. For those departments, such as finance and
information systems, managers could notify data security when employees, vendors or contract
personnel no longer require system access.

Recommendation
The Company should consider expanding its current budgeting system so that a more detailed
comparison between the budgeted expectations and the actual results as indicated by monthly financial
statements would be calculated. The budget is a valuable tool which, if used properly, can result in cost
savings from increased efficiency and from management's ability to more readily identify problem areas.
Budgets must be prepared from future expectations and past experience and only if the budgets are
realistic can they be an effective management tool. The new data processing equipment the Company
plans to purchase could be used to accumulate the required information, thereby eliminating any large
increase in the workload of the accounting staff.

Recommendation
We recommended the Company establish a shipping log and use prenumbered shipping advices. By
properly controlling shipments, the Company can be assured of a proper cutoff of sales and that all sales
are properly recorded in the accounting records.

We recommend management consider engaging a freight audit firm to examine freight charges. These
organisations audit freight invoices to determine that charges are consistent with the agreed-upon rate
schedules. As a fee, they generally charge 50% of the recovered refunds.

Recommendation
To improve the communication of these responsibilities and relationships, we recommend the Company
take the following actions:
(1) Prepare a graphic and written presentation of the Company's organisation, showing primary functions
and reporting responsibilities by area.
(2) Clearly establish the individual responsibilities of each employee.
(3) Prepare written procedures for all major functions within the company. These should clearly define the
objectives, standard documentation and time requirements where applicable.

A review should be made to determine the economic desirability of updating and improving older
systems. If improvements are adopted they could improve computer processing efficiency and flexibility,
increase physical security over files and also improve accounting controls over systems.

Recommendation
Require management to review and approve the final payroll information received from the service
bureau prior to distribution. This review should be documented.

We recommend the Company monitor its cash balance to ensure it is maximising interest income on
available funds.

Have management formally approve a severance policy.

Recommendation
Review the current closing and consolidation process, assess the impact of consolidating B Company
and develop or obtain a consolidation package which will enable the Company to enhance its ability to
implement an efficient, timely and accurate global reporting system.

B Company's closing and consolidation processes should be reviewed to ensure financial information is
reported to the Company on a timely basis. In our opinion, this will require the direct involvement of
individuals from the Company's Corporate Finance group. Once the closing and consolidation process
at B Company is improved, consideration should be given to changing B Company's year-end to be
consistent with the Company's.

In addition, intercompany transactions between the Company and its subsidiaries, including B Company
and its subsidiaries, should continue to be identified, reconciled and properly accounted for in the
Company's consolidated

Recommendation
We recommend a separate general ledger control account be established for the balance of trade
acceptance notes. A subsidiary ledger should be maintained manually and each month an ageing should
be prepared that is reviewed by the President of the Company.

Eliminate the use of generic login IDs from the system. Consider allowing the capabilities provided by the
generic ID to those users requiring it for their job function.
We suggest you continue to develop a full costing for all inventory items. This will this provide a valuable
management tool.

Recommendation
We recommend that formal authorisation procedures be adopted for all program change requests. When
the program change has been made, the manager or supervisor of the user department should sign the
program change form, signifying that the program has been changed according to the original
specifications. The program change form should then be filed in numerical sequence. A copy of the
program change form should be filed with the program's documentation such that a record of each
program change is kept in chronological sequence.

Recommendation
We recommend that management consider implementing a direct payroll deposit program. Direct payroll
deposit programs are increasing in popularity among all types of businesses. Direct deposit is a
convenience to employees and provides assurance that their pay has been deposited on a timely basis.
Employers receive additional benefits because controls are strengthened over the payroll function,
clerical time is reduced and the problem of security over payroll cheques is eliminated.
Negotiate expired leases and sign new written lease agreements.

Develop procedures that will ensure individuals responsible for monitoring the carrying value of long-term
assets are kept informed on a timely basis of changes in the underlying asset. This will allow for effective
monitoring of the realisability of such assets and ensure that proper accounting records are maintained.

Recommendation
We recommend that a study be performed to determine the feasibility of creating a centralised personnel
organisation within the Company. The study should include the following tasks:
(1) Identify, in detail, the various personnel activities existing within the Company and how and where
they are administered.
(2) Identify those personnel activities or programs that should be initiated.
(3) Determine the specific responsibilities of the central personnel organisation.
(4) Determine the specific personnel responsibilities of the operating department, divisions, or
subsidiaries.
(5) Determine the cost of operating a centralised personnel organization as compared to the cost of
operating in the present decentralised manner.

Recommendation
The securities held in safekeeping should be independently confirmed on a recurring basis. This includes
an inspection of all certificates of deposit on hand. The results should be compared to the detailed
security records and reconciled to the general ledger. Tests should also be performed on a timely basis
on detailed security transactions. For example tests could include inspection of underlying documentation
such as brokers' advices and market quotations to ascertain that securities were purchased or sold
through proper channels and that they were properly recorded and the prices, dates and amounts paid
were correct. These procedures could be performed by the internal audit department.
Recommendation
Because of the complexities of these matters, their interrelationship with each other and with other
transactions consummated or being contemplated, the Company should perform a review of the tax
function for purposes of evaluating the handling of these matters for quality assurance.

Recommendation
The Company should prepare profit and loss statements for each store. In order not to dilute the value of
the information, these statements should include only direct store expenses, including advertising.
Periodic "break-even point" analysis of the individual store operations would assist management in
making decisions such as whether to close a specific store or possibly to redirect its advertising effort.
Warehousing costs and administrative costs should be evaluated as separate cost centre s. The
Company's chart of accounts should be revised to facilitate such expense groupings.

Other reports such as analyses and comparisons of rent and square footage to net sales by store would
provide additional management information of the type needed to make operating decisions.

In addition, management information would be more valuable if month-end closings were accomplished
in a more timely manner.

Recommendation
We recommend establishing separate intercompany sales accounts in the standard chart of accounts to
make the information readily available for consolidation purposes. We also recommend that
intercompany receivables/payables be reconciled at least monthly so any out-of-balance condition will be
detailed. Further, the selling division should initiate the recording of the accounting entry by both
divisions. The receiving division should be required to book the entries from the selling division and
follow-up any shortage or errors by subsequently requesting the selling division to issue a credit or debit
memo.

Recommendation
Develop a written policy regarding e-mail and incorporate it into the personnel guide. An effective e-mail
policy should address, at a minimum, such issues as an employee's right to privacy, the personal use of
e-mail by employees, third-party access to e-mail and the company's rights to access electronic
messages. The policy should be formulated with the aid of personnel, information systems, users and
possibly legal counsel. The development of this type of policy could prevent possible conflicts or legal
action in the future

Bank account reconciliation procedures can be strengthened as follows:

-Reconciliations should be performed monthly and adjusted as appropriate. -
Reconciliations should be prepared by someone who has no cash duties and should be reviewed and
approved by management. - Terminated employee names should be removed from the
bank accounts and the banks notified in writing in a timely manner.
Recommendation
We recommend a job order cost system be established. At a minimum, the materials, actual labour and
overhead (at a standard rate) should be charged to each project being manufactured. Budgets should be
established and variances of actual costs from budget explained. If it is not feasible to establish a formal
cost system (fully integrated with the general ledger) due to the size and nature of the Company's
operations, we believe the Company would still derive the following benefits from a basic non-integrated
cost system:
(1) Allow management to determine inefficiencies in production
(2) Indicate waste in materials
(3) Indicate if selling prices are adequate.

Recommendation
Although certain new procedures were recently instituted to correct this situation, the following additional
steps should be taken to simplify procedures, eliminate duplicate record keeping and improve control
over material costs:

(1) Establish a raw material account for recording the monetary amount, at the estimated standard cost,
of all materials received. This account would be credited when materials are issued to jobs.
(2) Eliminate posting of item quantities to the job cost records by the accounting department. This
department should establish one material control for each job and should post the monetary amounts, at
the estimated standard costs per the job cost estimate, of materials issued to the job as reported on
material requisitions. The bills of material maintained by material control will provide a detailed record of
quantities issued for each job. These records should be forwarded to the accounting department upon
completion of a job for a review of accuracy.

Recommendation
These closing procedures should include:
(1) Preparing depreciation schedules and making the related adjustments. (We suggest you consider
computerising your depreciation schedules.)
(2) Reconciling detailed subsidiary records, such as cash, accounts receivable, and accounts payable
with control accounts.
(3) Reviewing and adjusting prepaid and accrued expense accounts including insurance, taxes, interest
and deferred compensation. (We also suggest reviewing these accounts periodically to determine the
reasonableness of the recurring entries).
(4) Reviewing transactions subsequent to year end to determine those that should be recorded in the
current year financial statements (e.g., accounts payable, professional fees, interest income and interest
expense).
(5) Requesting information as to the pension liability and adjusting the accrued liability

Recommendation
We believe the following improvements to internal control can be made without impairing efficiency:

[list of detailed internal control recommendations]

Develop a policy requiring written agreements and/or other formal documentation to be obtained from the
sales department to support the various incentive rebates and any other similar arrangements. If it is
determined that a formal agreement is not necessary, the Sales department should document that the
arrangement was communicated to the customer in a manner that will assist the customer, other Sales
department personnel and the accounting department in understanding the terms and conditions of the
sales department to prepare a formal computation of the incentive rebate accruals that should be
recorded at each quarter end supported by case sales, rebate rates, payments etc.

Recommendation
To help standardise the change management process and limit the possibility of unauthorised program
changes being moved into the production environment, management should review the change
management process with emphasis being placed on the following:

Þ Develop written policies and procedures relating to changes to third party software.

Þ Current policies and procedures related to changes to software written in-house should be emphasised
to programmers. In addition, management should perform periodic reviews to determine adherence to
established policies.

Recommendation
We recommend management develop a disaster recovery plan that addresses the following:
(1) Identification of critical applications
(2) Step-by-step instructions that define the responsibilities of each functional area
(3) Locations where computer operations can be re-established and continued
(4) Network back-up (if necessary)
(5) Specific security controls that will be needed during the recovery process
(6) Alternative manual procedures required to maintain the records and continue operations
(7) Impact of disruptions on customers and alternative systems for continued contact

As part of the recovery plan, we recommend the Company investigate and negotiate a back-up
agreement. Many companies with compatible equipment are willing to enter into reciprocal back-up
agreements to ensure continuity of operations in the event of a disaster. If such equipment is available, it
will be

Recommendation
We recommend management reevaluate the compensation arrangement for salesmen.
We recommend the following procedures be implemented in the bank reconciliation process:
(1) The responsibility for bank reconciliations should be assigned to an individual not having cash
receipts/disbursements duties or access to unissued cheques;
(2) A log should be established to assure that all reconciliations have been performed and reviewed by an
official on a timely basis;
(3) Since only one signature is required on the Company account, the activity in this account should be
reviewed by the treasurer on a regular basis; and
(4) The treasurer should review all bank reconciliations monthly and this review should be evidenced in
writing.

Recommendation
A stock appreciation plan could provide such incentive through participation in the Company's success
without requiring an immediate cash outlay. Under the provisions of a stock appreciation plan, an officer
is granted the right of payment for the increased value of the Company's stock from the grant to exercise
date. The Company's cost would be equal to the salary expense associated with the incremental
appreciation.

We recommend the company consider adopting the following policies to improve its collections efforts:

- Use a collection agency to reduce administration costs.

- Charge interest on over-due accounts to speed collection - Standardise collection correspondence

- Consider filing lawsuits for all overdue accounts

- Separate very old account balances from normal accounting routine.

Recommendation
We recommend the Company evaluate the cost of having the service bureau also prepare the general
ledger and financial statements.

Recommendation
Performance bonuses are a better incentive for employees in all phases of the business, regardless of
company size. For certain employee positions, the plan can be based upon a pre-established goal for
net earnings determined by the Company's Board of Directors prior to the beginning of each year.
Targeted net earnings is generally set aggressively and bonuses are calculated (as a percentage of
participant salary) based upon actual financial results as compared to the pre-established goal. The
Company's Board of Directors would budget an amount for bonuses and establish its incentive structure
accordingly.
Employees classified as accounting personnel (controller, cost accountant, bookkeeper, etc.) should not
be placed on an incentive program based upon net earnings. Such an incentive program could negate
the effectiveness of established internal controls. For these individuals, an incentive plan based upon
formal evaluations, which objectively assess the quality and efficiency of

Recommendation
We recommend that the Controller be responsible for the approval and review of all general journal
entries and that general ledger balances be agreed to supporting detail on a regular basis. Such a
procedure would strengthen control over the accounting function and facilitate prompt identification and
correction of errors.

Recommendation
Often smaller companies delegate this task to the end of a "to do" list and then put it off again if it
happens to surface. A well-organised manual is like an insurance policy, however, and has proved to be
well worth the time, effort and resolve necessary to put it together.

A manual of accounting policies and procedures is a written record of how the Company's internal
accounting function operates. Such a manual encompasses everything from the chart of accounts to
information about how a cheque is handled once it comes in the door. Day to day, the manual serves as
a valuable reference and training tool, ensuring consistency in accounting operations. In an emergency,
it is an invaluable record and resource that guides management in maintaining or re-establishing the
Company's operations. A mid-size business relying on the expertise and experiences of one or two
accountants should be especially concerned about developing such a manual (to be utilised in the event

Recommendation
Transfers between accounts should be authorised by 2 or more responsible officials. The bank advices of
the transactions should be directed to a responsible person other than the person initiating the
transaction.

All transactions should be recorded in the accounting system on a timely basis.

Prepare a formal lease agreement for all leases.

Recommendation
We recommend a formal detailed cost estimate form be prepared for each phase of a project and used
subsequently to monitor performance at interim dates. This form should contain, at a minimum, estimates
for materials and supplies, labour cost, freight and subcontracted costs. The form should be updated
periodically, to reflect changes in project scope (change orders, deletions, etc.).

Implementation of this procedure should provide greater control over job costs and enable management
to better monitor such costs by identifying potential overruns on a more timely basis. Additionally, other
business decisions such as those relating to the timing for billing customers and requests for additional
fees can be made on a more informative basis with this information available.

Recommendation
We believe a policy should be adopted requiring prior approval of all long-term leases exceeding a
specified amount.

We recommend that this reconciliation be made at the end of each month and any reconciling items be
investigated and cleared promptly. The controller should then review the reconciliation and satisfy himself
that it is proper.

An entity should consider writing off the accounts determined not collectible instead of increasing the
allowance account. A quarterly or semi-annual meeting should be held to monitor the status of the
accounts receivable aging and to identify problem accounts in a more timely manner.

Recommendation
We recommend that a permanent schedule of negative and affirmative covenants of each loan
agreement be maintained by the treasurer or controller. Columns for each compliance date should be
initialed and dated to indicate that all covenants were reviewed for compliance on a timely basis. When a
covenant has not been adhered to, an explanation of the action taken should be attached to the
schedule.
At a minimum, have a different individual distribute the pay cheques to employees at a date unknown to
the Human Resource Supervisor. This would include the receipt and review of the payroll cheques
directly from ADP.

Recommendation
The use of written policies, procedures and job descriptions in conjunction with the assignment of specific
responsibilities generally increases the efficiency of a Company's operations. The benefits derived from
the use of written policies and procedures include consistency in the manner in which transactions are
handled, formally documented lines of authority and responsibility, a practical means of evaluating
performance and a reduction of the problems incurred when an employee is absent or leaves.

We recommend that management establish an accounting and operating procedures manual outlining
corporate policies to be followed by all divisions, as well as additional policies adopted by specific
divisions. The preparation and maintenance of written standard procedures is necessary to: (1) facilitate
review by the corporate staff for adherence to corporate policies; (2) establish consistent corporate
practices; (3) aid in communication of

Recommendation
The Company should employ a Controller. This individual's responsibilities would be directed toward the
preparation and analysis of financial information and statements, the implementation and maintenance of
internal controls, and the general supervision of the Company's accounting system. The controller would
be charged with communicating the necessary procedural instructions for all accounting activities and
would have the authority to enforce compliance. This person should report directly to the President.
While not all inclusive, the following are suggested duties and responsibilities of the controller:
· Function as an administrative manager with responsibility for all office staff.
· Prepare and analyse in-house financial information and statements.
· Implement and maintain computerised accounting and information reporting system.
· Increase the use of microcomputers throughout the Company (i.e.,

Recommendation
Evaluate foreign currency cash balances and investigate the opportunities, if any, to mitigate the effects
of foreign currency fluctuations.

We recommend the Company consider automating the fixed asset records. The Company's data
processing system has the capability to handle additional applications. We believe automating the
accounting records for property and equipment records would be beneficial. We believe that if the
property records were automated, savings in clerical effort would result and it would be practical for the
Company to maintain the records required to calculate depreciation on a accelerated basis for tax
purposes.

Recommendation
Although the Company has historically utilised derivatives and hedging activities on a limited basis,
management should review its exposures to foreign currency risks and assess the impact the new
standard will have on the Company's consolidated financial position and results of operations.

Unpaid accounts should be reviewed regularly to effect prompt action on delinquent accounts. The only
means to accomplish this is by preparing an aged listing of the accounts receivable detail and reconciling
the total to the general ledger.
We recommend that at the end of each accounting period, the trial balance of accounts payable be
prepared in sequence by vendor with subtotals to facilitate reconciliation to vendor statements and other
verification procedures.

Recommendation
We recommend a study be undertaken to determine the cause for the increased rate of scrap and to
propose solutions to the scrap problem.

Bank account reconciliation procedures should be strengthened as follows:

(1) Bank accounts, including imprest accounts should be reconciled monthly;

(2) All cheque numbers should be accounted for;
(3) Cheques should be examined to determine that the signature is proper;
(4) The date, payee and amount of cancelled cheques should be compared with the disbursements
journal;
(5) Bank charges and miscellaneous reconciling items should be identified in the reconciliation and
adjustments should be made on a monthly basis;
(6) Reconciliations should be prepared by someone having no cash duties and should be reviewed and
approved by the controller; and
(7) Dormant or inactive accounts should be closed and the banks notified in writing.

Recommendation
We recommend that inventory cost standards be reviewed and updated periodically to ensure that
current manufacturing costs are being used for financial reporting purposes and in product pricing
decisions.

Deposit slips should be periodically reviewed to determine that no employee cheques are included in
bank deposits

To reduce this risk we recommend the Company establish a corporate policy on the acquisition and use
of personal computers.

BDO are happy to advise on implementing such a policy.

Recommendation
Internal controls should be strengthened to insure that:
(1) All items are counted and no items are counted twice.
(2) Quantities and descriptions are accurate.
(3) Accurate cut-offs of merchandise shipments and receipts are obtained.
(4) There is no major shift of inventory between departments

To ensure an accurate physical inventory, we recommend that detailed written inventory instructions be
prepared and reviewed with employees.
We recommend management consider the no-fee consulting services provided by freight carriers.

Recommendation
We suggest that a revised chart of accounts be developed. The various accounts selected should be
such that adequate management information can be derived from the accounts, but not so detailed as to
be cumbersome.

The Company maintains only one revenue account while there are six specific sources of revenue
(merchandise sales, franchise fees, consultation fees, survey fees, fixture sales, order processing fees).
We believe the detail of this information should be available in the general ledger and that separate
accounts should be used for each major source of revenue.

The expense detail is excessive. Some expense accounts could be combined with others when the basic
type of expense is similar, such as "utilities" rather than "heat," "electricity," etc. or "office supplies and
expense" instead of bank charges, general supplies, postage, etc.

Recommendation
Considering the Company's continued growth and increased earnings in recent years, the Company may
want to consider adopting some form of employee benefit plan for its employees and officers.There are
numerous employee benefit plans available and the type selected will depend upon long-range corporate
and individual objectives. Many companies find that profit sharing plans meet their corporate objectives.
Such plans, if properly structured, provide income to their employees upon retirement and such income is
not taxable to the employee until received. Profit sharing plans can provide that the company will not be
required to contribute funds unless it obtains some predetermined profit level. If the plan is approved by
the Taxation Authority, the Company's contributions will be deductible for income tax purposes. However,
there are disadvantages to profit sharing plans and it is possible that after considering corporate
objectives, a pension, deferred compensation or some other type of benefit

Recommendation
We recommend an evaluation form be developed and utilised in hiring employees.
We recommend the unit managers be instructed to include the opening reading on the register tape so
the activity shown on the Daily Reports can be verified.

Bank accounts should be maintained on a timely basis and any idle accounts should be closed.

Recommendation
We recommend a summary of warranty work performed is maintained for each machine sold.

We also recommend that consideration be given to establishing a budget for warranty expense based
upon sales, product failure and other experience factors. When used in conjunction with actual costs
incurred, the budget would then serve to identify potential problems as they develop. The problems could
then be identified as defective parts requiring modification, stricter enforcement of warranty guarantees,
or other areas as they develop. The warranty period covered has been increased, so strong controls are
necessary in this area.

Recommendation
We recommend the company process invoices daily based upon the previous day's shipments. The
processing of shipping documentation may be streamlined if the shipping department submits a copy of
shipping documentation directly to the accounting department. Such a procedure may also assist in
improving internal control over the shipping function.

Develop and implement policies and procedures whereby tooling contracts are routinely reviewed in
order to bill customers on a timely basis for completed contracts. Additionally when negotiating tooling
contracts, company sales representatives should be aware of prior pertinent issues relating to each
particular customer in order to maximise efficient collection of current tooling contracts.

Recommendation
We recommend that the Company consider implementing cycle counting procedures to increase
productivity, the reliability of the inventory records during the year and eliminate the annual book to
physical adjustment.
To make the standards more useful in analysing cost of production and to obtain a better measurement of
actual performance, these loss factors should be set as close to actual as possible. A separate provision
for inventory shrinkage outside of the standards could be recorded if deemed necessary.

The invoice number should be written on the shipping document and vice versa. Pre- numbered bills of
lading should also be accounted for regularly.

Recommendation
Stock certificate books/ corporate seals/ validated certificates etc... should be stored in a secure location
with restricted access. In addition marketable securities should be removed from the safe and held
instead by the entity's bank. All records should be kept up to date to reflect all movements of such
securities.

Recommendation
Review schedules prepared by individuals in the accounting department in a timely manner in order to
help prevent and detect errors and accurately reflect the financial condition of the Company.

We recommend that unit costs be updated quarterly to more accurately reflect inventory value.

Labour and overhead standards should be adjusted at least annually based on a well-planned, executed,
and documented review.

At this time, a detailed analysis of the Company's current and planned international operations, as well as
the related tax structure, would ensure that available tax incentives are appropriately utilised, and that the
Company has maximized the tax benefits from operating in countries having lower tax rates.

Recommendation
The company's control can be strengthened by developing a standard cost system. A small manufacturer
is limited in the precision of the standards and the degree to which it is practical to analyse cost
deviations. However, there are no basic complications in the use of pre-established costs that prevent
taking advantage of this management tool. A standard cost system will enable this individual to focus their
efforts by isolating the areas requiring attention.

The first effort in determining standard costs depends heavily on past experience. The basic steps in
making this attempt are as follows:
(1) Tabulate costs for past periods by elements, processes, and products.
(2) Review conditions that have caused changes from past periods in material, prices, wage rates,
material usage, labor performance, overhead costs and reasonable maximum production levels.
(3) Adjust actual past costs to provide cost standards that will reflect current conditions and
Recommendation
We recommend the Company consider conducting a study of present and future management
information needs to determine which computer programs should be rewritten and the additional
procedures that could be efficiently processed by the computer.

Consideration should be given to charging one person whose sole responsibility is to this important
control function. This individual, should be independent of the data processing department.

BDO can advise on the responsibilities with which this person should be tasked.
Recommendation
Controls should be established for the development of new programs and program changes.

BDO can advise on suitable controls to guard against risks in this area.

We recommend the Company consider revising the plans to include a complete bill of material.

The Company's data processing system has the capability to handle additional applications. We believe
fully automating the accounting records in the inventory costing area would result in substantial savings
of clerical time and other benefits.

Recommendation
We recommend the Company review the controls exercised by the user departments over data submitted
for processing. The user department should maintain a record of all errors found by the system to ensure
they are corrected and subsequently reprocessed.
User manuals should be provided to the user department detailing procedures for:
(1) Completion of input forms.
(2) Utilisation of output reports.
(3) Reconciling output to pre-established control totals prepared by the user departments.
(4) Correction of errors found by the system and procedures for their subsequent reprocessing.

Recommendation
To facilitate and streamline the accumulation of data for the required statements and closings, we
recommend the following be established:
(1) Timetable - A timetable should be established delegating responsibility to specific individuals for
developing the necessary information and schedules for the statements.
(2) Pro formas - Pro formas of the required schedules, statements and consolidating entries should be
developed to reduce the time required at each quarter.
(3) Procedures documented - The procedures for accumulating the data, the pro formas and the
timetable should be documented in a procedures manual.
This type of documentation and these procedures should prevent unnecessary delays and errors when
issuing the documents required by the Securities and Exchange Commission.

Recommendation
Develop comprehensive, detailed procedures outlining the internal controls and documentation
requirements of the import function. Upper management should oversee the development of these
procedures and monitor adherence to the guidelines.

Recommendation
Top management should be involved in evaluating the expansion. We recommend the following be used
in evaluating the potential expansion.

(1) Efficiency of the present warehouse servicing the area and other locations measured in terms of:
(a) Sales per square foot
(b) Sales per warehouse employee
(c) Freight cost per $ sales
(d) Warehouse cost per $ sales
(2) Demographic considerations:
(a) Potential market beyond that serviced by nearest facility
(b) Competitors in the area
(c) Distance between vendors and location
(3) Product mix consideration:
(a) Related product lines
(b) Metal products unique to the expansion area
(c) Long-range forecasts of product demand and raw materials supply

Develop polices and procedures which facilitate timely and accurate reconciliation of the general ledger
to the subsidiary ledgers.

Recommendation
We recommend a change in programming be implemented so the accounts payable balances are
properly recorded on the individual units' statements.
We recommend the quarterly statements reflect all adjustments normally made at year end. This should
help reduce year-end audit adjustments.

Remove the system operator capability from any users for which it is not considered necessary. For
those users performing only back-up operator functions, disable their system operator ID when not in
use.

Evaluate the entire plant and production process for overhaul efficiencies. Consider the possibility of
utilising an outside consultant in this area to offer a different perspective.

Recommendation
The stock certificates surrendered in connection with the stock split should be clearly marked as
cancelled or otherwise defaced to prevent subsequent unauthorised use. The Company should obtain an
affidavit from the stockholder certifying that the certificate is lost. The cancellation of this certificate should
be reflected in the minutes of the board of directors. The Company should insure that all stock records of
its subsidiaries are complete and up to date.

The Company should re-evaluate this philosophy in consideration of the system. We also suggest that a
review be performed of the access controls related to the system to ensure that access is controlled and
that users are only allowed to view information deemed necessary for their job function.

Recommendation
Develop a formal written contingency plan providing a framework for restoring critical information services
in the event of a loss of processing capabilities.
We recommend that, at a minimum, two individuals from outside the Company be added to the Board of
Directors. This would provide several benefits to the Company, including:
(1) Access to additional management expertise at little cost;
(2) Added prestige to the Company's name and actions by association with recognised names in the
community;
(3) A mechanism for an independent appraisal of management's decisions and policies; and
(4) A mechanism to provide for innovative solutions to Company problems.

Recommendation
Establish a system that would enable the Company to utilise bar coding capabilities. The use of a bar
code system would enhance such items as inventory control - relating to inventory movement and stock
levels, inventory observation (i.e., timing and procedures) and current sales information.

Bar code scanning could be utilised to track products through production to shipping and the eventual
sale of the product. Scanning could also be used to monitor the level of materials in work in process and
finished goods. With stronger, more reliable inventory controls in place, observations could be limited to
performing only interim cycle counts, which would avoid the shut down of production during the normal
year-end inventory. Useful sales data, such as customer, product type, geographic location, etc., would
be easier to track and analyse.

The benefits of such a system merit evaluating the degree of resources necessary to implement the bar
coding process.

Recommendation
To maximise the use of the Company's daily cash balances in banks, we recommend the Company
investigate the possibility of using the following types of cash accounts. These accounts would require
the cooperation of the banking institution with which the Company deals.
(1) A "concentration" account (checking) into which all deposits are made. Preferably, this would be an
interest-bearing checking account.
(2) A "zero balance account" (checking) located out-of-town against which all checks, other than payroll,
are written.

Once established the concentration account would contain a stipulated minimum balance at all times that
would reimburse the bank for its services. The zero balance account would contain a zero balance at all
times. Funds would automatically be transferred each day from the concentration account to the zero
balance account to cover exactly the dollar amount of checks presented that day. Any excess balance in
the concentration account

Recommendation
We recommend that the Company maintain a notes payable register including all pertinent data
regarding each open note payable (e.g., date, amount, payee, maturities, interest rate, collateral). Unpaid
principal amounts per the register should be reconciled periodically to the general ledger. In addition,
copies of paid and unpaid notes could be retained in the register.
Recommendation
The department would benefit by making the bank reconciliation function more efficient. A schedule for
completing reconciliations should be followed and reviewed by the cash manager. Reconciling items
should be corrected as soon as possible, tracking any items written off.

The outstanding checklist should be computerised for the general account. Cheques can be cleared on
line with an outstanding list generated automatically, rather than using the current cheque registers to
prepare and track lists manually.

As planned, the Company should review their system of lock boxes, only maintaining those which are
necessary. This will also relieve some of the internal work of reconciling and maintaining the accounts.

Recommendation
We believe the Company should establish a formal system for controlling the quantities and movement of
materials at outside vendors. Utilising the Company's data processing equipment to maintain perpetual
inventory records of all materials at outside vendors should be considered. However, because of the
limited capacity of the Company's present data processing equipment, such application may not be
practical and, in this event, a simplified manual system should be considered as a means of controlling
the movement of these materials.

We recommend that modifications of lease terms be reflected immediately in the accounting records by
updating amortisation schedules. This should reduce bookkeeping errors and clerical time required to
correct the errors

Recommendation
To control inventory levels more effectively, consideration should be given to the following matters:
(1) All salesmen with specific customer relationships should give a quarterly estimate of customer needs
to forecast reasonable inventory levels on specific parts.
(2) A report comparing the salesmen's estimates with actual sales should be prepared quarterly.
(3) Inventory turnover should be one of the evaluation factors for the district manager's bonus.
(4) Any item not issued during a 6-month period should be noted by the district manager and considered
for obsolescence.
In addition, we believe an analysis of alternative uses of cash versus the current investment in inventory
should be prepared.

Recommendation
We believe control over payroll preparation would be improved if the computations made and data used
by the computer were test checked by someone independent of payroll preparation on a periodic and
limited basis. Such a procedure would verify that pay rates used by the computer were the authorised
pay rates and that deductions from gross pay were authorised and proper. This procedure would also
verify that the computations made by the computer were proper.

We believe overall operating efficiency could be improved by storing similar inventory items in one
location. This storage system would enable the warehouse manager to fill sales orders quickly and also
help to ensure a complete and accurate physical inventory count is taken.

Recommendation
We recommend that a person other than one issuing cheques or making deposits assume the duties of
reconciling the bank accounts.

Recommendation
This presents a good opportunity to prepare a revised organisation chart and to clearly define the duties
of each position in writing. While growth and operating experience may require changes from time to
time, reducing position descriptions to writing and challenging what is actually being done should be
beneficial.

As a part of this process, each member of management should prepare a job description for his own
position as well as for the positions reporting to him. Resolution of any differences will be valuable to all
concerned.

The Company should consider defining the degree of autonomy allowed the operating managers at the
various locations and the level of abilities required of the divisional departments. Decisions in this area
will have a bearing on the sizes and duties of the corporate staff. This is particularly true in the finance
and research and development functions. Lack of strong divisional personnel in these areas can be offset
by a strong corporate

Recommendation
Develop a more detailed management report package. The package should include, but would not be
limited to, the following:

· Monthly financial statements (balance sheet, income statement, statement of cash flows) comparative
to the corresponding period of the prior year
· A comparison of actual to budget figures, including a comparison of actual cash flow to the projected
amount
· Comparative information from outside the Company (general economic indicators and industry
statistics)
· Ratio analysis
§ Accounts receivable turnover
§ Number of days sales in accounts receivable
§ Current ratio
§ Return on investment
§ Expense items as a percentage of sales
§ Ageing categories of accounts receivable and work in process

In addition, the package should include explanations for significant fluctuations between years, budget
and actual amounts, and ratio

Recommendation
We recommend that a study be made of current and future personnel requirements to facilitate the
orderly development of qualified people in all areas. The study should be based on a projection of
anticipated volume and activity over the next five years, and should be followed by the establishment of a
program to recruit and develop personnel to meet future needs.

In defining present and future personnel requirements, we suggest utilising formal job descriptions that
include responsibilities and experience requirements. Well-defined staff positions will aid in converting
the projected growth into personnel requirements.

Recommendation
Restrict access of credit/ billing clerks to the cash receipts system to strengthen controls regarding cash
remitted directly to the company. Controls can include password approval, preparation of batch totals by
someone independent from the person responsible for entering the cash amounts, producing daily
exception reports. If the customer base is rapidly expanding the time constraints of the accounts
receivable supervisor make it important that these controls are installed.
Recommendation
Because of increased workload and responsibilities, we believe that an additional controller, whose
function would be separate and apart from the treasurer function, should be employed at either the XYZ
Division or at the corporate level. The controller would be primarily responsible for the design, installation,
operation, and control of a centralised financial management information system. Such a system would
coordinate the financial systems of the divisions, which should prevent delays resulting from duplication
of efforts. The position should be filled by an individual who understands how financial systems can be
organised to obtain information to be used by the manufacturing, marketing, financial, and engineering
functions in making informed and timely decisions.

Recommendation
All general ledger accounts should be reviewed regularly for unusual items and cleared as necessary.

We recommend that the monthly sales entry be reconciled to the sales register total for the month before
it is recorded. This procedure should be done as part of the approval of the monthly sales journal
voucher.

Recommendation
We recommend that signed cheques be forwarded to another specified employee for enclosure in an
envelope for mailing. This procedure would improve segregation of the cash disbursing and record-
keeping functions.

Develop and implement policies and procedures whereby the receipt of inventory items is posted
immediately to the inventory system. Thus, inventory and accounts payable records would accurately
reflect the physical receipt of goods. Additionally, periodic analysis of receiving documentation should be
performed in order to assure adherence to receiving policies by receiving personnel.

Recommendation
Establish a systematic approach to estimating the reserve for future warranty costs.
The amount of such a reserve should include all costs expected to be incurred under the warranty
including the cost of materials, labour and overhead based on historical experience. The warranty
reserve should be based on detailed information compiled from claims. Such information should include:

· Date unit was sold

· Date and monetary amount of warranty service
· Model number of unit serviced
· Detailed description of reason for service
· Whether the charge can be recovered from vendor

In addition, the chart of general ledger accounts should be appropriately revised so warranty expenses
are segregated from non-warranty costs or allowances and classified in the necessary detail.

Recommendation
Formalise all leases entered into by the Company.

We recommend management require the retention of test libraries for a period of time. This will permit an
audit trail to the type and quality of testing performed.

Recommendation
Prepare a formal detailed cost estimate form for each phase of a project and use to monitor actual
performance at interim dates. This form should contain, at minimum, estimates for materials and
supplies, labour cost, freight, and subcontracted costs. The form should be updated periodically to reflect
changes in project scope (change orders, deletions, etc.).

Implementation of this procedure should provide greater control over job costs and enable management
to better monitor them by identifying potential overruns on a more timely basis. Additionally, other
business decisions, such as those relating to the timing for billing customers and requests for additional
fees, can be better informed with this information available.

The preparation of bank reconciliations should be assigned to a person independent of the cash
disbursements function. Reconciliations should be reviewed and approved on a monthly basis by a level
of management higher than that of preparer.

Recommendation
An audit stamp should be used when an invoice is prepared for payment. The stamp should have a place
for the individual processing the payment to initial as the above tasks are performed. This encourages an
individual to perform the steps more conscientiously if required to sign that procedures were performed.
Secondly such a stamp would facilitate the review prior to authorising payment.

We recommend the Company develop a formal strategic plan, and establish long-term operational and
profit goals. In developing the strategic plan, the following should be considered:

[Give examples]
Recommendation
The practice of establishing miscellaneous subsidiary accounts within the accounts receivable subsidiary
ledger should be discontinued. Each customer should be assigned a separate account within the detailed
accounts receivable ledger. This procedure should reduce the chance of clerical error and provide an
accurate detailed ageing of all account balances that is not being provided under the present system.

Prenumbered receiving reports help to ensure that actual quantities of goods received are recorded.
Purchase orders should be matched to the receiving report by someone independent of the receiving
function. Numerical sequence of the receiving reports should also be maintained to ensure that all
goods received are properly recorded. As noted above, this system of receiving should be computerised.
The system should automatically assign a receiving number and produce any necessary exception
reports.

Recommendation
We recommend purchase discounts be recorded in the accounting records when they are taken at the
time invoices are paid.

We recommend management initiate efforts to determine ownership of the software and to secure
documentation of ownership in writing. In addition, the agreement should indicate that, in the event of the
vendor's going out of business, the Company owns the software and will be supplied with the source
code. Also, program documentation should be secured to indicate the input, processing and output cycles
for programs and data files. This will permit the Company to make changes to software and will also
serve as a training facility.

Recommendation
Consideration should be given to determining the possibility of reducing the reports prepared by the data
processing department and thereby reducing administrative expenses as well as providing the data
processing department more computer time for necessary projects.
Terminate user sessions after a predefined period of inactivity (often set at 30 minutes). Consider the
possibility of disconnecting the user profile without terminating any active jobs that the user is running at
the time.

Since customers may take exception to these charges, these amounts are ultimately written off.
Therefore we recommend that all finance charges be accumulated separately by customer to facilitate
identification. These finance charges should generally be reversed at the year end for accounting
purposes because they are usually not collected.

Recommendation
All cash disbursements should be adequately supported by invoices or other documents that have been
properly approved. Any disbursements initiated from internally generated documents should be signed by
the person initiating the request for payment and approved by an appropriate level of management.

We recommend that a pre-numbered form be utilised to document all adjustments to the vendors'
accounts and that a space be provided on the form for approval by a designated official.

Total credits within the accounts receivable ledger should be closely observed on a timely basis. Old or
potentially unused credit balances should be purged from the accounts receivable file periodically.

Recommendation
To supplement the federal income tax calendar we previously provided to you and reduce the possibility
of incurring penalties and/or interest charges for late or missed filings of the tax returns, an all-inclusive
tax calendar should be prepared. The calendar should cover all returns required to be filed by the
Company and its subsidiaries, and should include the (1) type of return, (2) due date, and (3) assignment
of responsibility for.

All cash receipts should be deposited promptly (within 3-5 days) and the permitted period to include cash
deposits in a prior periods records should be shortened to 3-5 days.

Monitor the discounts taken when terms are not met and reconsider offering a discount to those
customers not in compliance with the terms of the contract.

Recommendation
Audit adjustments should be posted to the books and records.

Prepare the budget on an accruals basis for comparability to the audited financial statements. The
budget should also be presented in a monthly format to allow for interim comparisons of actual to budget.
To facilitate this comparison, monthly internal financial statements should reflect changes in accounts
receivable, accounts payable and other assets and liabilities.
Such a control can best be achieved by having supervisors review and approve time cards in writing prior
to their submission to accounting for payroll processing.

Recommendation
We recommend the company establish a position to verify sales reported by the franchisees by visiting
the franchisees and testing sales and examining related documentation. This individual should report
directly to the Treasurer so the results of the review could be processed promptly and any additional
billing could be performed in a timely manner. In addition this person could be supplied with an
operational questionnaire (prepared by management) that could be used to produce suggested
improvements in the franchisees' operations, thus providing the franchisee some tangible benefit from the
visits. We believe the benefits derived from this function will more than offset the cost.

Recommendation
We recommend that the directors meet at least annually with the Company's attorney to write up
business decisions made or proposed. Topics that should be discussed and documented in corporate
minutes include:
(1) Annual salaries of officers and other key personnel.
(2) Amount of contribution to the profit sharing plan.
(3) Ratification of space or equipment leases.
(4) Financial statements for the current fiscal year.
(5) Dividend policy and payment of preferred dividends.
(6) Business needs to support retention of retained earnings

Recommendation
To prevent these problems from recurring, we recommend consideration of the following procedures:
(1) Standard monthly interdivisional charges should be made in the middle of the month to allow for
processing by all divisions by month-end.
(2) A standard form that clearly outlines the amount and nature of interdivisional charges should be used.
(3) Interdivisional accounts should be reconciled at month-end and the controller should be notified of
unexplained differences over a specified dollar amount.

To ensure that all levels of management are working to meet growth objectives, we recommend the
Company formally document its corporate objectives and its strategy to meet those objectives. This
document, which would be distributed to all managerial levels, would ensure that personnel understand
corporate goals and formulate their personal and departmental goals/objectives in accordance with
corporate objectives.
Recommendation
We recommend documentation (ie returned authorisation forms) be attached to credit memos and be
approved by an official before being processed.

Consider creating separate expense and accrual accounts for each tax agency to which taxes are paid,
for ease in tax planning.

Adopt and implement a formal policy that provides for accurate recording of fixed asset purchases,
transfers and disposals. This includes modifying present procedures in the purchasing department,
which are critical to initial fixed asset identification. Improve the current fixed asset system to accurately
identify and monitor all fixed asset transactions. Consider developing a fixed asset addition/deletion
form.

Reset the system values to ensure that users cannot change their own profiles.

Recommendation
Overhead rates will vary based on the capacity usage of the divisions. Since past projections have not
been consistent with actual results, the rate used during the year to value inventory should be reviewed
on a semiannual or quarterly basis for accuracy. More accurate reporting of these costs will help
management in decision making throughout the year.

A great deal of control over the generation of scrap can be exercised by setting the pick-up schedule for
each department such that a fixed number of working days elapse between each pick-up. When the
scrap is picked up, it should be weighed and the weight should be recorded. Any definite trends in the
production of scrap at a specific work station can thus be observed and addressed.

We recommend the approximate amount of scrap resulting from production be determined in advance
and reconciled to actual amounts sold.

Recommendation
We recommend the Company retain all information and reports generated from the physical inventory
and verify that it is transferred accurately into the final costed inventory report.

Periodically review listings of outstanding cheques and enquire as to why they were not be presented. All
unpresented cheques after X months should be written back, cancelled or remitted to the state in
accordance with state law.

BDO are able to assist with a complete study of the Company's data processing system.

Improved control would result if cheques over [amount] were manually signed by an authorised cheque
signer.

Recommendation
The following recommendations are suggested: 1. Automatically send computer bills on
matters that have been completed but not billed within one month; 2. Use progress
billings during lengthy matters; 3, Send computer-generated "reminder statements" each
month on all accounts over 60 days old; and 4. Identify problem receivables and
assign collection responsibilities to a "collections committee".
To compensate for this lack of numerical control, we recommend all voided sales slips be approved by an
official in writing.
The user IDs referred to above should be disabled when not in use by a service technician. This will limit
the possibility of unauthorised access with any of these powerful user IDs.

Recommendation
To assist the Company in achieving its desired profit objectives, we recommend it consider the following:

(1) Analyse gross margin by product line.

(2) Develop and implement a long-term and short-term profit planning system.
(3) Design and implement a budgeting system.

The product line analysis would highlight standard items that are marginal or generate less than the
desired gross margin while the cost reporting system provides a method of controlling manufacturing
costs. The product line study would also assist in analysing and controlling the increase in the Company's
cost of sales. The budgeting system would assist the Company in evaluating the performance of its
organisational units against its profit plans as well as the possibility of achieving these objectives.

We recommend the following budgeting/analysis tools be implemented as a means of minimising the

operating expenses of owned units,

Recommendation
Control over scrap costs would be more effective if scrap tickets were coded to indicate the cause (e.g.,
faulty material, faulty machinery, poor finish and appearance, or material handling) and if monthly scrap
reports indicate total units and costs by cause.

Duplicates of program documentation should be stored in an off-premises location to eliminate prolonged

reconstruction time in the event of fire or other disaster. While we realise that the development and the
continual updating of duplicates is costly and time consuming, we believe it would be substantially more
costly and difficult to reconstruct these documents if they are destroyed or stolen.

Recommendation
We recommend the Company investigate the use of a corporate travel account service provided by major
credit card companies. Under such a service, employees who travel frequently would be given a credit
card that would be used to charge expenses. Cash advances could then be limited to amounts deemed
appropriate for incidental uses. Employees would still be required to file expense reports for
reimbursement. They would be responsible for paying the charges accumulating on their card.

Recommendation
A general systems narrative should be written for all systems. This narrative need not be a lengthy
document, but sufficient to provide an overall view of each of the systems. User manuals should be
prepared to describe in detail the procedures to be followed by the user department. The manuals should
include instructions on completing input documents, correcting errors and reconciling reports.

We recommend that inventory cost standards are reviewed and updated periodically to ensure that
current manufacturing costs are being used for financial reporting purposes and in product pricing
decisions.

Inventory count procedures should be formalised in writing and distributed to all relevant employees prior
to the count in order to avoid misunderstandings and facilitate an accurate count.

Recommendation
We recommend the minutes indicate why bonuses are awarded so they cannot be construed as non-
deductible dividends. The minutes should also explain the reasons officers' salaries were increased.
Important computer programs and files should be protected from loss due to fire, theft or accidental
damage. This could be accomplished through the utilisation of fireproof storage facilities for records on
the premises and by maintaining back-up files in another location off the premises. We also suggest
extending your insurance coverage to cover loss of computer programs and files.

Recommendation
To position itself to meet these increasing demands, the Company should consider the following:

Develop a long-term strategic plan for the MIS Department. This should be based upon corporate goals,
expected growth of the company and outstanding projects

Currently, priorities are evaluated on a corporate level by management and users on a quarterly basis.
We emphasis the importance of this process to ensure resources are allocated on a timely basis as new
priorities arise. Also, if significant projects are identified, hold interim management meetings.

Examine the structure of the MIS function. Consider establishing "business analyst" positions to enhance
the interface with user departments. Also, consider establishing an assistant to the Director. This
position could address the day-to-day management issues and allow the Director to concentrate on
strategic issues. (This would also provide the Company with succession management

Recommendation
We recommend controls be implemented to prevent programmer access to programs and data files. One
method would be to restrict programmers from entering the computer room. If programmers are to be
allowed "hands on" testing, test files should be provided and the production files should be locked in
storage cabinets or the vault during periods of programmer testing. In either case, the data processing
manager should review a system-produced listing of actual updates made to the production program
library and relate those to a control list of authorised changes.

Recommendation
We recommend an analysis of gross profit percentages by product line for the past four years. The
reason for each significant increase or decrease should be identified, such as an addition to the product
line or a significant increase in the cost of the product. These studies could be put into the form of a chart,
such as you already have for sales and cost of sales. They should then be updated at least quarterly and
analysed for possible corrective action.

A policy should be established regarding accounting for fixed assets and repairs and maintenance. We
recommend all purchases under $x are expensed. Any expenditure over $x should be capitalised if the
item purchased has a life in excess of one year or, if a repair, it extends the useful life of the asset beyond
its normal life. If the expenditure does not meet either of these criteria, it should be expensed.

Recommendation
We recommend the Company consider a study of the factoring arrangement and analyse the related
incremental costs. Analysis of the daily cash requirements should consider funds available under the
existing credit line.

The new contracts to be written between the Company and the service bureau in 2XXX should
specifically provide that the programs, tapes, etc., which are used to run and store the Company's
information are the sole property of the Company.

The credit department should approve customers' accounts from a credit evaluation viewpoint, follow-up
on collections, and prepare adjustments to customers' accounts. Accounts receivable department
personnel should take no part in sales or collection functions and all credit memos should be approved
by someone independent of the receivable functions.
Recommendation
We recommend that the Company consider establishing a deferred compensation plan covering
executive personnel and a pension plan covering all employees to provide additional retirement benefits.

BDO would be able to advise on the options available to the company.

All cheques over [amount] should require a second signature. This will improve control over the
company's assets and ensure that large items of expenditure have proper approval.

Define and document formal contingency plans for each department. The plan should include the
method of operations to be followed while the system is inoperable, how data should be collected during
system down time for later recovery and what steps the users must follow once the system is operational
to ensure all data collected is accurately entered and the system brought up to date.

Recommendation
These considerations suggest a marketing policy that discourages special customer orders, pays full
sales commissions only when salesmen sell what management wants sold, and keeps inventory at a
minimum level. We recommend the Company establish the policy of marketing what is currently held in
inventory in standard packs. To implement this policy, salesmen should be provided with weekly listings
of items for which they will be paid full commissions for selling.

Recommendation
Require employees to begin using their computers to perform the tasks associated with their jobs.
Employees should create linked templates for the schedules that they produce daily to eliminate the need
to constantly re-create schedules or perform mathematical procedures by hand. Human error can also
be minimised and the computer files will create a work trail for other employees in the event that an
individual were to leave the organisation.
Recommendation
Management should consider implementing a scrap control activity at each location that includes a
record of all pick-ups. This might necessitate sending an employee with the scrap truck to the location
where it is weighed, or use of a shipping notice or log that requires a description of the load size. The
record can then be used by accounting personnel to reconcile credits from the scrap dealer to actual
pick-ups.
Cheques that have been signed should be mailed by individuals with no disbursement responsibilities.
Payroll bank reconciliations should be performed by an individual not having payroll responsibilities.

To reduce interest costs and to utilise the best financing available, we recommend the Company pay off
the long-term loans with borrowings on the line of credit or utilise other cash funds available for this
purpose.

Recommendation
We recommend the numerical sequence of all sales invoices be accounted for to help ensure the
completeness of the revenue records. Additionally we recommend that credit invoices be printed on a
different colour paper so they are easily distinguishable from sales invoices for posting purposes.

We recommend this evaluation be expanded to include an analysis of sales, cost of goods sold and
operating expense on a per-square-foot basis. Implementation of such analysis would allow the
Company's retail units to be evaluated on an equal basis. We also recommend the analysis of retail units
include comparison of budgeted and actual inventory turnover and days of inventory on hand. Variations
noted in inventory levels and operating results should be explained by the retail units' managers. These
analyses lend themselves to microcomputer application and therefore would not require a substantial
investment of time.

Recommendation
Perform research to a desired level before production is started for new items to ensure there is an
adequate market for the product. In addition, all purchase orders should be approved and reviewed for
reasonableness in order to eliminate purchasing inventory that will not be used.

Adopt a policy of recording obsolescence on a percentage write-down method based on the aging of
inventory.

Recommendation
We suggest the Company investigate the merits of a medical reimbursement plan

Obtain an information system needs analysis and planning process. This will help determine the proper
software needs of the Company next year and in the future

We believe the involvement of an outside "expert" as a team leader is key to this process success.
Someone who has had experience in selecting and implementing accounting and/or manufacturing
systems should be utilised to ensure the success of such a change. BDO are able to offer this expertise.
Review intercompany inventory transfers as part of the monthly internal audit by the internal auditor. To
ensure consistent recording, remind all locations of Company policies.

Recommendation
Segregate the duties of initiating purchase orders from reviewing and approving invoices to prevent
payment and ordering of goods that the Company does not need or does not receive.

Implement and enforce a policy requiring all employees to sign a confidentiality agreement, including
those hired prior to the formation of the policy.

Recommendation
We strongly recommend preparing a formal forecast to assist in improving profitability by establishing
goals and objectives for the management team.

The Company should prepare a five-year projection of sales. The projection should be made on a
product line basis, and should include potential and desired lines as well as current lines. Costs and
related expenses also should be estimated. The Company can then determine its cash flow requirements
necessary to support this anticipated program. Once this has been determined, sources of cash flow can
be identified, and the best approach to financing the projected growth can be made.

As the Company grows, there is a greater need to have interim accounting reports and financial
statements that accurately portray financial position and results of operations. Accordingly, it is
necessary to have staff available to generate these reports and ensure their accuracy. Consider
increasing the accounting staff.
Recommendation
We recommend the Company periodically back up all source programs. These backup files and any
related documentation should be stored in a secure offsite location
Acquire and implement a computer software system that would maintain the following information
regarding the Company's fixed assets:

1. Asset description
2. Cost
3. Date of purchase
4. Asset life
5. Asset depreciation methods
6. Annual depreciation - book and tax
7. Accumulated depreciation - book and tax

Consider using the same system purchased by X Company. This may eliminate research time and
possibly alleviate the expense of outside user training.

Recommendation
Sales should be recognised only upon shipment of the goods. A journal entry should be made to record
shipments made but not billed, or goods billed but not shipped. Consideration should be given to
updating the system to prevent this from occurring.

Accordingly, the expiration dates should be considered in the Company's overall tax planning. The
approximate amounts of carryovers and their expiration dates are as follows:

We suggest you finalise the terms of the agreements and have it signed by all interested parties.

We recommend that cash management be centralised under the direction of the corporate treasurer to
ensure optimum utilisation of available cash funds.

The billing function should be separated from all cash and recording functions. If segregation is not a
viable option due to the size of the company, close management supervision should be adopted instead.

Recommendation
Set a priority of identifying the cause of the book to physical adjustment in order to control and possibly
reduce the effect of the difference. This priority should be communicated to the designated responsible
personnel, increasing the likelihood of success. The commitment should include specific designation of
responsible personnel, resources required such as programming time, computer time, etc.

Attach the main system directly to the local area network as a second file server if the hardware is
upgraded. This will simplify system access for the network users, allow backups for both servers to be
done at the same time and allow access to the engineering file server from other departments if so
desired. If access to the engineering server from other departments is not desired, this access can be
denied via network security features. This would also serve as an important first step in moving to CIM
(Computer Integrated Manufacturing) should that be a goal of the Company.

Recommendation
We recommend that access to the on-line system and central data files be restricted to appropriate
personnel. Such restrictions could be accomplished by assigning passwords or security codes to
employees and by physically locking unused terminals. Implementation of a logging mechanism providing
documentation of system use should be considered.

Although the percentage used in the calculation is consistent from year to year, past history should be
reviewed to justify its accuracy. Unusual write-offs should not be included as they can skew the pattern of
normal activity.

To control inventory at outside locations, a general ledger account should be established. In addition, we
recommend a physical count be made of material returned from contractors to control and account for the
shrinkage inherent in certain processes.

Recommendation
Improved cash forecasting techniques would provide more accurate determinations of operating cash
requirements and would assist in anticipating short-term financing needs. They also would help in
planning for certain discretionary expenditures such as equipment purchases, bonus payments, and
profit-sharing contributions.

Two basic methods may be used to forecast cash. First, the receipts and disbursements approach
essentially is a projection of the sources and uses of cash. The other method, the adjusted net income
approach, projects the changes in the balance sheet, with emphasis on the working capital accounts.
This approach is useful over a longer term.

Good cash forecasting also would aid in identifying funds available for investment. To invest excess
funds, the Company must regularly translate the book balances into the amount of available funds. One
way to determine this adjustment is to calculate for a reasonable period of time

Recommendation
We recommend the Company consider establishing a procedure whereby each salaried employee would
have a conference with an executive of the Company to discuss his performance for the year and any
salary increase. These conferences should be held on the employee's anniversary date and should be
documented in writing and maintained in the employee's personnel file. We also believe that each
employee should receive a semiannual written evaluation of his performance prepared by his immediate
supervisor.

Recommendation
A formal list of billing rates should be established. The list should be reviewed periodically by an
appropriate level of management to determine that proper rates are utilised. All modifications to the rates
should be made only upon receipt of written authorisation. Implementation of a formal billing rate list will
ensure the proper billing rates are used and that modifications in rates are reflected in billings on a timely
basis.

The company should discourage the practice of drawing cheques to "cash". Instead cheques should be
made payable to the person responsible for the funds. This person should not be the same person who
writes the cheques.

Recommendation
We recommend that a realistic monthly closing and reporting schedule (in terms of number of business
days from month-end) be established. Standard monthly journal entry procedures should provide the
basis for determining the closing schedule. With efficient accounting personnel and procedures, it should
be possible to have financial information in the hands of management within 10 to 12 business days after
the end of the month.
Standard monthly reports desired by management should be established. Once the content and format
are established, the forms can be pre-printed to reduce clerical effort and preparation time.

The monthly reports should include, at a minimum, the following:

(1) Comparative balance sheets.
(2) Comparative monthly and year-to-date income statements and statements of cash flows, including
profit or loss by company with related percentage analysis.
(3) Brief explanations of significant balance sheet and income statement

Recommendation
As a result of the change to the LIFO method of determining inventory cost, formal inventory procedures
should be developed and included in the Company's procedures manual. In developing these
procedures, the following areas should be considered:
(1) Procedures to be used to build-up LIFO (base-year) standards for new parts with previously-used raw
materials.
(2) Procedures to be used to build up LIFO (base-year) standards for new parts with new raw materials.
(3) Procedures that prescribe when base-year standards should be developed for new parts and when
the index method should be used.
(4) Procedures for retention of base-year standard cost decks and records

Recommendation
Consider upgrading the Company's inventory system in the near future and developing guidelines
regarding what information users would like to receive from the system. Minimum requirements would
include usage, minimum reorder points and costing. Also, review procedures for maintaining current
inventory reserve analyses.

Cheque writing days should be implemented to reduce clerical time, reduce the contoller's time for
approving and signing cheques and improve control over manual cheques.

Record the liability for accrued vacation payable to employees and evaluate on an annual basis.

We recommend consideration be given to forming a corporate-wide steering committee to coordinate

systems development efforts, back-up plans and allocation of information system resources. Affiliate
systems could be used as potential back-up and recovery sites.

Recommendation
Inventory quantities should be analysed in more detail throughout the year for slow-moving and obsolete
inventory. Consideration should also be given to centralising the lumber purchasing function for all
divisions or consolidating it with another company in order to obtain the best pricing.

Record foreign currency transactions with the exchange rate in effect on the date of the transaction. The
Company should establish a system to obtain the exchange rates regularly from its bank.

The Company has begun to reconcile monthly vendor statements. In addition, the locations with material
inventories should be included in the Company's cycle count procedures.
Recommendation
We recommend the following activities are undertaken:

-Review the security related activity options noted to determine if they might be set in a more restrictive
manner.

-The security level on the A Company AS\400 is set at 20, which is below the requirements set on the
machines at B Company. This setting provides only password security, no object security and should be
changed.

-The auditing level is set to not journal any security events that occur, this should be set to record such
events.

-Users are allowed to sign-on to more than one device at one time. Ideally, allow only certain individuals
requiring this option to do so (i.e., some programmers).

-The individual designated as the Security Officer can sign-on to any device. Ideally, limit the Security
Officer profile to two or three devices.

Recommendation
We recommend a formal system of communication be established among the credit departments. Such
communication could be achieved through a periodic summary of significant problem accounts that would
be circulated to each division. We believe this would help minimise the risk of extending credit to
customers with overdue balances with other divisions.

A review of this nature should be completed as soon as possible.

A list should be prepared and maintained of who should be receiving copies of computer print-outs and
the internal auditor should periodically check to see if actual distribution conforms to the list.

Recommendation
Establish a formalised policy regarding potential conflicts of interest. Annually, all employees in decision-
making positions should read and sign a written conflict of interest questionnaire. These should be
returned to a responsible person who will then summarise any potential conflicts and forward the
summary to the Board of Directors for their review and follow-up.

Recommendation
We recommend that management consider obtaining and reporting segment information from the
existing system or implementing a new system that will provide operating results by business segment.
Most of the information could be obtained by manually summarising selected general ledger accounts.
Where business segments share common facilities an analysis could be prepared to properly allocate the
cost of the shared expenses based on estimates of the expense relationships. In the near-term,
management might use a sales contribution (before fixed overhead) format until an overhead allocation
has been developed. Ideally, such a system would also segregate key balance sheet accounts, such as
accounts receivable, to enable the Company to evaluate return on assets and net investment in the
business segments. These amounts may become very important as the Company moves into other
business segments. The cost benefit of implementing this suggestion should be reviewed carefully before
proceeding.

Recommendation
Documentation of policies and procedures offers an opportunity to provide continuity in the event of an
employee's departure or reassignment. In addition, as the Company's enterprise management system is
rolled out across the Company's operating units, uniformity of business practices will facilitate the
accuracy and quality of the information supplied to management. Written policies and procedures will
help facilitate common practices across businesses.

Begin to document policies and procedures in writing. When a significant amount has been documented,
it can then be compiled into a policies and procedures manual.

A review of the insurance coverage should be made to simplify coverage and combine various policies to
take advantage of possible cost savings from blanket coverage.

We suggest that insurance coverage be reviewed to determine whether the Company is adequately
protected from fire or other possible losses

Recommendation
Rotate backup files periodically to an off-site location to ensure that at all times there is a historical copy
of the data off-site. The frequency of the rotation is dependent on the overall risk of the data to the
organisation and the difficulty of recreating it. Some organisations rotate backups daily if the risk is high
while other organisations rotate data weekly since they believe the risk is less.

We recommend the Company investigate the possibility of long-term institutional or equity financing that
would result in lower interest expenses related to the permanent needs of the Company.

Implement semi-monthly payroll for all administrative employees at headquarters and unit managers. A
semi-monthly payroll would benefit the Company by:

· Improving cash flow management

· Reducing administrative time for processing the weekly payroll
· Reducing expenses for the independent payroll service

Recommendation
We recommend that passwords be changed on a periodic basis (e.g., every 60 days). Changing
passwords on a periodic basis would strengthen the overall EDP security.

We recommend the Company maintain a record of increases in raw materials costs. Prior to the end of
the current fiscal year we will again discuss the advisability of changing the inventory valuation method to
LIFO.

We recommend that sales return credit slips be numerically controlled and any missing documents
accounted for. This control will help provide assurance that sales returns are accurately reported.

Recommendation
We suggest a policy be established for controlling drop shipments so the date a customer receives drop
shipment merchandise the company is notified, preferably in writing and bills the customer as of that
date. The written notice of receipt could then be attached to the invoice as proof of receipt.

Recommendation
We recommend the data processing department prepare a standards manual that describes the
minimum documentation requirements for a data processing application. This manual should include
specific definitions, standard forms, and examples of the required items for the following:
System Overview, including flowchart and narrative
Program Maintenance, including:
· Program narrative
· File formats and record layouts
· Data element definitions
· Explanation of logic and calculations
· File to program cross-reference tables
· Control features
· Test data and results
· Program change log
Computer Operator Instructions
User Procedures, including:
· Non-technical narrative description of the system
· Explanation of input data, output reports and error messages
· Control balancing instructions

Recommendation
We believe the Company should consider changing this policy so employees would have several options
regarding overtime.

This revised policy would benefit both employees and the Company. Employees typically like receiving a
lump-sum payment during the year which in effect serves as a "forced" savings program. Employees may
also like the option of being able to take additional time off. The policy would benefit the Company if
employees elected deferral since it would permit the use of the funds for an extended period of time and
payroll expense would be reduced if compensatory time off were taken.

Record transactions when all documents and facts are readily available.

Recommendation
We recommend the use of pre-numbered receiving reports to strengthen the related internal control
activities.

A listing should be made of all mail receipts by the person opening the mail. A copy of the listing should
be passed to the cashier for comparison with the items received. This ensures all items are properly
processed.

Recommendation
We recommend all pricing changes be reviewed and signed by two authorised officials. We also
recommend that access to the maintenance file of pricing data and processing of price changes be
restricted to authorised personnel and that all changes be documented. These recommendations should
help ensure the proper valuation of inventory.

We recommend the use of a shipping clerk with full responsibility over the items being loaded for delivery
or pick-up by customers. No merchandise should be loaded without the sales order and shipping
documents

Reconciliations should be performed on a timely basis and all differences should be fully investigated and
resolved.

Recommendation
The signature plate should be stored in a secure location. Use of the cheque signing plate should be
limited to one person. This person should keep a log of its use. The log should show the numerical
sequence of cheques signed and the date used. The plate and the log should be under key control. Also,
only employees authorised to prepare or supervise the preparation of cheques should have access to
blank cheques.
Recommendation
Review user profiles on the system and consider making changes as follows:

Þ Remove unnecessary special authorities from those users not requiring them for their job function. At
most, two users should be allowed to perform unlimited functions on the system.

Þ Assess the need for the individuals noted to have multiple user IDs in addition to access to the
predefined profiles. Typically, multiple user IDs should not be provided.

Þ The profiles that are used should have the password changed on a regular basis, as is required of all
users, and access to the password should be strictly limited.

Although the Company's insurance coverage appears to be adequate in many areas, the Company
should evaluate the need for business interruption insurance.
Recommendation
A reserve for sales returns should be established based upon historical data to provide an adequate
matching of returns to recorded sales.

All production and test tapes in the tape library should be placed under the control of a tape librarian.
This person should normally be the only one with access to the library. The librarian should be
responsible for keeping a record of the tapes that are in the library, the back-up copies of files off-site,
and the retention schedules of all data files. The librarian should supply operations personnel with the
tapes needed for processing based on the daily production schedule. All tapes used for testing should be
controlled by the librarian and supplied to the programmers when formally requested.

Recommendation
A computerised accounting and information reporting system would be a tremendous benefit to the
Company at this time and will be a virtual necessity in managing the business as the Company grows.

A significant result of automation is the improvement that will be derived in the area of financial reporting.
The availability of timely accounting information will enhance the Company's efforts at budgeting,
planning, and analysing its present and future financial goals. A computerised system will provide for
better audit trails and prompt recall of important historical accounting information. Additionally,
operational efficiencies would be realised by the elimination of existing duplicate manual procedures and
an improvement in the general information flow within and outside of the Company.

There are a variety of hardware products and software packages available to satisfy the needs of
similarly-sized, fast-growth companies. We would be happy to

Recommendation
Consider a commissions formula that accounts not only for sales, but also subsequent cash receipts.
This will create an incentive for increased collections. A "billed and collected" system may be
appropriate. Consideration should be given to whether the process accomplishes proper financial
reporting and efficient administration.

We believe a formal capitalisation policy will provide the guidelines for the effective and consistent
administration of fixed asset accounting matters. Such a policy should include dollar limits for levels of
approval by appropriate officials.

Recommendation
Define and document a formal policy for verification of processing and reports. If it is to be the user's
responsibility, this should be stated in the policy. The policy should also outline the frequency of
verification (daily, weekly, each program run, etc.) and the procedure to be followed if errors are detected.

Examine the securities lending arrangement and consider whether the return is worth the risk involved.

Recommendation
To expedite the interim and year-end consolidation, the use of a standardised strip statement should be
considered. The statement should be prepared at the various accounting unit locations, sub-consolidated
at the appropriate locations, and then forwarded, together with consolidating details, to the corporate
office for inclusion in the consolidated financial statements.
We recommend that the payrolls be reviewed by an officer of the Company. This review should be
evidenced in writing by requiring that the reviewer sign or initial the payroll journal. In addition, any
changes to salaried or hourly pay rates should be documented in writing and approved by the officer.

We recommend such entries be handled as standard journal entries. The detailed distribution of the entry
and the explanation can be prepared in advance for a number of months; only the current month's
amounts need be inserted.

Recommendation
We recommend management consider adjusting cost standards on a regular basis throughout the year
so that inventory is valued using more recent costs. This will provide more accurate reporting during the
year and help avoid large year-end adjustments.

Develop a system or policy that sustains a billing system that properly accounts for receivables in each
financial reporting period. This will require effective communication between billing, sales and
engineering departments. Timely entry of hours in the professional service billing system will help to
facilitate more accurate and meaningful financial reporting. Time and expenses should be billed as work
is performed or expense incurred.
We realise that these carryovers will not be most effectively utilised until the Company begins to operate
profitably but sound tax planning should give consideration to items to ensure complete or maximum
utilisation of the loss carryovers prior to expiration.

Recommendation
Procedures for counting should be formalised and approved. All staff involved in the inventory count
should be fully briefed before counting commences.

All credit approvals over a stated amount should be subject to final approval by a second appropriate
member of the management team.

Implement a policy of approval, which may require two signatures, for significant additions and amounts
incurred in excess of vendor quotes.

Recommendation
We recommend the edit report indicate the extended retail value and batch total that can be compared
with the inventory transfer balance.

Recommendation
As noted, the Company is currently investigating a couple of different automated change management
products.

Continue to investigate an automated change management product and implement it as soon as

possible. When properly implemented, this would provide management with a tool for auditing, moving
and tracking of all sources, objects, files and documentation from development and testing libraries into
production libraries.
Management should consider having these employees adopt an Individual Retirement Account.

Such an arrangement is attractive because unlike other retirement programs it can be established for a
select number of employees and does not involve the administrative costs of other programs.
Contributions, however, are subject to limitation.
Recommendation
Forward all future tax amendments and reassessments to BDO to ensure that tax returns have been
assessed as filed or any differences are followed up prior to the expiration of the objection period.

To minimise the disruption to the business of such a change in data processing personnel, it is essential
that the documentation of the Company's programs and data processing procedures be improved.

Recommendation
Separate sales return and allowance accounts should be established to provide management with
information identifying the erosion of gross sales attributable to merchandise returns versus other
allowances granted. The allowances account could be further broken down according to the primary
nature of the allowance (eg accommodation, freight charges) to enable management to monitor
allowances granted.
The variance system should accurately track the standard and actual costs. The adjustment to actual
cost should be made based on the variances recorded. Standards for items that have greater
fluctuations from actual costs could be updated on a quarterly basis, rather than annually, to more
accurately reflect the actual costs.

Recommendation
Segregate duties so an employee, who does not have access to the accounting records receives the mail
and prepares a summary of the cash receipts, such as an adding machine tape. The entries made to the
accounting records and the deposit made by the accounts receivable clerk should then be balanced to
the summary to ensure that all cash receipts have been recorded properly.

Limit access to the work-in-process system and designate individuals who are permitted to make rate
changes. Require authorisation for changes to labour rates that are different than standard labour rates.
In addition, management should review individual labour rates on a regular basis.

Recommendation
Implement and enforce a policy whereby all obsolete inventory write-offs are charged against the
obsolete inventory reserve. This will enable management to more effectively value and analyse inventory
both currently as well as historically through the use of an accurate obsolete inventory reserve.

Individuals generally accomplish more and work better as a team when they fully understand their
responsibilities and have a common agreement with their superiors as to the job objectives and
performance standards on which they will be evaluated.

We believe that benefits would be derived by a personnel program that include:

(1) The preparation and issuance of written job responsibilities for all personnel.
(2) A mutual understanding between superior and subordinate as to job description, operating objectives,
and performance standards.
(3) A periodic review of employee performance against these goals.

Recommendation
To effectively plan and control future operations, we recommend that forecasts for mill and warehouse
sales be related to the respective costs and expenses associated with these two types of sales. In
addition, actual sales and respective costs by type of sale should be determined and reported against
such forecasts. The use of separate general ledger accounts to segregate mill sales and costs also
should be considered.

Establish improved pricing processes and policies in order to minimise pricing differences and the
resulting billing adjustments.

Recommendation
In anticipation of the Company's initial public offering of common stock, we recommend the Company
establish an audit committee consisting of a majority of outside directors. The committee's objectives and
responsibilities should be set forth in a written document approved by the board. The responsibilities of
the committee should include, but not necessarily be limited to:
(1) Review and recommend to the directors the appointment of the Company's independent auditors.
(2) Meet with the independent auditors and financial management of the corporation to review the scope
of the proposed audit for the current year and the audit procedures to be utilised, and at the conclusion
thereof review such audit, including any comments or recommendations from the independent auditors.
(3) Review with the independent auditors, the Company's internal auditor, and financial and accounting
personnel, the adequacy and effectiveness of the accounting and financial

Recommendation
Recommendation
Recommendation
We recommend the Company maintain a formal profit plan; (i.e., a forecast of sales (by units), costs and
expenses) against which actual profit is measured. A profit plan, if properly used, can assist in improving
profitability by planning sales activities, while controlling costs and expenses.

The Company should consider the following guidelines in developing and monitoring the budget:
(1) Budgeted revenue should be by customer and based on anticipated man-hours and production costs;
(2) A written statement of assumptions should be attached;
(3) Operating expenses should be analysed by caption;
(4) A forecast of the cash flow and cash position should be included;
(5) The Board of Directors should approve the original budget and subsequent revisions; and
(6) The actual to budget comparison should be made monthly and the responsibility for explanations of
significant variations from budgeted amounts should be

Recommendation
We recommend consideration of the following:
(1) File all freight bills with their respective invoices and arrange for the buyer or the clerk who does the
filing to verify that the freight billing is correct.
(2) Do not pay a freight bill until it has been matched with the vendor invoice to which it relates.

Recommendation
Benefits from such a change include:
(1) Timely payment by accounts payable without interference due to buyers' travel schedules.
(2) Elimination of the use of time to review and approve invoices when they have already effectively
approved them via the purchase order.
(3) Elimination of the need for accounts payable to determine if all invoices were returned by buyers.
(4) Better control of invoices through their payment and less opportunity for misplacement.
(5) Reduced clerical time.
Buyers or the general merchandise manager, however, should approve the invoices with prices and
quantities differing from the purchase order. Also, as part of the automation of the accounts payable
system, all paid invoices should be accumulated into a buyer purchases journal requiring written buyer
review.

Recommendation
Develop a policy to calculate and recognize any gains or losses that are incurred in conjunction with the
sale or disposal of any fixed assets in accordance with GAAP. This is exclusive of the current policy on
leased equipment in which the items are returned to inventory for future rental or sale.
Accrue all bonuses and commissions at year-end.

Recommendation
We recommend the Company consider maintaining perpetual "storage" inventory records to the same
extent "owned" inventory perpetuals are maintained. The storage perpetuals should be updated
periodically to reflect all processing and other transactions

Recommendation
A written obsolescence policy that requires comparison of quantities on hand to actual usage and sales
forecasts should be adopted. This would provide a consistent basis for valuation of inventory for both
accounting and physical retention purposes, and should facilitate the preparation of a final priced
inventory compilation. The policy should include procedures for identification and disposition of material
determined to be obsolete.
We recommend that management review the current budget process and consider changes that would
streamline the information flow enabling completion of the annual budget in a timely manner.
Consideration should be given to documenting the budget process in writing.

Recommendation
The company should consider employing an individual to assist the controller in cash collections, which
would help determine the credit worthiness of new and old customers and to call and/ or write to those
customers who have old outstanding balances.

We recommend that the Company's accounting policies be evaluated and modified accordingly.
Appropriate procedures to capture the applicable cost and identify the point of technological feasibility
should be a part of such evaluation.

Recommendation
Consider implementing the use of a tool to record additional security related events such as attempts to
access unauthorised files and changes to system security values.

BDO can advise on suitable tools and software to assist in this area.

We recommend that Parent Co retain detailed records indicating that the facts in the adjacent paragraph
are correct. While such records are no guarantee that the authorities will accept the Company's
intercompany pricing (since they may determine that different quantities, different markets, or other
factors may indicate that apparent comparable prices are not actually comparable) they will serve as
some evidence as to the acceptability of such pricing for. tax purposes. We further recommend that
ParentCo have transfer pricing studies prepared in the future.

Recommendation
We recommend the following procedures be implemented:
(1) A batch control be established for the number of hours submitted to data processing and compared to
the data processing-generated report.
(2) The payroll clerk should compare hours per the time cards to the data processing-generated report as
opposed to the worksheet.
With an effective perpetual inventory system in place, timely and accurate inventory information would be
readily available. Presently, the Company has in place the necessary software to fully implement a
perpetual inventory system. Thus, the need for routinely significant manual inventory adjustments will be
eliminated. By prioritising this system, and making the necessary investment of set-up time, timely and
accurate inventory information will greatly enhance management's decision-making capabilities.

Recommendation
Consider implementing use of the audit journal to audit specified security-related events. These should
include changes to security-related functions, authorisation failures and delete operations. In addition,
the audit journal should be reviewed on a periodic basis, either daily or weekly and appropriate follow-up
procedures should be developed.

We recommend the Company develop and implement a written policy covering all construction, servicing,
sales and purchase contracts, and any other significant contracts or agreements, which includes
procedures for their awarding, processing, and review.

Recommendation
We recommend the Company adopt a formal inventory policy. Such a policy should be based on
customer demands and the Company's product and cost requirements.

BDO would be happy to advise on the procedures to be considered in completing an inventory system
review.

We recommend that all advances made to employees that which are to be repaid to the Company be
recorded as miscellaneous receivables so the balance and all subsequent repayments may be
accounted for.

Review those user IDs that do not require mandatory menus. For those users that do not perform
security administration or system operator functions, change the setting to require a mandatory menu.

Recommendation
To maintain the desirable separation of duties between operators and programmers, the following
controls should be implemented:
(1) Operators should not be permitted to program applications or make modifications to programs unless
a comprehensive review of their work (i.e., 100% check of coding) is made by programming personnel.
(2) Operators should be denied access to source program decks, program listings, and block diagrams
so they will be unable to determine the program logic and make changes for their own benefit.
(3) Programmers should not be permitted to operate the computer in a "hands on" mode unless rigorous
safeguards are installed (e.g., a dedicated machine, a copy of the system and program pack being
utilised, no live files being used for tests, review of files utilised in tests and output from tests).
(4) Neither programmers nor operators who program should be permitted to catalogue a new or a revised
program into the program library.

Recommendation
Develop and adhere to an investment policy. This policy may include restrictions on, or Board approval
of, purchases and sales of securities. The policy may include a definition of which investments match the
company's/ association's desired level of risk and return.

We recommend the following controls be established:

(1) The computer room should be locked at night.
(2) Unissued cheques should be stored in a secured area (i.e., safe).
(3) The cheque writer key should be removed and stored in a secured area when not in use.

Recommendation
We recommend that the purchase files contain documentation as to why competitive bids are not
obtained for purchase orders in excess of $X. We also believe the files should contain documentation of
the basis of selection.
We recommend the numerical sequence of purchase orders and receiving reports be accounted for to
assure all documents have been processed at the end of each period. Open or unmatched documents
should be periodically reviewed by a supervisor.

Recommendation
We recommend that the company assign appropriate personnel to review periodically the accounting and
administrative controls, which include systems and procedures providing for proper segregation of duties.
These reviews will help insure the safeguarding of assets and the receipt of materially accurate and
reliable financial data.

The volume of payments has increased, and an improved filing system appears necessary for orderly
handling of paid invoices. In addition, we recommend adoption of the following procedures:
(1) A follow-up system should be initiated to insure that proper support is obtained and referenced for
disbursements made in advance of normal processing.
(2) The cheque number and date should be written on the invoice as a cross-reference and indication of
payment.

Recommendation
There are a number of steps that the Company may take to safeguard its computer facilities and reduce
the risk of loss.

BDO are able to advise on safeguards that the company can easily follow.