ML Points

SUMMARY GUIDANCE OF AUDIT MANUAL VOLUME II AND STANDARD
WORDING FOR MANAGEMENT LETTER POINTS
This is a summary of the guidance on (i) the policies and procedures and (ii) the wording on
written communications to clients on internal control weaknesses and other matters arising
during the audit. For full details, refer to Chapter 3 of the Audit Manual Volume II on the
Audit Web.
1. Policy And Procedure Summary
1.1 The guidance in International Auditing Practices Statement, Communications with

Management, should be adhered to.
1.2 We should use the audit form Matters for Inclusion in Report to Management [43].
1.3 We should ensure that we follow up on the action taken on our prior year’s
recommendations. This follow up should be documented and our risk assessment
amended accordingly.
1.4 The management letter should be addressed to an appropriate member of the client’s
staff. This will vary according to each client’s circumstances. However, the
addressee will generally be of sufficient seniority to authorise any necessary rectifying
action.
1.5 The final management letter should be issued to the client at the completion of the
audit. Where an interim management letter has been issued the final letter should
make reference to this.
1.6 Each management letter should include a caveat that explains that the primary
purpose of the audit is not the identification and reporting of weaknesses in internal
control. It should not be issued in final form until client management have had chance
to comment on its contents.
1.7 A less formal method than the issuing of a letter, such as a meeting or meetings,
should be used by the partner or manager to communicate important or urgent
matters promptly. Minor matters may also be more appropriately communicated in a
meeting.
1.8 The content of the management letter should not conflict with our audit opinion. If a
clean opinion has been given yet significant weaknesses disclosed the content of the
letter should explain how our opinion was arrived at.
1.9 There is no standard layout for our management letters as circumstances vary from
client to client. The Appendix to this section in the complete Manual includes a
number of pro forma layouts which may assist in drafting letters.
E KNOWLEDGE RESOURCE CENTRE P AGE 1

1.10 To provide value to clients a Business Review Memorandum may be prepared and
the contents discussed at the final audit meeting.

2. Guidelines for the Wording of Written Communications on Internal Control

Matters
2.1 Although we are flexible as to the specific wording of our written communications on
internal control matters, we follow recommendations made in the International
Auditing Practice Statement (IAPS) pertaining to “Communications with
Management—IAPS 1007.” Therefore, in our written communications on internal
control, we will:
• Not include language that has the effect of being in conflict with the opinion
expressed in the audit report;
• State that the accounting and internal control systems (or structures) were
considered only to the extent necessary to determine the auditing procedures to
report on the financial statements and not to determine the adequacy of internal
control for management purposes or to provide assurances on the accounting and
internal control systems (structure). The firm’s standard paragraph is as follows:
“Our review of the company’s system of internal control is carried out to

assist us in expressing an opinion on the financial statements of the company
as a whole. This work is not primarily directed toward the discovery of
weaknesses (other than those which would influence us in forming that
opinion) or the detection of fraud and should not, therefore, be relied upon
to show that no other weaknesses exist. (Furthermore, in certain areas of
our audit work we considered it more efficient not to rely on internal control
systems but to perform alternative testing, in order to be able to arrive at our
audit conclusion). Accordingly, our audit work would not necessarily allow
us to identify all possible improvements that a more exhaustive systems
review might develop.”
• State that it discusses only weaknesses in internal control which have come to our
attention as a result of the audit and that other weaknesses in internal control may
exist; and
• Include a caveat statement that our letter is provided for use only by the
management (or another specific named party).
2.2 It may be helpful to explain to the client why such a caveat is included, or to expand it
to give more detail. Alternatively, if the caveat has already been included in recently
submitted management letters (or engagement letters) it may be possible merely to
refer to these documents. Either of these approaches may be used to help avoid the

negative impression which the caveat can occasionally create. An alternative caveat
is included in an appendix to this section.
2.3 We encourage management to respond to our comments in which case we can

include any response in our report.

PRO FORMA MANAGEMENT LETTER POINTS - GENERAL
When using these summary pro forma management letter points, great care
should be taken to tailor them to the client’s specific circumstances
INDEX
1. NO ACCOUNTING POLICIES AND PROCEDURES M ANUAL........................................... 3
2. NO CONTROL AND ADMINISTRATIVE PROCEDURES M ANUAL ................................... 4
3. NO BUSINESS PLAN AND STRATEGY........................................................................... 5
4. NO INTERNAL AUDIT FUNCTION ................................................................................. 6
5. INADEQUATE INTERNAL AUDIT FUNCTION ................................................................. 7
6. INADEQUATE M ANAGEMENT INFORMATION SYSTEM.................................................. 9
7. INACCURATE M ANAGEMENT INFORMATION SYSTEM ............................................... 10
8. NEW M ANAGEMENT INFORMATION SYSTEM ............................................................ 11
9. M ANUAL PREPARATION OF PAYROLL ...................................................................... 12
10. PERSONNEL RECORDS NOT UPDATED.................................................................... 13
11. ABSENCE OF EMPLOYMENT CONTRACTS FOR STAFF............................................. 14
12. LACK OF JOB DESCRIPTIONS FOR STAFF ............................................................... 15
13. INADEQUATE SEGREGATION OF DUTIES IN PAYROLL SYSTEM................................ 16
14. LACK OF BUDGETARY CONTROL - 1 ....................................................................... 17
17. LIQUIDITY CONCERN - 1.......................................................................................... 20
18. LIQUIDITY CONCERN - 2......................................................................................... 21
19. INADEQUATE CASH M ANAGEMENT......................................................................... 22
20. INADEQUATE INSURANCE COVER............................................................................ 23
21. OPEN CHEQUES ISSUED TO THE CUSTOMS DEPARTMENT ....................................... 24
22. COLLECTIONS FROM SALES OUTLETS AT FRANCHISE COUNTERS ......................... 25

23. NO PETTY CASH EXPENSE SUMMARY..................................................................... 26
24. DE-RECOGNIITION OF PRE-OPERATING COSTS ...................................................... 27
25. DE-RECOGNIITION OF DEFERRED EXPENDITURE..................................................... 28
26. LACK OF EMPLOYEES FIDELITY INSURANCE ........................................................... 29
27. REVIEW AND APPROVAL OF PAYMENTS NOT EVIDENCE BY SIGNATURE................. 30
28. DIFFERENCE BETWEEN GENERAL LEDGER AND PDC SUB-LEDGER.......................... 31
29. INCONSISTENT USE OF LOCAL PURCHASE ORDERS (LPO)..................................... 32
30. NO HOLDING COMPANY......................................................................................... 33
31. ASSETS NOT REGISTERED IN THE NAME OF THE COMPANY.................................... 34
32. NO FORMAL USER PROGRAM CHANGE PROCEDURE .............................................. 35
33. INADEQUATE STORAGE OF DAILY BACK UPS ......................................................... 36
34. FOREIGN CURRENCY TRANSLATION AT INCORRECT RATES ................................... 37
35. CHART OF ACCOUNTS NOT ALIGNED TO HEAD OFFICE REQUIREMENTS ............... 38
36. DIVISIONAL BRANCH RESULTS .............................................................................. 39

1. NO ACCOUNTING POLICIES AND PROCEDURES M ANUAL
Observation
We noted that the financial department does not have an accounting and operating
procedures manual. Currently not all employees are aware of the accounting
policies and operating procedures that have been adopted by the company. This
has resulted in inconsistencies throughout the company, and new staff not having a
reference to work from.
Recommendation
We recommend that the company consider the preparation and maintenance of

written standard accounting and operating procedures. When these have been
completed staff should be trained to the extent necessary to understand and apply
them.
The manual should include, as a minimum:
Ø Organisation of the finance department
Ø Accounting policies of the company
Ø Accounting procedures and controls for each transaction type
Ø Financial reports to be prepared, and the checking and distribution of each of

these
Ø Chart of accounts
Ø Standard accounting entries
Management Response

2. NO CONTROL AND ADMINISTRATIVE PROCEDURES M ANUAL
Observation
At present there is no comprehensive control and administrative procedures manual

available within the Group. Rather, senior management’s directives on such
procedures are contained and documented in the form of various ad hoc internal
memoranda.
As a consequence, staff within the Group of Companies may not be aware of the
Group’s procedures. In addition companies within the Group may follow
inconsistent practices.
Recommendation
In the absence of a consolidated procedures manual the risk exists that:
Ø certain new activities may not be covered by existing directives
Ø procedures may be applied in an inconsistent manner
Ø procedures might not be updated on a timely basis
Ø staff may not be aware of all corporate policies and procedures
The Group should prepare and maintain written standard control and administrative
procedures. When these have been prepared staff should be trained to the extent
necessary to understand and apply them.
We would be happy to assist in the preparation of these manuals should this be

required.
Management Response

3. NO BUSINESS PLAN AND STRATEGY
Observation
Given the ever changing environment, we believe that this is an appropriate

opportunity for the Group to document the long term strategic objectives which
should reflect the current aims of the business. This plan should encompass all
aspects of the business and how the Group expects to develop over the medium
(say, 3 years) to the long term (up to 5 years). This strategy document should also
take into consideration the influence of external factors, such as changing market
conditions, effectiveness of competition, changes in product technologies, etc. This
can be achieved by the development of a SWOT analysis, i.e. identifying the
strengths, weaknesses, opportunities and threats facing the Group.
As part of this process, the Group should also include commentary on its business
risks and how the Group is seeking to reduce or control these risks. Such risks
presently facing the Group include over-reliance on one key supplier, foreign
currency exposure in paying suppliers, working capital and cash flow problems due
to high levels of inventory, etc.
Recommendation
We recommend that the management should undertake a strategic analysis of the

Group’s activities and operations which may then be developed into a suitable
business plan. This 3 or 5 year business plan should then be reviewed on a
periodic basis and updated to reflect the changes in the Group’s business strategy.
Management Response

4. NO INTERNAL AUDIT FUNCTION
Observation
We have noted that there is no internal audit function operating within the Company.
An internal audit department exists to aid management control over the business and
assist in the identification of matters requiring their attention. As a result of the
multiple locations from which the Company is planning to operate, and the dilution of
control which ultimately arises, this is increasingly important.
As part of the formation of an internal audit department it is important that a suitably

experienced professional is employed to perform the function and that sufficient
resources are allocated to the department to gain maximum benefit from its
operation.
Recommendation
We recommend that management review the requirement for the implementation of

an internal audit function based on the current and future expected activities of the
Company. The department would focus initially on areas that are of concern to
management and in which there may be a lack of control with a view to ensuring that
key management objectives and strategies are achieved. The function must be given
adequate resources, both financial and operational, and a clear reporting structure
should be formalised and documented for reporting the findings to the Board of
Directors on which they can base decisions.
Management Response

5. INADEQUATE INTERNAL AUDIT FUNCTION
Observation
We have observed several issues in relation to the Internal Audit Department (IAD)
which require attention:
Ø The size of the IAD appears to be small in relation to the nature and level of the
company’s operations and activities.
Ø There are no formalised procedures or work programs for the department.
Ø There appears to be no clear lines of responsibility and authority within the
company’s operations requiring functional departments to co-operate with IAD
queries or similarly to permit the internal auditors automatic access to all
information and explanations they require in the pursuance of their duties
Ø It would also appear that the follow up of IAD findings and reports by Head
Office is not in a structured manner.
Implication
Ø The IAD can serve an important function for the company in controlling the
activities of functional departments, especially for a large company, where Head
Office management are not involved in the day-to-day activities. In this situation,
the IAD can ensure on behalf of management that company policies and
regulations are being followed.
Ø Without clear lines of authority, there is a risk that full information and co-
operation may not be provided to the IAD, thereby reducing its effectiveness in
assisting management in the operation and monitoring of controls.
Ø By only focusing on financial risks and compliance with policies and procedures,
without addressing business risks, this can give rise to gaps in internal audit
coverage and missed opportunities to add value
Ø If Head Office follow up of IAD findings is not always clear, the credibility and
effectiveness of the Internal Audit department may be undermined.
Ø In the situation where the IAD is under-resourced and consequently weak or
ineffective, it is not possible for IAD to fully cover all areas of high risk and
address all weaknesses on a timely and periodic basis.
Recommendation
Ø A service charter should be developed setting out the roles and responsibilities of
IAD and the lines of reporting, which is normally to the Board of Directors or a
separate Audit Committee.
Ø The IAD should be provided with a clear organisational function, including
authority and responsibility to carry out its duties effectively. The IAD head

should have the authority to seek all information and explanations as is deemed
necessary from all management and employees. Department managers should be
aware that part of their duties would be to provide any such information on
request.
Ø The size of the IAD should be increased in order that enough staff are available
to carry out the work effectively. The staff employed should be suitably qualified
with appropriate levels of experience.
Ø A formal internal audit plan and work program should be drawn up and agreed
at senior Head office management level. The audit plan should be based on a
business process-focused methodology to allow the IAD to increase coverage of
risks facing the business and ensure that its work is aligned with corporate
objectives. This is a move away from the traditional methodology for internal
audit which focuses on compliance with policies and procedures, especially in
financial and accounting areas, but does not cover all potential business risks and
exposures of the company.
Ø Formal procedures should be developed to ensure management action is clearly
stated in the report and properly and timely follow up is undertaken to ensure
that recommendations are addressed.
Ø Where no reporting to the Board of Directors, the IAD should at least report
directly to senior Head Office management and the reports and findings should
be followed up to ensure action is taken to resolve issues identified within a
reasonable time.
Management Response

6. INADEQUATE M ANAGEMENT INFORMATION SYSTEM
Observation
We note that the management reporting system is not adequate for the requirement
of the business. The management report included only daily sales and collections,
monthly sales, a comparison with the last two years and the variations. It does not
cover other important areas as follows:
Ø Cost of sales,
Ø General and administration expenses,
Ø Selling and distribution expenses,
Ø Depreciation and finance charges,
Ø Debtors’ and creditors turnover ratio,
Ø Inventory turnover ratio, etc.
This information, ratios and a comparison to last periods figures will help
management in the decision making process.
Further, the financial statements are not drawn on a monthly basis. In the absence of
monthly accounts, errors may not be identified on a timely basis and management
will have only limited, outdated information to control the business.
Recommendation
We recommend that a regular and timely management reporting system should be

introduced and should cover, apart from other areas, the following:
Ø Monthly Balance sheet and profit & loss account

Ø Gross profit margin and Net profit margin analysis with comparison with last
year
Ø Item wise analysis of the expenses with the comparison with the previous year
Ø Debt collection period analysis
Ø Days cost of sales in accounts payable analysis
Ø Inventory turnover ratio
Ø Ageing of inventory, etc.
Management Response

7. INACCURATE M ANAGEMENT INFORMATION SYSTEM
Observation
We have noted that the system generated balance sheet, which forms a part of the
monthly MIS report, does not balance, ie the total assets do not agree to the total
liabilities. This resulted from the non-creation of links relating to two profit and loss
account groupings.
Recommendation
We recommend the management should thoroughly review the MIS reports to

ensure that the information appears reasonable and accurate.
Management Response

8. NEW M ANAGEMENT INFORMATION SYSTEM
Observation
In light of the forecast increase in the operations of the Company it is increasingly

important that a suitable management information system is implemented. Such a
system must be capable of supplying up to the date information on a project wise
basis on which management can then make decisions on a fully informed basis.
We understand that at the present time the Company has budgeted for the
implementation of an Oracle based system. It is vital that the above characteristics
are present in the final system.
Recommendation
We recommend that management conduct a full post implementation review of the

new system once it has been installed and has become operational. This will ensure
that the user requirements of the system have been fully met and that the system is
best suited to meet the Company’s needs.
Management Response

9. M ANUAL PREPARATION OF PAYROLL
Observation
We noted that the Company is preparing the payroll manually. This requires a
significant amount of the senior staff’s time, which could be more effectively used.
Recommendation
We recommend that the Company switch over to the computerised payroll

accounting package adopted by other Group entities. This will save time, be more
cost effective and reduce the chance of errors.
Management Response

10. PERSONNEL RECORDS NOT UPDATED
Observation
We noted that certain personnel records are not regularly updated or maintained
adequately. Specifically, we were unable in instances to verify the breakup of salary
or the date of joining. This may lead to future misunderstandings between the staff
and management, although we are not aware of any occurrences to date. In
addition, inadequately maintained records may result in errors in the accounting for
leave and gratuity benefits as well as in the allocation of salary amongst basic salary
and the company’s prescribed allowances.
Recommendation
We recommend that personnel records be routinely updated and detailed.
Management Response

11. ABSENCE OF EMPLOYMENT CONTRACTS FOR STAFF
Observation
We noted that the company does not presently provide written employment
contracts for all of its employees. Written employment contracts help to minimise
misunderstandings and the occurrence of errors in respect of terms, conditions and
rights of both the company and an employee. We are aware of several instances
where such misunderstandings have occurred.
Recommendation
We recommend that the company should provide written employment contracts for
all employees and place a copy in the individual’s personal file. The contract should
include, as a minimum:
Ø Job description
Ø Term of contract
Ø Probation period
Ø Salary and benefits, including end of service benefit
Ø Notice of termination
Ø Any other requirements specified by the (..... national .....) labour law
All subsequent amendments to the terms of employment, including salary increments,

should be notified in writing and copies attached to the contract.
Management Response

12. LACK OF JOB DESCRIPTIONS FOR STAFF
Observation
We noted several instances where staff have no clear levels of responsibility or

accountability. This is mainly due to the fact that the Company does not issue formal
job descriptions to its staff.
The absence of formal job descriptions can lead to confusion and uncertainty over
individual duties and responsibilities within the Company as indicated above. It can
also complicate the recruitment of new employees as the staff duties are not defined
at the time of recruitment or, once recruited, the new member of staff is expected to
perform duties that had not been made clear to him.
Recommendation
The Company should provide written job descriptions for all employees. These
would include as a minimum:
Ø Executive responsibilities, if any e.g. immediate superior; approval authorities
Ø Operational responsibilities of the individual, e.g. specific duties to be

performed; supervision of staff who report to the individual
Ø Administrative responsibilities which relate, indirectly, to the performance of the

job
Ø Any other duties which the departmental head deems as necessary to be

performed at any given circumstances
Furthermore, management should review the present duties and responsibility of staff
and should ensure that a single duty is not allocated to two staff.
We will be pleased to assist in the development of job descriptions for your staff
should you wish.
Management Response

13. INADEQUATE SEGREGATION OF DUTIES IN PAYROLL SYSTEM
Observation
We noted a lack of segregation of duties in the payroll. The person who is

maintaining the payroll, prepares the pay packets and distributes the cash wages to
the employees. The accounting records are therefore more vulnerable to errors or
irregularities as the work of one member of staff is not being independently checked.
Recommendation
We recommend that segregation of duties should be introduced, as follows:
Ø Payroll reports should be prepared by the accounts assistant and then checked
and authorised by the Chief Accountant.
Ø The staff member preparing the pay packets should be independent of the staff
member maintaining the payroll records. This pay packets should then be
matched by the Chief Accountant with the payroll records.
Ø The disbursement of cash wages should be made using the exact withdrawal of
cash from the bank. Any unclaimed wages should be kept by the Chief
Accountant for 7 days and if it is not collected after 7 days should be deposited
back with the bank.
Management Response

14. LACK OF BUDGETARY CONTROL - 1
Observation
We noted that the company does not presently operate a budgeting system.
This places considerable limitations on the ability of the management to control the
operation of the business and monitor actual results. Furthermore, the absence of a
formalised budget making process removes the need for the company to develop
any vision or strategic plan. This may result in a loss of business direction, and funds
being spent in unnecessary areas.
Recommendation
We recommend that a budgeting system should be implemented which enables the

company’s management to monitor, as a minimum, sales revenue, costs and
working capital. Significant variances between budgeted and actual amounts should
be identified and investigated on a monthly basis. This information should be
prepared for management shortly after the end of each month/quarter and these
should highlight any action proposed to rectify adverse variances should be
reported.
The annual budget for the company should be set after agreeing individual budgets
with each department. On a quarterly or half yearly basis the budget should be
updated to reflect any changes that may have arisen during the year.
Management Response

Observation
Detailed annual budgets are not prepared

or
Annual budgets are prepared, but no comparison of actual monthly results to budget
is made.
The (preparation of detailed annual budgets and) comparison of actual results to

budgets each month is an important management tool in controlling the business.
This enables management to identify variances from budget and take corrective
action on a timely basis.
Recommendation
(A detailed annual budget should be prepared and) monthly management accounts

should be compared to budget, for both the current month and the year to date.
Variances should be analysed and explained in detail.
In addition to a comparison of individual profit and loss account items, key

performance indicators (such as gross margin percentages, number of days sales in
receivables and inventory turnover) should be given and commented on.
Management Response

Observation
The company presently prepares an operational budget at the beginning of each

financial year. The planning department compares budgeted results to actual at the
year end and makes a report to management with variances analysed. In 20XX,
actual expenditures varied significantly from the budget for a variety of apparent
reasons, most notably that many of the budgeted figures were only broad estimates
and secondly, because the circumstances and basis on which the budget had been
prepared had altered during the course of the year.
The comparison of budget variances on an annual basis does not allow the timely
monitoring of expenditure and thereby can inhibit management control and decision-
making. Yearly comparisons of budget to actual information do not provide the
timely information on which management can take prompt action to react to
changing situations and timely address problems.
In the situation where the assumptions and conditions on which budgeted figures are
prepared change, it is important to revise the budget to reflect the different
circumstances, otherwise comparisons are rendered invalid and management do not
receive accurate information concerning the operations of departments and cost
centres.
The effect of budgets being prepared on inappropriate assumptions also has the
effect of rendering comparisons difficult. Again, such comparisons cannot be used
by management in any meaningful way for decision-making purposes.
Recommendation
A budgeting system should be implemented which enables the company’s

management to monitor, as a minimum, sales revenue, operating costs and working
capital. Significant variances between budgeted and actual amounts should be
identified and investigated on a monthly basis. This information should be prepared
for management shortly after the end of each month/quarter and any action
proposed to rectify adverse variances should be highlighted.
The annual budget for the company as a whole should be established after agreeing
individual budgets with each department. Detailed guidelines and guidance notes
should also be issued to all departments to ensure that budgets are properly
prepared. On a quarterly or half yearly basis the budget should then be updated to
reflect any changes in assumptions or circumstances that may have arisen during the
year.

17. LIQUIDITY CONCERN - 1
Observation
At present, the operations of the company are being financed by overdrafts and
short term borrowings. This has given rise to substantial interest charges and
eventually lead to reduced profitability of the company.
Recommendation
We recommend that adequate funding should be made available by the owners

either by additional capital or interest free loans.
Management Response

18. LIQUIDITY CONCERN - 2
Observation
We noted that finance costs form a very significant portion of the Company’s total
expenses and is continuously increasing. Currently the Company depends on
overdrafts and short term bank borrowings at an average interest rate of 10.5% per
annum to finance its operations. Whilst short term borrowing offers flexibility, it
comes with the cost of higher interest rates.
Recommendation
We recommend that adequate funding should be made available by the owners

either by additional capital or interest free loans.
Management should also consider refinancing the overdrafts by using long term
loans. The interest rates on long term loans are generally less than the overdraft rates
and as a result the Company can save on interest expense.
Management Response

19. INADEQUATE CASH M ANAGEMENT
Observation
We noted that there are no detailed cash flow projections prepared on a regular
basis in order to monitor the short term cash needs of the business.
As a result, excess cash may be available that could be better utilised, or short term
liquidity problems could be identified and corrected on a timely basis.
Recommendation
We recommend that weekly cash flows projections, showing anticipated receipts

and payments, should be prepared. Actual weekly receipts and payments could then
be compared to those projected and large discrepancies investigated.
Management Response

20. INADEQUATE INSURANCE COVER
Observation
The Company does not regularly review the adequacy of the insurance cover of its
assets. We noted that the (fixed assets) were recorded in the financial statements
at a value of ($400,000) whereas the sum insured was only ($250,000). In the
event of fire, theft or loss of such assets the company would be liable for the
replacement cost of the assets destroyed. This is likely to be significantly in excess
of the sum presently insured.
Recommendation
The company should increase the sum insured of (fixed assets) to reflect the current
replacement cost of the assets. Insurance cover should be reviewed and adjusted, if
necessary, on a periodic basis (say annually) with the assistance of specialist
insurance advisers.
Management Response

21. OPEN CHEQUES ISSUED TO THE CUSTOMS DEPARTMENT
Observation
We noted that the company is still continues to issue open cheques to the Customs
department. These cheques represent a large potential liability to the company if
customs department were to present these cheques for payment. We understand
that due to local market competition management is not willing to discontinue this
policy at present.
Recommendation
We reaffirm our recommendation in previous years that the company should insist
that customers supply their own blank cheques for deposit with the customs
department in order to reduce the risk. For important customers where the company
has to issue blank cheques, then bank guarantees should be obtained from the
customers to mitigate the risk borne by Company.
The management should ensure that all cheques issued to the customs department be
collected after the specified time period or after the conditions are completed
satisfactorily.
Management Response

22. COLLECTIONS FROM SALES OUTLETS AT FRANCHISE COUNTERS
Observation
We note that cash collections against sales at franchise counters are sent to the
accounts department through the driver. The counter clerk is not provided with the
acknowledgment for the above collection by the accounts department. This could
result in errors and disputes with regard to collections which can not be supported.
Recommendation
We recommend that the accounts department should provide acknowledgment of

the collection on one copy of the Daily Sales Report sent by the counters and return
it to them. This will act as a control over the collections where the sender checks the
collections by the accounts department.
Management Response

23. NO PETTY CASH EXPENSE SUMMARY
Observation
We noted that the head cashier’s petty cash expenses are not summarised into
expense categories by the head cashier. This causes difficulties in processing the
petty cash payment vouchers by the accounts staff and increases the possibility of
expenses being incorrectly classified as the head cashier is the most familiar with the
nature of the expenses.
Recommendation
We recommend that the head cashier’s petty cash expenses should be grouped into
major categories before submission to the accounts department for reimbursement.
This will provide useful information as to the nature of the expenditure and will
provide support for reimbursement.
Management Response

24. DE-RECOGNIITION OF PRE-OPERATING COSTS
Observation
International Accounting Standard 38, “Intangible assets”, is effective for financial

periods beginning on or after 1 July 200X. This will need to be implemented by the
Company for the year ending 31 December 2000.
Under IAS 38, paragraph 57, pre-operating costs cannot be recorded as an

intangible asset and should be expensed as incurred. As a result, the Company will
need to de-recognise the net pre-operating costs of UD 173,311 in the year ending
31 December 2000.
Recommendation
We recommend that the Company de-recognise the net pre-operating costs by

adjusting the opening balance of retained earnings for the earliest period presented in
the financial statements, in accordance with IAS 38, paragraph 120 and IAS 8,
paragraph 49.
Management Response

25. DE-RECOGNIITION OF DEFERRED EXPENDITURE
Observation
We noted a number of cases were expenses had been deferred by Group entities.
Examples of this include:
Ø Expenses of UD 2,228,527 were deferred by XYZ and ABC during 1999.

These deferred expenses included losses made on 200X sales, gifts, travel
expenses, salaries, repairs and maintenance.
Ø In XYZ UD 201,367 receivable from two defunct and non operating group
companies (Co and Co B) were deferred and are currently being amortised
over 3 years.
Ø In XYZ provision for obsolete inventory is being created over 3 years.
Under International Accounting Standard 38, “Intangible assets” (IAS 38), which is
effective for years ending 31 December 2000, these expenses can not be deferred.
IAS 38 only allows expenses to be deferred when they will provide “future benefits”
to the Group.
Recommendation
We recommend that management reconsider their policy for deferring expenses and
ensure that it is in accordance with the requirements of IAS 38.
Management Response

26. LACK OF EMPLOYEES FIDELITY INSURANCE
Observation
We noted during the course of our audit that the company has taken employees
fidelity insurance policy covering the main cashier at its ______ showroom and
another person.
We note however that such cover has been taken out for cashiers at other locations
such as spares part, workshop and service station at ____ industrial area, _____
Road showroom, main showroom cashier.
Recommendation
We recommend that company should reconsider the risk involved in handling of

cash at different locations. Accordingly the company should take employees fidelity
insurance policy to cover the full risk involved
Management Response

27. REVIEW AND APPROVAL OF PAYMENTS NOT EVIDENCE BY SIGNATURE
Observation
We observed that payments vouchers are not approved by the Company’s

Manager and Managing Director before the payment is released. As a result there is
no evidence that the payment vouchers are independently reviewed and approved
for the payment.
Recommendation
We recommend that the Manager and Managing Director review and authorise all
payment vouchers and that this be evidenced by them signing the payment voucher
and related supports. This will make these employees more accountable.
Management Response

28. DIFFERENCE BETWEEN GENERAL LEDGER AND PDC SUB-LEDGER
Observation
We noted an unreconciled difference between the general ledger and the PDC
subledger control account.
Reconciling differences must be resolved promptly as they could indicate errors

some of which may cause losses to the Company. For example, a debtors invoice
might have been deleted from the debtors sub ledger resulting in its exclusion from
the debtors statements and hence non-collection.
Recommendation
We recommend that management investigate and reconcile this difference on a

timely basis.
Management Response

29. INCONSISTENT USE OF LOCAL PURCHASE ORDERS (LPO)
Observation
We noted cases where local purchase orders (LPO) had not been raised for local
purchases. This may result in unauthorised purchases, goods being accepted that
were not ordered and the failure to obtain competitive prices.
Recommendation
We recommend that all local purchases should be based on an LPO which is

approved by the Divisional Managers. A copy of the LPO should be matched and
attached to the purchase journal voucher prior to being posted into the accounting
system.
Management Response

30. NO HOLDING COMPANY
Observation
At present, the Group financial statements combines the financial statements of

various companies where Mr. X has a controlling interest. Therefore, the Group
financial statements lack the legal status which is accorded to a Holding Company.
Recommendation
We recommend the formation of Holding Company which ultimately shall hold the
controlling interest in the various subsidiaries of Group. A consolidated financial
statements are then prepared which legally reflect the performance of X Group of
Companies.
Management Response

31. ASSETS NOT REGISTERED IN THE NAME OF THE COMPANY
Observation
We noted that certain assets are not registered in the name of the company. This
indicates that the company may not be able to exercise a full and satisfactory title to
all assets recorded in its financial statements and consequently, the user of the
company’s financial statements (creditors, banks or investors) may not place much
reliance on the financial statements.
Recommendation
We recommend that steps should be taken to transfer these assets to the company’s
name.
Management Response

32. NO FORMAL USER PROGRAM CHANGE PROCEDURE
Observation
There are no standard procedures for computer users to follow when initiating and
controlling requests for computer application maintenance; such requests are often
verbal. Without formal written application maintenance procedures, there is the risk
that some program changes may not be valid, or some program changes may not be
adequately tested before being implemented. To help ensure these control
objectives are met, documented evidence of users’ requirements and written
authority for program changes as well as a program change log should be
developed.
Recommendation
We recommend a form be designed to provide standard documentation for all

computer user requests. These forms should be pre-numbered and include, at a
minimum, these details:
Ø User name initiating the request.

Ø Date of the request.
Ø Specifications of changes required.
Ø Required completion date for request.
Ø Authorisation of request by user department manager.
Ø Authorisation of request by Group information technology manager.
The completed user request forms should be filed in numerical sequence. Periodic
checks of the sequence would enable data processing management to identify any
requests not completed for follow up by management.
A log book showing the changes should be maintained which should be reviewed by
the Group information technology management at periodic intervals.
Management Response

33. INADEQUATE STORAGE OF DAILY BACK UPS
Observation
We noted that the daily back up of computerised information is stored in a

cabinet in the accounts department. Both the original and back up information could
be lost in the case of a disaster, such as a fire.
Recommendation
We recommend that the back up information be stored in a separate location. This

will reduce the risk that both the original and back up are lost.
Management Response

34. FOREIGN CURRENCY TRANSLATION AT INCORRECT RATES
Observation
We noted that foreign currency transactions are not recorded at the actual
underlying rate at the date of the transaction. The rates used is a flat rate of 2.1 UD
per DM. In order to reconcile the above differences, the respective balances are
re-translated at the year end and any differences arising are accounted for as
exchange gains or losses. We understand that the existing accounting software
package does not have a multi-currency facility and is not therefore particularly
user-friendly in this regard.
Recommendation
We recommend that foreign currency translation rates used by the Establishment are
updated regularly e.g. weekly. This will reduce the number of exchange differences
arising during the normal course of business and assist the Company Accountant in
his monthly reconciliations.
We also recommend that further consideration is given by both local and head office
management with a view to upgrading the existing accounting software package to
maintain pace with the expansion that the Establishment has experienced.
Management Response

35. CHART OF ACCOUNTS NOT ALIGNED TO HEAD OFFICE REQUIREMENTS
Observation
The chart of accounts in the Sage accounting software package is not aligned with
the monthly management accounts reporting format required by the head office. As
a result a rework of accounting information generated by Sage has to be carried out
using an Excel spreadsheet. This is inefficient and may lead to errors and omissions.
Recommendation
We recommend the existing accounting software is amended to ensure the chart of

accounts is aligned with the reporting requirement of the head office so that monthly
management accounts can be generated directly from the accounting system.
We also recommend that further consideration is given by local and head office
management with a view to upgrading the existing software.
Management Response

36. DIVISIONAL BRANCH RESULTS
Observation
Although divisional/branch results are prepared each month, these contain no

element of finance costs for capital employed (allocation of head office / centralised
costs).
As a result the true profitability of each branch/division is not clear.
Recommendation
Imputed finance costs, based on fixed assets employed and working capital
requirements (inventory, plus receivables, less trade payables) {head
office/centralised costs allocated on the basis of the benefit to the division/branch}
should be deducted from the divisions/branch’s results in order to arrive at a more
accurate result for each division/branch.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - CASH AND BANK
INDEX
1. BANK RECONCILIATIONS NOT PREPARED.................................................................. 2
2. CONTROL NOT EVIDENCED BY SIGNATURE................................................................ 3
3. BANK RECONCILIATION NOT INDEPENDENTLY REVIEWED......................................... 4
4. BANK RECONCILIATION STATEMENTS........................................................................ 5
5. PHYSICAL VERIFICATION OF CASH............................................................................. 6
6. CASH SALES RECONCILIATION................................................................................... 7
7. CASH RECEIPTS .......................................................................................................... 8
8. DELAY IN ALLOCATING CASH RECEIPTS.................................................................... 9
9. BANK BALANCE CONFIRMATION.............................................................................. 10
10. DELAYED DEPOSIT OF RECEIPTS............................................................................ 11
11. DORMANT BANK ACCOUNTS TO BE CLOSED - 1.................................................... 12
12. DORMANT BANK ACCOUNTS TO BE CLOSED - 2.................................................... 13
13. ABSENCE OF M ATCHING OF CASH COLLECTIONS WITH SUBSEQUENT BANKING.. 14
14. RECONCILIATION OF COLLECTION CHEQUES BANK AND POST DATED CHEQUES

DISCOUNTED........................................................................................................... 15
15. AUTHORISED SIGNATORIES ..................................................................................... 16
16. OVER-R IDING OF SIGNING LIMITS .......................................................................... 17

1. BANK RECONCILIATIONS NOT PREPARED
Observation
The company does not prepare bank reconciliations on a regular basis. As a result
there is reduced control over the accuracy of the accounting for bank transactions as
any errors would not be promptly detected.
Control over cash balances is also reduced as any error by the bank in managing the
company’s account would not be detected on a timely basis. In addition, the
company is not aware of the effect on its cash position of unpresented cheques.
Recommendation
Bank reconciliations should be prepared on a monthly basis as soon as possible

after the month end. To ensure the reconciliation is properly prepared it should be
reviewed by a person independent of the reconciliation process.
Management Response

2. CONTROL NOT EVIDENCED BY SIGNATURE
Observation
The (financial controller) does not approve the monthly bank reconciliations after
reviewing them. There is therefore no evidence that the reconciliations have been
independently checked to ensure they have been properly prepared and long
outstanding, and unusual items have been properly explained.
Recommendation
The (financial controller) should evidence his review and approval of the monthly
bank reconciliations by signing and dating the reconciliation working papers. This
evidencing provides a record of the person responsible for the checking process
having fulfilled his responsibility.
Note
This pro forma could be amended for use in many other situations where a control is
not evidenced.
Management Response

3. BANK RECONCILIATION NOT INDEPENDENTLY REVIEWED
Observation
There is no evidence to suggest that the monthly bank reconciliation statements

prepared are being reviewed by a person independent of the preparer. There is,
therefore, no independent check to ensure that the reconciliation statement has been
properly prepared and that long outstanding and unusual items have been properly
explained.
Recommendation
The Finance Manager should review the monthly bank reconciliation statements
prepared and evidence his approval of these reconciliations by signing and dating the
reconciliation working papers.
Management Response

4. BANK RECONCILIATION STATEMENTS
Observation
The information relating to the reconciling items in the reconciliation statements is not
sufficient. The date of the cheque drawn and the name of the party in whose favour
the cheque is drawn is not readily available in the reconciliation statement.
As a result there is reduced control over the accuracy of the accounting for bank
transactions as any long outstanding cheques would not be promptly detected.
Recommendation
Bank reconciliations should be prepared in a systematic manner with the following

details for each reconciling item:
Ø Date on which the cheque is drawn/ received

Ø Amount
Ø Name of the party (from whom cheque is received / in whose favour the cheque
is drawn)
Ø Reason for the item appearing in reconciliation
Ø Date of subsequent clearance of the reconciling items
To ensure that the reconciliation is properly prepared, it should be reviewed by a

person independent of the reconciliation process.
Management Response

5. PHYSICAL VERIFICATION OF CASH
Observation
During our surprise cash count at the Company’s showroom on XXXX 2000 we
noted that there was a cash shortage of UD XXX. The following explanations were
provided to us for this. We provide our recommended actions against each
explanations below.
Cash disbursements not accounted Amount Recommended action

for (UD)
Cinema tickets purchased. The XXX The cost should be debited to the
purchases had been made a number personal account of the beneficiary
of months prior to the surprise cash
count.
Cinema tickets purchased. The XXX The cost should be debited to the
purchases had been made a number personal account of the beneficiary
of months prior to the surprise cash
count.
Refund to customers after return of XXX The return of the goods should have
goods been entered into the system by
making a sale return entry and the petty
cash disbursement should have been
recorded in the petty cash ledger.
Cash shortage during the year XXX The shortage should have been
reported to the accounts department
and an appropriate adjustment should
be made in the petty cash ledger.
Short paid by customer XXX The shortage should have been

reported to the accounts department
and an appropriate adjustment should
be made in the petty cash ledger.
Total XXX
Recommendation
Management Response

6. CASH SALES RECONCILIATION
Observation
We noted that daily cash collections for the petrol station and vehicle sales
departments are not being reconciled to the cash sales records.
Daily cash reconciliations provide a key control over the completeness of the daily
cash collections and provide a mechanism to identify any missing cash on a timely
basis.
In the absence of such reconciliations there is a risk that cash may be

misappropriated and these misappropriations will not be detected on a timely basis.
Recommendation
Daily cash collections should be reconciled by the cashier to the cash sales records
and be authorised by the respective departmental head.
The above discrepancies occurred over a period of 2 to 3 months. It is important

that there is a procedure for the timely balancing of the petty cash fund. Any
discrepancies should be reported to the accounts department for follow up
investigation and resolution.
Management Response

7. CASH RECEIPTS
Observation
We observed the following with regard to business practices relating to the cash and
bank areas:
Ø Daily cash receipts are been used to meet the cash disbursement requirements.
This increases the risk of error or fraud in accounting for cash receipts.
Ø We noted considerable delays in handing over cash collections to the main

cashier for banking.
Ø The cash collection and petty cash balances are not separately kept, instead
they are held together in one vault.
Recommendation
We recommend that management review the need to meet cash disbursements out
of cash receipts and also establish an impress system of cash control. Frequent
surprise cash counts should be carried out by either the internal audit department or
an executive of the accounts department. All cashiers in charge of the respective
departments should be advised to hand over the cash collections to the main cashier
intact. Management should also ensure that cash collections are separated from the
petty cash balance and held in a vault.
Management Response

8. DELAY IN ALLOCATING CASH RECEIPTS
Observation
We noted that there is a considerable delay in allocating cash receipts to the

outstanding invoices in the outstanding invoices sub ledger. As a result the
outstanding invoices listing will not match the sales ledger balances at any given point
of time.
Cash receipts from customers should be matched and posted to individual debtor
accounts on a timely basis. In the absence of timely matching, allocation and posting
to customer accounts there is a risk that material errors may go unnoticed. In
addition the delay in allocating cash receipts to customer accounts may give rise to
the risk of frauds such as teeming and lading. Finally, the Company will also
experience delays in the follow up and collection of outstanding debts.
Delays in allocating cash receipts to the individual invoices outstanding could

facilitate material errors to take place which may not be detected soon after their
occurrence.
Recommendation
We recommend that cash receipts should be allocated to relevant individual

outstanding invoices without delay.
Management Response

9. BANK BALANCE CONFIRMATION
Observation
We noted that the confirmation from the XYZ Bank did not include the current
account balance of UD XXX. We understand that this is an old balance and the
account has not been used for a number of years.
Recommendation
We recommend that the management of the Company contact the bank immediately
to ensure that this is still a valid bank account. Any differences should be reconciled
and the balance investigated if it is disputed by the bank.
Management Response

10. DELAYED DEPOSIT OF RECEIPTS
Observation
We observed several instances where collections from cash sales were not
deposited into the bank the next day. Examples of this include:
No. Amount Receipt Date Deposit Date

UD
1. XXX 25-5-200X 29-5-200X
2. XXX 24-5-200X 29-5-200X
3. XXX 22-5-200X 29-5-200X
4. XXX 26-6-200X 01-8-200X
This increases the risks of misappropriations and reduces the time cash is on deposit
with the bank and therefore reduces interest income.
Recommendation
We recommend that collections should be deposited intact the following banking

day. This would reduce risks associated with holding cash in premises and enable
opportunities to derive interest income.
Management Response

11. DORMANT BANK ACCOUNTS TO BE CLOSED - 1
Observation
We noted a number of bank accounts which are no longer being used. These bank
accounts were opened for the specific needs of project works carried out in the
past.
These bank accounts are currently being maintained and monitored by the
accounting staff whose time could be used better elsewhere.
Recommendation
We recommend that management review these non operating bank accounts and
should close any accounts that are no longer required.
Management Response

12. DORMANT BANK ACCOUNTS TO BE CLOSED - 2
Observation
We observed the following bank accounts which had zero balances at the end of the
financial year:
Ø ABC Bank A/c no.

Ø DEF Bank A/c no.
Ø GHI Bank Time deposit
Maintenance of these accounts results in incurring administrative costs in terms of

bank charges and staff time spent in dealing with related matters.
Recommendation
To ensure proper control over bank funds and accurate recording of all bank
transactions, we recommend that bank statements are obtained and reconciliations
are performed for all bank accounts, including those with zero balances. These
reconciliations should be independently reviewed by a senior member of
management.
We also recommend that a review is carried out of dormant bank accounts to

ensure that any accounts that are no longer required are identified and closed as
soon as possible.
Management Response

13. ABSENCE OF M ATCHING OF CASH COLLECTIONS WITH SUBSEQUENT BANKING
Observation
We noted during the course of our audit that the collections from various locations
for previous day are banked in the morning. Furthermore, we noted that collections
of the day at the main showroom are deposited net of deductions for any cash
requirements.
The resulting weakness is that the company will not know what its true cash sales
are and also the risk of misappropriation increases as cash takings may not be
documented..
Recommendation
We recommend that collections from different location should be banked intact

through separate pay in slips. Any requirements of funds at various locations should
be approved by responsible official and these should be withdrawn from the bank
separately or from a separate petty cash float.
The current procedure of holding cash from collections for the day should be
discouraged. In case of emergency needs a written approval for the same should be
taken by the concerned cashier/ sub cashier.
Management Response

14. RECONCILIATION OF COLLECTION CHEQUES BANK AND POST DATED CHEQUES

DISCOUNTED
Observation
We noted that the company does not obtain statements from bank and that no
periodical reconciliation’s are done for cheques sent to bank for collection and post
dated cheques dated with bank.
Recommendation
We recommend that, the company should call monthly statements from bank and
prepare monthly reconciliation’s in respect of cheques sent to banks for collection
and post dated cheques discounted with the bank. These reconciliation’s should be
reviewed by the accountant and should instruct to pass relevant accounting entries
for reconciling items.
Management Response

15. AUTHORISED SIGNATORIES
Observation
We noted that the name of the ex-Personnel Manager, Mr.____________ still

appears on the list of authorised bank signatories. This was confirmed to us by
XYZ Bank Middle East. We understand that the company has already informed the
bank to remove his name. However, till the year end the bank has not deleted the
name of Mr. ___________ from the list of authorised signatories.
Recommendation
The fact that the name of an employee appears on the bank signatory list indicates
that he is able to authorise bank transactions. However, we understand that this can
only be done jointly with another authorised signatory. In all such cases, where the
bank has been informed for the addition/removal of the names, the company should
follow up with the bank to have the names removed immediately. This would ensure
that transactions with the company’s bankers are by personnel authorised by the
management of the company.
Management Response

16. OVER-R IDING OF SIGNING LIMITS
Observation
The Finance Manager has the authority to sign cheques singly up to and including
UD 10,000. We noted that, in some cases, where the payments exceeded UD
10,000, more than one cheque was made for the supplier/creditor, each being less
than UD 10,000, to accommodate the payment. This clearly defeats the purpose of
setting up limits. Moreover, the authorisation, approval and signing limits up to UD
10,000 are with one person only, the Finance Manager, which compromises on the
basic control of segregation of duties.
Recommendation
It should be ensured that, all cheques signed are as per the intended signing limits.
Moreover, the best practice is to keep approval and signing functions segregated to
provide better internal control.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - RECEIVABLES
INDEX
1. PROVISION FOR DOUBTFUL DEBTS ONLY MADE ANNUALLY ...................................... 2
2. NO POLICY FOR DETERMINING PROVISIONS FOR DOUBTFUL DEBTS - 1 ................... 4
3. NO POLICY FOR DETERMINING PROVISIONS FOR DOUBTFUL DEBTS - 2 ................... 5
4. INADEQUATE PROVISION FOR DOUBTFUL DEBTORS - 1............................................. 6
5. INADEQUATE PROVISION FOR DOUBTFUL DEBTORS - 2............................................. 7
6. GENERAL PROVISION FOR DOUBTFUL DEBTS ............................................................ 8
7. ABSENCE OF PROPER CREDIT LIMITS FOR CUSTOMERS ............................................. 9
8. NO ESTABLISHMENT AND M ONITORING OF CREDIT LIMITS FOR DEBTORS ............. 10
9. NEED FOR REALISTIC CREDIT LIMITS FOR CUSTOMERS ........................................... 11
10. UNALLOCATED CREDITS IN AGED ACCOUNTS DEBTORS LISTING ......................... 12
11. AGED DEBTORS ANALYSIS NOT PREPARED ........................................................... 13
12. NO AGED DEBTORS ANALYSIS FOR OVER 4 MONTH OLD BALANCES ..................... 14
13. POOR M AINTENANCE OF AGED DEBTORS RECORDS ............................................. 15
14. INCREASE IN AVERAGE AGE OF RECEIVABLES ....................................................... 17
15. NO PHYSICAL VERIFICATION OF DISHONORED CHEQUES ...................................... 18
16. INADEQUATE RECORDS FOR LEGAL CLAIMS OF DISHONOURED CHEQUES ............. 19
17. POOR M ANAGEMENT OF DEFAULTING POST DATED CHEQUE (PDC) CUSTOMERS 20
18. ACCEPTING POST DATED CHEQUES (PDC) FROM AFFILIATE COMPANIES ............. 21
19. UNMATCHED RECEIPTS AGAINST DEBTORS ........................................................... 22
20. DIFFERENCE BETWEEN DEBTORS SUB LEDGER AND GENERAL LEDGER.................. 23
21. LONG OUTSTANDING RECEIVABLES ....................................................................... 24
22. NO WRITE OFF OF OUTSTANDING RECEIVABLES FROM EX-EMPLOYEES ............... 25

23. ACCOUNTING FOR OLD REFUNDABLE DEPOSITS ................................................... 26
24. NO LOCAL PURCHASE ORDERS (LPO) OBTAINED FROM WHOLESALE CUSTOMERS27
25. CREDIT INVOICES ONLY SIGNED BY ONE INDIVIDUAL ............................................. 28

1. PROVISION FOR DOUBTFUL DEBTS ONLY MADE ANNUALLY
Observation
The process for assessing the provision for doubtful debts continues to be made
only once at the year end and provision amount is determined without identifying and
analysing each customer and its recoverability.
Setting a defined criteria for identifying doubtful accounts and making a provision
against such debts on a timely basis will provide a more objective assessment of the
valuation of accounts receivable, as well as enabling management to monitor the
collectability of receivables on a proactive basis.
Recommendation
A written formal policy including defined criteria for provisioning should be

established for identifying doubtful accounts. We also recommend that a review of
accounts receivable is conducted and provision made on a periodic basis, say
quarterly, and not only at the year end which could result in delays in the finalisation
of the Company’s financial statements. In addition Head Office management should
closely monitor all receivable balances and assign responsibility to management of
the Group companies to follow up and submit a status report on long outstanding
receivable balances on a periodic basis.
Management Response

2. NO POLICY FOR DETERMINING PROVISIONS FOR DOUBTFUL DEBTS - 1
Observation
The company do not have a stated policy to provide against overdue accounts
receivable using predetermined percentages for various aged categories. We have
noted certain accounts receivable which were overdue by more than one year and
the recovery of which appeared doubtful to us but were not provided for.
As the amount of such receivables was not considered material by us for the
company’s financial statements, taken as a whole, we did not insist on their
adjustment in the 200W financial statements.
Recommendation
To fairly reflect the amount of accounts receivable in the financial statements, the
company should develop a policy to provide against overdue accounts receivable
using percentages, determined based on historical experience, for various aged
categories.
This will also assist the management in keeping a close track of the overdue
balances leading to better recovery efforts and collection.
Management Response

3. NO POLICY FOR DETERMINING PROVISIONS FOR DOUBTFUL DEBTS - 2
Observation
We noted that, there is no proper management policy for determining provisions for
doubtful debts against long outstanding accounts receivable.
The establishment of an adequate policy will provide clear guidance to management

and ensure consistency and ultimately comparability between years of profits and
accounts receivable balances.
Recommendation
We recommend that a formal policy to be established to recognize doubtful debts in

each category of accounts receivable.
Management Response

4. INADEQUATE PROVISION FOR DOUBTFUL DEBTORS - 1
Observation
We observed cases were no provision has been made for long outstanding debtors.
Examples of this include:
Ø In AMX W.L.L UD 399,227 is due from Sheikh ABC. This represents a

personal loan given in 1986-87 for which only UD. 100,000 has been repaid.
Ø In AWY W.L.L. UD 385,059 is due from Sh. ABX and has been outstanding
for more than twelve years.
Ø In WER Services UD. 3,717,952, receivable from QPC for variation claims,
has been carried forward from 1996. Our review of correspondence with QPC
indicates that this amount will not be fully recovered.
Recommendation
We recommend that management follow up these balances on a timely basis as the

longer these balances remain unpaid the higher the risk that they will not be
collectable. If management believe that these balances are not collectable they
should be provided for.
Management Response

5. INADEQUATE PROVISION FOR DOUBTFUL DEBTORS - 2
Observation
The Company has recorded a provision for doubtful debts of UD 225,790 which
has been carried forward from 200W. This provision is based on a specific
provision of UD 220,756, for debtors older than 5 years, and a general provision of
UD 5,034.
As can be seen from the following debtors ageing, the Company has a serious bad
debts problem such that the current provision for doubtful debts may not be
adequate:
Total
UD
Prior 199Y 359,552

200W 494,832
200X 66,219
200Y 285,415
We believe that these old debts have accumulated due to poor evaluation of
potential credit customers and an ineffective follow up of slow paying debtors. As a
result it may be difficult to recover the above balances and the Company may face
an inevitable and significant loss.
Recommendation
We recommend that:
Ø The management of the Company should establish strict control procedures to

closely monitor the old debtors and that slow paying debtors be followed up on
a regular and timely basis.
Ø A formal credit policy should be implemented with potential credit customers

carefully evaluated by management.
Ø Management should review old debtors at year end and create an adequate
provision.
Management Response

6. GENERAL PROVISION FOR DOUBTFUL DEBTS
Observation
A general doubtful debts provision has been established by increasing the provision
by UD 150,000 yearly. Calculating a provision this way may result in a provision
that does not reflect the doubtful debts that exist causing the provision to be either
excessive or inadequate.
Recommendation
We recommend that that management adopt a policy for the provision for doubtful
debts that is based on the ageing of the accounts receivable, the movement of the
customer accounts and specifically identified bad debtors.
Management Response

7. ABSENCE OF PROPER CREDIT LIMITS FOR CUSTOMERS
Observation
We noted that management has not precisely established appropriate credit policy
applicable for credit customers.
The absence of an appropriate credit company can lead to sales to un-creditworthy

customers and losses to the company.
Recommendation
We recommend that a credit policy be developed by management from accounting

and sales sections.
Management Response

8. NO ESTABLISHMENT AND M ONITORING OF CREDIT LIMITS FOR DEBTORS
Observation
Credit limits established for customers are not regularly monitored to ensure sales
are in line with the set limits. Also, there are no formal procedures for periodic
review of the credit limits and approval of sales exceeding the limits, “excess sales”.
Consequently the branch is exposed to a higher risk of bad and doubtful debts.
Recommendation
Management should establish formal procedures for periodic review of credit limits
and approval of excess sales over limits set.
Management Response

9. NEED FOR REALISTIC CREDIT LIMITS FOR CUSTOMERS
Observation
Management’s credit policy, has, among other things, fixed credit limits for specific
customers. However, in several cases credit limits had been exceeded by significant
amounts. For instance: (list examples)
It is possible that the credit limits have not been set at realistic levels. As a result
they are being exceeded.
The absence of realistic credit limits could adversely affect relations with customers
which in turn would harm the company’s performance.
Avoidable administrative time could be spent in following up large customers for

whom credit limits are set at unrealistically low levels.
Recommendation
The present credit limits should be reviewed as soon as possible in consultation with
divisional heads. The limits should be set at the most appropriate levels based on:
Ø the normal volume of business with the customer

Ø past experience with debt collection
Ø financial position of the customer
Ø strength of relationship with relevant employees in the customer’s organisation
The limits should be periodically reviewed, for instance at the monthly debtors
meeting, to account for changes in any of the factors noted above.
Management Response

10. UNALLOCATED CREDITS IN AGED ACCOUNTS DEBTORS LISTING
Observation
The aged accounts debtors listing contains some unallocated credit balances. These
are credit transactions that should have been allocated to specific invoices. A
possible reason for such credits are lump sum payments from customers which do
not specify any details. These unallocated credits, which amounted to (XXXX) at
year end, increase the risk that potential doubtful debts, or disputed invoices, may
not be identified as it is not possible to see which individual invoices are unpaid at
any one time.
Recommendation
Necessary amendments should be made in the computer system so that all credit
entries in an account receivable balance will be allocated to specific invoices as far
as possible. In the meantime, certain stopgap procedures could be introduced to
reduce the level of unallocated credits. Customers making unspecified, or lump sum
payments, should be contacted in an attempt to identify the invoices being paid.
Once identified, the payment should be allocated against those specific invoices. If
the payment is a lump sum payment, it should be allocated to the oldest outstanding
invoices.
Management Response

11. AGED DEBTORS ANALYSIS NOT PREPARED
Observation
We noted that the company does not prepare an aged analysis for debtors.
The absence of a debtors ageing analysis has contributed to overdue debts not being
identified and pursued for payment.
Additionally, the company has not been able to produce an accurate provision for
bad debts on a regular basis with the result that the management accounts have
consistently understated the provision throughout the accounting period.
Recommendation
We recommend that an aged analysis of debtors be prepared on a monthly or

quarterly basis as soon as possible after the period end. This analysis should then
be reviewed for long-outstanding balances, and the appropriate action should then
be taken to recover such debts. The bad debt provision need only be updated
annually.
Management Response

12. NO AGED DEBTORS ANALYSIS FOR OVER 4 MONTH OLD BALANCES
Observation
The ageing report of accounts receivable classifies the outstanding balances into four
categories i.e. 1 month, 2 months, 3 months and 4 months and over.
In the absence of further classification for balances more than 4 months old, certain
long outstanding balances may not receive the required attention.
Recommendation
We suggest that ageing report of accounts receivable should include additional

classification to cover balances outstanding for 6-12 months, and over 1 year. This
will help the management to have a better focus on long outstanding accounts
receivable balances and minimise risk of bad and doubtful debts.
Management Response

13. POOR M AINTENANCE OF AGED DEBTORS RECORDS
Observation
At 31 December 200X there were retail customer debtors with a total balance UD
669,683 which have been outstanding for more than 90 days. The accountant was
unable to provide us with a detailed list or the age of these debtors when we were
performing our final audit in March 200Y. We are concerned that no follow up is
being performed for these accounts to ensure payment and that they may need to be
provided for.
The Company has no policy for providing for doubtful debts and has recorded no
provision for the year ended 31 December 200X. The debtors ageing report
allocates debtors based on the following:
Ø Less than 30 days

Ø 31 to 60 days
Ø 61 to 90 days
Ø Over 90 days
It is difficult to use this report to calculate the provision for doubtful debts as it does
not allocate the age of the debtors over a long enough time period. As a result the
“over 90 days” category (UD 1,613,797) represents a significant proportion of the
total debtors balance at 31 December 200X.
We also noted that no provision had been recorded for NMG Contracting
(outstanding debtor balance UD 70,410) for which a legal case has been filed.
Recommendation
We recommend that:
Ø A detailed list be maintained for the retail customer debtors and that this be aged
to allow the accountant and debt collector to follow up any overdue balances.
Ø The ageing report be modified to show debtors older than one and two years.
This will help to identify very old debtors for which a provision is required.
Ø Management should develop a policy for providing for doubtful debts that is
followed consistently from year to year.
Ø Management should review long outstanding debtors on a regular basis and

create an appropriate doubtful debts provision.

Management Response

14. INCREASE IN AVERAGE AGE OF RECEIVABLES
Observation
The average age of receivables has deteriorated from XX days to YY days as at the
end of the financial years.
In addition, receivables greater than 120 days have increased from UD XX to UD

YY.
As a result, working capital is tied up in receivables and the company is financing

this with bank borrowings. This also increases the company’s risk of increased
doubtful debts.
Recommendation
Management should reconsider the policy for granting credit; which at present is
fixed solely on monetary amounts and allows debtors to continue to receive goods
on credit, even though the debtor has amounts outstanding outside of their agreed
period of credit.
Management Response

15. NO PHYSICAL VERIFICATION OF DISHONORED CHEQUES
Observation
We noted that no physical verification has been carried for dishonored cheques
either at year end or at an interim date. Furthermore, physical existence and value of
this asset has not verified even after the change of partners of the business in 1997.
Therefore, the actual existence and value of this asset is not reliable.
Recommendation
We recommend that a complete physical verification be performed by an

independent official to ensure the physical existence and valuation of cheques
dishonored.
Management Response

16. INADEQUATE RECORDS FOR LEGAL CLAIMS OF DISHONOURED CHEQUES
Observation
We noted that there were no proper records maintained for cases filed in courts
against the customers in relation to the dishonored cheques.
Recommendation
We recommend that a proper register be established and maintained with

appropriate details for all cases filed in the courts. This register should be updated in
case to case basis and reviewed by the head of the department.
Management Response

17. POOR M ANAGEMENT OF DEFAULTING POST DATED CHEQUE (PDC) CUSTOMERS
Observation
We noted a significant amount of long outstanding debtor balances and customers

who have defaulted on post dated cheques (PDC) payments. We believe this is a
result of the lack of effort & coordination between the accounts department the debt
collectors, who have not been effective in the control, monitoring and follow up slow
paying customers and PDC defaults on a timely basis.
We noted that no evaluation of this provision was performed by management for the
year ended 31 December 200X.
Recommendation
We recommend that the following initiatives be implemented:
Ø A formal credit policy should be implemented with potential credit customers

carefully evaluated by management.
Ø The management should establish strict control procedures to closely monitor

the old debtors and default PDC customers. A list of defaulting PDC customers
and old debtors should be supplied to the debt collector on a regular and timely
basis to allow immediate follow up. Ultimately, where the debt concerns a
vehicle sold under the instalment plan, the vehicle should be repossessed and
sold to maximise the Company’s recoupment of the principal outstanding.
Ø Management should review old and default PDC customers at year end and
create an adequate provision.
Management Response

18. ACCEPTING POST DATED CHEQUES (PDC) FROM AFFILIATE COMPANIES
Observation
We noted related party transactions which were not made on an arms length basis.
An example of this is where post dated cheques (PDC) have been collected from
various affiliates in favour of ABC W.L.L. These PDCs have then been discounted
with various banks and the interest expense allocated between the affiliates.
In effect this amounts to interest free loan to ABC W.L.L at the expense of the
affiliates.
These transactions undermine the assessment of the true performance of each

individual Group entity and results in successful entities supporting the poor
performing entities. This in turn hides operational problems, increasing the chances
these entities will fail.
Recommendation
We recommend that management discontinue the use of non arms length

transactions, such as that noted above, designed to support the poor performing
entities. Management should review the activities of the poor performing entities and
make the necessary structural changes to enable these operations to become
profitable. If the performance of these entities can not be improved in the short term
then management should consider winding up the entity, otherwise they will continue
to act as a financial drain on the Group’s profitability.
Management Response

19. UNMATCHED RECEIPTS AGAINST DEBTORS
Observation
We have noted a significant number of unmatched receipts are included in the

debtors sub ledger due to problems with matching receipts against invoices. This
could result in an incorrect debtors ageing, reducing the accuracy of reports used for
debtors follow up and allowing fraudulent transactions to be hidden.
Recommendation
We recommend that:
Ø An effort be made to ensure unmatched receipts on the debtors ledger are

matched to invoices. If receipts cannot be matched the customer's approval
should be sought to offset the balances on a first in, first out basis.
Ø A debtors statements of account be sent to customers on a regular basis and

any disputed amounts be investigated and resolved.
This will result in an accurate debtors ageing, which will help in the follow up of long
outstanding balances and in the calculation of the doubtful debts provision.
Management Response

20. DIFFERENCE BETWEEN DEBTORS SUB LEDGER AND GENERAL LEDGER
Observation
We note an unreconciled difference of UD 214,336 between the debtors sub ledger

control account and the general ledger.
Reconciling differences must be resolved promptly as they could indicate errors

some of which may cause losses to the Company. For example, a debtors invoice
might have been deleted from the debtors sub ledger resulting in its exclusion from
the debtors statements and hence non-collection.
Recommendation
We recommend that management investigate and reconcile this difference on a

timely basis.
Management Response

21. LONG OUTSTANDING RECEIVABLES
Observation
Included under other receivables is UD 1.2 million which was paid in 1978 as a
50% advance for the purchase of a plot of land in ABC. This transaction was
canceled but the advance was not refunded. Substantial interest income has been
lost due to the delay in the follow up of this advance and it will become more difficult
to recover the longer this is left unattended.
Recommendation
We recommend that this advance be followed up on a timely basis. If it likely that

the advance will not be recovered a provision should be made in the company’s
accounts.
Management Response

22. NO WRITE OFF OF OUTSTANDING RECEIVABLES FROM EX-EMPLOYEES
Observation
We noted that staff receivables includes an amount due from ex-employees.
Further, the policy and procedure applicable for recover of staff advances are not
precisely established.
Recommendation
We recommend that, the company should review all staff advances receivable and
write-off irrecoverable amounts. Furthermore, a company policy should be
established regarding the recovery process and other related matters of staff
advances.
Management Response

23. ACCOUNTING FOR OLD REFUNDABLE DEPOSITS
Observation
We noted that UD 61,637 is recorded as refundable deposits payable at 31

December 200X. This balance represents refundable deposits received from
customers for items rented by them. This balance has accumulated over a number of
years due to customers not returning the items rented.
Recommendation
We recommend that when an item is not returned within a reasonable period the
deposit payable should be recorded as a sale, the item rented removed from
inventory and the deposit payable be reversed.
Management Response

24. NO LOCAL PURCHASE ORDERS (LPO) OBTAINED FROM WHOLESALE

CUSTOMERS
Observation
We note that at present the Company does not have any system of requesting
purchase orders from the wholesale customers, such as, Souqes and supermarkets.
In the absence of purchase orders prices, quantity and quality of the goods supplied
may be disputed. This could result in a loss being incurred by the Company where
the order can not be substantiated with a purchase order.
Recommendation
We recommend that the Company request purchase orders from all wholesale
customers giving details of materials to be supplied and the prices. This will act as a
documentary evidence in support of any dispute.
Management Response

25. CREDIT INVOICES ONLY SIGNED BY ONE INDIVIDUAL
Observation
We noted that credit invoices are signed by only one person as evidence of review
and approval.
Recommendation
In order to improve control over credit sales, we recommend that the credit invoices
form be amended to include a space for two employees to sign (e.g. prepared by
and checked by). This procedure reduces the level of errors that may arise on
credit sales.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - INVENTORY
INDEX
1. NO INVENTORY MANAGEMENT S YSTEM ........................................................................................................3
2. NO EFFECTIVE S YSTEM FOR ACCOUNTING FOR INVENTORIES ...............................................................4
3. REDUCTION IN INVENTORY TURNOVER RATE..............................................................................................5
4. INCREASE IN INVENTORY HOLDING PERIOD................................................................................................6
5. INVENTORY ITEMS USED IN THE BUSINESS ....................................................................................................7
6. NO PERPETUAL INVENTORY COUNT...............................................................................................................8
7. POOR ARRANGEMENT OF S TORES FOR INVENTORY COUNT...................................................................9
8. LACK OF S EGREGATION OF INVENTORY ....................................................................................................10
9. NO REGULAR PHYSICAL VERIFICATION OF INVENTORIES ....................................................................11
10. QUANTITY FIGURES PROVIDED TO INVENTORY COUNTERS ................................................................12
11. INAPPROPRIATE VALUATION OF FINISHED GOODS ..............................................................................13
12. INVENTORY NOT RECORDED ON A TIMELY BASIS .................................................................................14
13. FINAL CHECKING OF COSTING S HEET AND PRICE LIST .......................................................................15
14. NO FIXED POLICY FOR VALUATION OF S PARES PARTS INVENTORIES ON RECEIPT.....................16
15. NO PREPARATION OF PRIMARY DOCUMENT ON RECEIPT OF INVENTORY .....................................17
16. NO RECONCILIATION OF INVENTORY AND FINANCIAL RECORDS ...................................................18
17. NO QUANTITY RECONCILIATION FOR CARS ...........................................................................................19
18. NO PROVISION FOR USED CAR INVENTORY ...........................................................................................20
19. NO REVIEW OF S ECOND HAND CAR INVENTORY LEVELS....................................................................21
20. NO REVIEW OF NEW CAR INVENTORY LEVELS .......................................................................................22
21. NO PERIODIC INVENTORY COUNT FOR S PARE PARTS .........................................................................23
22. NO COMPREHENSIVE INVENTORY COUNT FOR S PARE PARTS ............................................................24
23. NO PREPARATION OF DOCUMENTS TO RECORD MOVEMENT OF VEHICLES FROM YARD TO

DIFFERENT LOCATIONS ..................................................................................................................................25
24. NO INVENTORY AGEING REPORT ...............................................................................................................26

25. NO REVIEW FOR S LOW MOVING, DAMAGED OR OBSOLETE INVENTORY - 1.................................27
26. NO REVIEW FOR S LOW MOVING, DAMAGED OR OBSOLETE INVENTORY - 2.................................28
27. CALCULATION OF PROVISION FOR S PARE PARTS - 1 ..........................................................................29
30. PROVISION FOR S LOW -MOVING INVENTORY .......................................................................................32
31. INVENTORY AGEING AND PROVISIONS ....................................................................................................33
32. NO EXPIRY DATES FOR INVENTORIES ........................................................................................................34
33. DELAYS IN ACCOUNTING FOR S TOCK ADJUSTMENTS ..........................................................................35
34. NO DISPOSAL OF S CRAP INVENTORY ......................................................................................................36
35. DATA ENTRY ERRORS FOR INVENTORY ....................................................................................................37

1. NO INVENTORY M ANAGEMENT SYSTEM
Observation
Inventory is a commodity which can be a significant drain on working capital.

Poorly maintained inventory levels may spiral out of control. This costs the
Company in a number of ways. Cash is spent on inventory which then has to be
stored somewhere. The longer inventory is held, the higher the possibility that it will
become obsolete. In the Company inventory is held for over six months on an
average.
The following would assist management in monitoring and controlling its inventory:
Ø A perpetual stock system would not only enable the company to control stock
levels but also protect against pilferage, as this will be identified quickly.
Ø Stock systems should be able to identify shortages and ageing stock.
Ø Stock turnover ratios across a range of products should be available for

management review to assist management in the decision making process. The
Company may be able to benefit from setting optimum reorder levels for its
stock lines.
With the advent of quality computer software to aid the management of stock, many
of the issues identified above can be solved.
Recommendation
The management should look at new inventory systems to meet the requirements of
management to effectively monitor its inventory and take corrective action on a
timely basis.
Regular inventory checks should be undertaken by management. Any discrepancies

need to be fully investigated between book stock and physical stock to identify
pilferage, damaged or incorrectly recorded items. Book values should be
corrected.
Management Response

2. NO EFFECTIVE SYSTEM FOR ACCOUNTING FOR INVENTORIES
Observation
We noted that the company does not maintain an accounting system for inventory,
but relies on the year end inventory count to ascertain the value of stock in hand.
The effect of this is that management has no reliable information on quantities in hand
during the year, nor on turnover of each inventory item. This prevents the effective
management of the company’s substantial investment in inventory.
Additionally, it is not possible for management to accurately determine the

company’s financial performance throughout the year as the effect of varying
inventory levels on monthly profitability cannot be reliably determined.
Recommendation
We recommend that an accounting system for inventory be implemented. As a

minimum the system should include:
• Financial reporting of each inventory item including quantity on hand, cost

price and selling price
• Identification of slow moving or excessive inventory levels
• Physical quantities of each inventory item, location and condition
• On-line enquiry of balances and other data
• Ability to generate reports for a perpetual inventory system.
We will be pleased to assist you in identifying a suitable system should you so wish.
Management Response

3. REDUCTION IN INVENTORY TURNOVER RATE
Observation
Inventory turnover for (raw material/finished goods) inventories has reduced from X
to Y times a year.
As a result, working capital is tied up in inventories, and the company is financing

this with bank borrowings. These is also a risk that some of the inventory may
become obsolete (or past its sell-by date).
Recommendation
Management may need to look at their inventory reordering procedures which are
currently based on requisitions from the factory managers / storeman / sales
manager. Consideration should be given to automating the system so that minimum
and maximum inventory levels and economic reorder quantities are held in the
computer. The computer could also generate the purchase requisition for approval.
Management Response

4. INCREASE IN INVENTORY HOLDING PERIOD
Observation
The inventory holding levels for the Company has increased from XXX days at 31
December 200W to XXX days at 31 December 200X. High inventory levels can
result in inventory items being held for a long period, causing them to become
obsolete, and cost the Company money in the form of warehousing and financing
costs.
Recommendation
We recommend that the Company should identify and analyse the reasons for the
increase in the number of days stocks held. Possible causes may include:
• Non-competitive pricing
• Lack of customer demand
• Lack of aggressive marketing during the sale season
• Stock holding levels that are too high
• Purchasing the wrong items or the wrong quantity
• Unnecessary holding of items in stores.
The Company can then pursue appropriate policies to enable a faster inventory
turnover, for example:
Review its sales data to ascertain “who is buying” rather than “what is selling”. The
Company can then concentrate on its major wholesale customers and consider
strategies, e.g., incentives, to boost sales and marketing efforts directed at such
customers.
Negotiate with suppliers and bankers for an increased credit period. The current
credit period under the bank letters of trust receipt arrangement is 120 days.
Management Response

5. INVENTORY ITEMS USED IN THE BUSINESS
Observation
We noted the following items which are being used in the business operations but
are recorded as inventory:
Code Description Value

(UD)
CX 7500 Sharp Colour CopierXXX

PAW 1410 Word Processor XXX
The effect of this is to overstate the value of these items, as they have been used and
their value decreases over time, and to understate depreciation expense. This could
also result in inventory items becoming out of stock as the inventory system will
show them as available for sale and therefore purchases of these items will be
reduced.
Recommendation
We recommend that all the inventory items which are currently used in the business
should be capitalised as fixed assets after obtaining approval from senior
management. All the divisional managers should be instructed that inventory items
should not be used in the business unless prior approval is obtained from senior
management.
Management Response

6. NO PERPETUAL INVENTORY COUNT
Observation
We noted that the company is primarily relying on annual inventory count to

reconcile the book stocks and physical stocks for spares inventory. The main
purpose of stock verifications are to confirm that the stock records reflect actual
quantities on hand. If the records are not updated on timely basis the stock records
will not accurately reflect materials on hand. This could adversely affect operational
requirements as stock -outs may occur. Furthermore management will not have an
up to date information on stocks in hand and discrepancies till the year end.
Recommendation
We recommend that an independent team of employees of company to include

some non-stores staff, be formed to carry out physical verifications of spares parts
inventories at periodic intervals during the year using a predetermined schedule.
After these verifications, necessary adjustments should be made to stock records to
account for any discrepancies noted during the physical stock verification.
Reconciliations should be carried out for all differences noted during the stock count
to identify the adjusting entries that should be passed.
Management Response

7. POOR ARRANGEMENT OF STORES FOR INVENTORY COUNT
Observation
We noted that the inventory items are not arranged in an orderly manner before the
physical count at the year end.
Recommendation
We recommend that all inventory items be arranged in an orderly manner, inventory

items be sorted and returned to their allocated location before commencing the
physical count. This will improve the efficiency of the physical count and reduce the
chance of items not being counted or being moved between locations and then
double counted.
Management Response

8. LACK OF SEGREGATION OF INVENTORY
Observation
During our visit to the stores on 31 December 200X, we observed that difference
types of inventory are not physically segregated. We noted that the following items
were mixed together:
• Inventory items to be scrapped,

• Goods issued and returned to the stores,
• Inventory held on behalf of customers
• Fixed assets which were no longer in use.
The absence of proper physical segregation of inventory increases the risk of errors.
For example, items held on behalf of customers could be included in Company’s
stock or items to be scrapped could be included at full value.
Recommendation
We recommend that different types of stock be physically segregated and clearly

labeled. This will reduce the risk of errors and will make the physical inventory count
easier and faster.
Management Response

9. NO REGULAR PHYSICAL VERIFICATION OF INVENTORIES
Observation
We noted that stock takes are not being performed on a regular basis for stock
significant value items including NKG parts, HJ parts and the Industrial supplies.
The last stocktaking dates for the above items are summarised as follows:
Department Date of Inventory at

last stock take 30 June 200X
(UD’000)
NKG parts October 1996 21,789
HJ parts June 1997 10,389
Industrial Supplies March 1997 14,152
The absence of regular inventory stock counts increases the risk that
misappropriation of inventories may not be detected and also that the stock ledger is
not accurate.
Recommendation
We recommend that the company adopt cyclical counts for all major stock
categories. A process of cyclical costs aims at ensuring that a number of stock items
are selected each day and counted so that all items counted at least once each year.
Any discrepancies are investigated and adjusted as required. The adoption of
cyclical counting will ensure that stock quantities are reviewed for accuracy on a
regular basis and will provide management with a mechanism for the timely
identification of any stock discrepancies.
Management Response

10. QUANTITY FIGURES PROVIDED TO INVENTORY COUNTERS
Observation
During the course of our attendance at the annual inventory count, we noted that the
counters were provided with inventory records and that the book quantity was
known to them before starting the count.
This observation was also noted in our 200W letter to management but our
recommendations at that time do not appear to have been implemented in 200X.
Recommendation
The purpose of a physical count is to determine the physical inventory available at a

particular point in time and to identify the differences, if any, between physical and
book records. This purpose is defeated if book quantities are made available to
counters as they may then try to tally quantities to the amount per the book records
or in some cases may not even do the counting.
We recommend that in future, blank count sheets should be used for inventory
counts. Any differences between the book balance and the physical balance should
then be investigated by an independent person.
Management Response

11. INAPPROPRIATE VALUATION OF FINISHED GOODS
Observation
We have noted that finished goods produced in previous years are revalued using
current material, labour and production overhead charges. This is not in accordance
with International Accounting Standards which require inventory to be record at
historic cost, being the cost that was originally incurred to produce the inventory
item.
This valuation method could result in a material difference, although the difference
was small in 200X.
Recommendation
We recommend that finished goods be valued at historic cost or net realisable value,
whichever is lower, as per International Accounting Standards 2, “Inventory”.
Management Response

12. INVENTORY NOT RECORDED ON A TIMELY BASIS
Observation
We noted the following instances where items were sold before they were entered
into the inventory module:
Item No Quantity Value Date of Sale
A 48A0101 6 1,008 29/2/200X

A 48A0102 6 420 29/2/200X
We understand the sale of these items are recorded as stock adjustments. These
stock items were sold before they were entered into inventory module due to delay
in preparation of the costing sheets. This increases the risk of liabilities and inventory
being understated and the possibility of lost sales, as the inventory items will not be
included on the inventory system as available for sale.
We further noted a delay in the processing of “checking reports” for materials

received, which in turn delayed the adjustment of the inventory records and the
preparation of final costing sheets. In some instances the delay in the processing was
up to 7 months.
Recommendation
We recommend that the processing of the costing sheets and the checking reports
should be performed on a timely basis. This will help ensure that the inventory
records are accurate.
Management Response

13. FINAL CHECKING OF COSTING SHEET AND PRICE LIST
Observation
We note that the final entry of suppliers invoices, preparation of the final costing
sheet and price list, are not being checked independently by the section head. The
absence of a check on the final costing sheets and price lists increases the risk of
errors in preparation of these documents.
Recommendation
We recommend that the final costing sheet and price lists should be checked and
authorised by the section head before the price lists are forwarded to the
Showroom. As this price lists are used as the basis of selling price it should be
closely monitored by the section head.
Management Response

14. NO FIXED POLICY FOR VALUATION OF SPARES PARTS INVENTORIES ON

RECEIPT
Observation
We noted that for the purpose of valuing spare parts inventories in the inventories
system the following formula is used:
C&F price (in Japanese Yen) X Yen to UD conversion factor X Mark up
Mark Up usually varies from 11% to 17%.
The mark up is added to cover up the costs for insurance, customs, clearance
charges etc. In case of parts delivered by air, a higher mark up is used as Nissan
does not bear air freight charges . The reasons for range for mark up was explained,
as to keep the valuation approximate to cost.
Recommendation
We recommend that a policy for fixing a fixed mark up be determined to minimise

subjectivity . This will ensure that there are fluctuations are contained to movements
within inventory and not variations in valuation methods.
Management Response

15. NO PREPARATION OF PRIMARY DOCUMENT ON RECEIPT OF INVENTORY
Observation
We noted that stores receipt vouchers are not prepared upon receipt of inventory at
the stock yard. Subsequently the company has no documentary evidence that stocks
have been received at the yard.
Recommendation
We recommend that stores receipt voucher be prepared on receipt of consignment

stock at the stock yard.
Management Response

16. NO RECONCILIATION OF INVENTORY AND FINANCIAL RECORDS
Observation
We noted that no regular reconciliation is performed between the inventory

accounting package “OPMAN” and the financial accounting package “FINAL”.
Further, we noted a difference between these two balances during our interim audit
visit.
Recommendation
We recommend that a regular reconciliation be performed between the inventory

and financial records with any differences investigated and adjusted.
Management Response

17. NO QUANTITY RECONCILIATION FOR CARS
Observation
We noted that the company has no practice of quantity reconciliation of car in trade
on periodical basis.
Quantity reconciliation is a standard control for car retailers which supports sales,
purchases and inventory whilst ensuring that vehicle stock is accounted for.
Additionally this provides key management statistical data for operational decision
making.
Recommendation
We recommend that the accounts department should prepare a quantity

reconciliation on monthly basis. The reconciliation should as a minimum include
opening units, receipts, issues of cars on model-wise and issues to be analysed in to
different methods of sales.
Management Response

18. NO PROVISION FOR USED CAR INVENTORY
Observation
The inventory of used cars includes UD 1.8 million of cars which have been held for
more than one year. This represents a significant expense to the company in terms of
financing and storage costs. Also, no provision has been recorded for these slow
moving cars.
Recommendation
We recommend that management review the inventory of used cars on a regular

basis and implement steps to dispose of any slow moving used vehicles. A suitable
provision should be made in the financial statements at year end for discounts which
the company will need to provide to customers in order to realise these units.
Management Response

19. NO REVIEW OF SECOND HAND CAR INVENTORY LEVELS
Observation
Second hand cars, which are purchased as trade ins, are recorded at cost. No
provision has been created for these cars.
We believe that these cars will not realise their carrying values and as a result are not
recorded at their net realisable value, as required by International Accounting
Standard 2, “Inventories”.
Recommendation
Although the difference may not be material to the group as a whole, we

nevertheless recommend that management review the carrying value of the second
hand car inventory with a view to creating a provision for the difference between
cost and estimated sales value.
Management Response

20. NO REVIEW OF NEW CAR INVENTORY LEVELS
Observation
We noted that at 31 December 200X Company held UD 13.1 million of new car
inventory (232 cars) which represented 171 days stock. Of this 174 cars were
200X models. This represents a significant increase on 31 December 200W
inventory level of UD 9.9 million (142 cars).
The purchase of these cars is financed by bank loans, resulting in a significant interest
expense and a drain on the Company’s resources. With such a significant amount of
200X inventory, the Company may have to provide discounts or promotional
giveaways to sell this inventory, reducing the sales margin.
Recommendation
We recommend that management carefully monitor the level of new car inventory
and reduce purchases to match demand, thereby avoiding unnecessary finance costs
and sales discounts.
Management Response

21. NO PERIODIC INVENTORY COUNT FOR SPARE PARTS
Observation
During the year end 31 December 200X no periodic inventory counts were
performed for spare parts inventory.
The absence of adequate counting will result in discrepancies between stock

quantities in the system and the actual physical stock accumulating to such a time that
they are unreliable. Losses to the Company will occur through the following:
Ø Inventory items being ordered that are not required, leading to overstocking.
Ø Inventory running out without reordering causing lost sales and loss of
reputation
Ø Unidentified fraud. No stock counting means that losses from theft will not
be identified either at all or until substantial losses have occurred.
Recommendation
We recommend that all inventory items be counted at least once a year with
counting conducted on a cyclical basis. This will identify quantity differences resulting
ordinarily from transaction errors or possible fraud to prevent losses to the
Company.
Management Response

22. NO COMPREHENSIVE INVENTORY COUNT FOR SPARE PARTS
Observation
During the year end 31 December 200X periodic inventory counts were performed
for spare parts inventory covering only 44% of the total inventory held.
If an error occurs for an inventory item, and it is not counted, the inventory records
will be incorrect. This could result in inventory items being ordered that are not
required, leading to overstocking.
Recommendation
We recommend that all inventory items be counted at least once a year. This will
result in inventory errors being found on a timely basis and will improve the accuracy
of the inventory listing.
Management Response

23. NO PREPARATION OF DOCUMENTS TO RECORD M OVEMENT OF VEHICLES FROM

YARD TO DIFFERENT LOCATIONS
Observation
We noted during the course of our audit that no documents are prepared for
movement of vehicles between different locations.
Subsequently no audit trail exists to support vehicle movements.
Recommendation
We recommend that all inter-location transfers of vehicles should be authorised and

adequately documented.
Management Response

24. NO INVENTORY AGEING REPORT
Observation
The Company maintains its stock records manually and as a result no inventory
ageing report is available.
In the absence of an inventory ageing report it is a time consuming, difficult process

to calculate the provision for slow moving inventory and it makes it difficult for
management to review inventory levels.
Recommendation
We recommend that management investigate implementing a computerised inventory

system which would provide an ageing report. This would help management to
monitor inventory levels and control inventory movements.
Management Response

25. NO REVIEW FOR SLOW M OVING, DAMAGED OR OBSOLETE INVENTORY - 1
Observation
It is Company policy to calculate the inventory provision on an item by item basis.

We noted however that this exercise was not carried out for the year ended 31
December 200X. As a result the provision for slow moving inventory of UD
153,014 was carried forward from 200W.
Without a proper review for inventory obsolescence being performed, and the
inventory provision adjusted, it is likely that inventory will not be recorded at its net
realisable value.
Constant monitoring of inventory is of major importance in the computer industry

due to the pace that new products are being released. If inventory is not sold on a
timely basis there is the risk that it will be outdated and will have to be sold at a
discount.
Recommendation
We recommend that the inventory levels be reviewed by management on a regular

basis, with slow moving, damaged and obsolete inventory identified, and efforts be
made to sell this inventory before it becomes obsolete.
At year end a detailed review should be performed and an adequate inventory

provision created. To ensure a consistent approach, review guidelines should be
prepared to assist the reviewers in classifying the inventory items.
Management Response

26. NO REVIEW FOR SLOW M OVING, DAMAGED OR OBSOLETE INVENTORY - 2
Observation
We noted that the Company does not have a policy for the systematic review of it’s
inventory to identify slow-moving, damaged and obsolete items. Failure to identify
and provide for such items could lead to the overstatement of the inventory value in
the financial statements. It could also result in the management not having adequate
information as to identify and prevent the cause of such losses on a timely basis.
Recommendation
We recommend that items of inventory that are damaged or obsolete be physically

segregated from the remaining inventory as it is identified. These items should then
be recorded as damaged in the stock ledger, after taking management’s approval.
During the stock count a detailed review should be performed for damaged and
obsolete items. Review guidelines should also be issued by the management to assist
the reviewer
Management Response

27. CALCULATION OF PROVISION FOR SPARE PARTS - 1
Observation
The provision for spare parts inventory of UD 127,851 has been carried forward
from 200W. This was created for spare parts relating to the 2 door vehicles, for
which production has been discontinued.
We believe that this provision is not sufficient based on the age on the inventory.
Recommendation
We recommend that the provision for spare parts be based on the age of the
inventory.
This policy should be approved by senior management and be consistently followed

from year to year.
Management Response

Observation
The provision for spare parts inventory of UD 9,000,000 has been carried forward
from 200W.
We noted however that the exercise for estimation of provision for spare parts was
not reperformed for the year ended 31 December 200X. As a result the provision
for slow moving inventory of UD 9,000,000 was carried forward from 200W.
Without a proper review for inventory obsolescence being performed, and the
inventory provision adjusted, it is likely that inventory will not be recorded at its net
realisable value.
Constant monitoring of inventory is of major importance in the automobile industry

due to the pace that new products are being released.
Recommendation
We recommend that the inventory levels be reviewed by management on a regular

basis, with slow moving, damaged and obsolete inventory identified, and efforts be
made to sell this inventory before it becomes obsolete. At year end a detailed review
should be performed and an adequate inventory provision created. To ensure a
consistent approach, review guidelines should be prepared to assist the reviewers in
classifying the inventory items.
We also recommend that the provision for spare parts be based on the age of the
inventory. This is standard practice followed by the majority of car dealerships. This
policy should be approved by senior management and be consistently followed from
year to year.
Management Response

Observation
The provision for spare parts inventory is based upon a computer generated ageing
report, which is calculated based on the last inventory movement.
This could result in an understatement of the provision where a large quantity of old
inventory is moved into the current category by the sale of one item.
Recommendation
We recommend that the ageing of inventory be based upon the purchase date or
days stock on hand. This will result in an accurate inventory ageing and an improved
basis to calculate the spare parts inventory provision.
Management Response

30. PROVISION FOR SLOW-M OVING INVENTORY
Observation
The provision for slow moving inventory, other than vehicles and heavy duty
equipment, is based on the inventory ageing report. This report calculates the age of
inventory based on the last sale date, which may not correctly age the inventory.
For example, if there is the sale of one item, the whole stock balance will be moved
into the current ageing category, no matter how old this stock is and how slow it is
selling.
Recommendation
The ageing of inventory should be based on the date of purchase of the item or days
stock on hand. This will result in a more accurate ageing and provision.
Management Response

31. INVENTORY AGEING AND PROVISIONS
Observation
We noted that no inventory ageing report is available for the Company. In the
absence of an inventory ageing report it is a time consuming, difficult process to
calculate the provision for slow moving inventory. It also makes it difficult for
management to identify slow moving inventory items leading to potential overstocks
and obsolete inventory.
Recommendation
We recommend that:
Ø Management investigate implementing a system which will provide an inventory

ageing report. This will help management to monitor inventory levels, control
inventory movements and accurately calculate the provision for slow moving and
obsolete items.
Ø All items of obsolete inventory should be identified by the storeman, maintained

in a separate location and adequately provided for.
Management Response

32. NO EXPIRY DATES FOR INVENTORIES
Observation
We noted that the company does not have any record of the expiry dates of
inventory items, making it difficult to identify items approaching expiry dates.
Recommendation
We recommend that records be maintained of inventory items with expiry dates, and
that a computer program be developed to list items which are going to expire by a
certain date e.g. in three months time.
These records will assist management in taking necessary action in respect of items
nearing expiry dates.
Management Response

33. DELAYS IN ACCOUNTING FOR STOCK ADJUSTMENTS
Observation
The stock checking section of the warehouse department carries out physical
verifications of warehouse stock at periodic intervals during the year using a
predetermined schedule. After these verifications, necessary adjustments are made
to the stock records to account for any discrepancies noted during the physical
stock verification. Reconciliations are carried out for all differences noted during the
stock count to identify the adjusting entries that should be passed. In some cases
the necessary adjustments have not been made in the stock records on a timely
basis, e.g. the discrepancies for certain class numbers were observed at the interim
count date but no adjustments had been passed prior to the year end.
The main purpose of stock verifications is to confirm the that the stock records
reflect the actual quantities on hand. If the records are not updated on a timely basis
the stock records will not accurately reflect materials on hand. This could adversely
affect operational requirements as stock-outs may occur.
Recommendation
There should be a pre determined time interval within which all necessary
adjustments must be made to stock records after the results of stock verification are
finalised.
Management Response

34. NO DISPOSAL OF SCRAP INVENTORY
Observation
We observed that the Company’s inventory yard and stores area are congested with
scrap items and were advised by staff that the yard and stores have not been
cleaned for years.
This makes the inventory yard and the stores area very untidy and the space could
be used for other more productive purposes.
Recommendation
We recommend that the Company periodically identify and dispose of scrap items.
If any item has been identified as scrap, it should be moved to a special area marked
as the scrap yard and should then be separately controlled.
Management Response

35. DATA ENTRY ERRORS FOR INVENTORY
Observation
We noted cases were inventory quantities physically counted at the year end were
not correctly entered into the computerised inventory system. For example, a
Mikasa Vase, code number SW 020625, was entered as 5 items whereas the
physical quantity was 51 items.
The impact of such errors is an inaccurate stock balances, which may result in items
being ordered that are not required or items becoming out of stock.
Recommendation
We recommend that the data entry of items physically counted should be entered by
one staff member and independently checked by another staff member.
Management should consider developing a report that identifies stock items where
the physically counted quantity is different to the system’s inventory quantity. This
would allow errors to be identified and these items to be recounted and the data
entry rechecked.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS -
PROPERTY, PLANT AND EQUIPMENT
INDEX
1. NO FIXED ASSETS REGISTER ...................................................................................... 2
2. FIXED ASSETS NOT IDENTIFIABLE.............................................................................. 3
3. NO COMPREHENSIVE PHYSICAL VERIFICATION OF ASSETS - 1................................... 4
6. NO CYCLICAL PHYSICAL VERIFICATION OF ASSETS .................................................. 7
7. PROPERTY, PLANT AND EQUIPMENT IDENTIFICATION NUMBERS - 1........................... 8
8. PROPERTY, PLANT AND EQUIPMENT IDENTIFICATION NUMBERS - 2........................... 9
9. DEPRECIATION RATES NOT RECORDED IN FIXED ASSETS REGISTER....................... 10
10. TITLE TO ASSETS NOT IN THE NAME OF THE COMPANY .......................................... 11
11. NO WRITE DOWN OF ASSET VALUES ..................................................................... 12
12. ESTIMATED USEFUL LIFE ASSESSED AS HIGHER THAN EXPECTED USEFUL LIFE..... 14

1. NO FIXED ASSETS REGISTER
Observation
We noted that the company does not maintain a register of fixed assets.
Accordingly, there is no readily available record of the net book values for each of
the company’s fixed assets. It is therefore difficult and time consuming to ascertain
the profit or loss on any asset sold, and to produce the correct journal entries to
record the sale. In addition, the annual depreciation charge cannot be determined
accurately. At present the company determines the charge on the gross cost of fixed
assets in the books of account. However, as there is no way of determining whether
any of these assets are already fully depreciated, it is likely that the charge is
overstated.
Recommendation
We recommend that the company establish and maintain a fixed assets register
covering significant asset groups. This exercise should be under taken after physical
verification of all assets and adjusting any discarded/disposed assets. The following
information should be maintained, as a minimum, for each asset:
Ø Identification number (if available)

Ø A description
Ø Location
Ø Date of acquisition / date placed into operation
Ø Original cost
Ø Accumulated depreciation
Ø Custodian
Ø Depreciation method to be applied
Ø Depreciation rate
Ø Estimated surrender value.
The implementation of the register will lead to improved accuracy of the accounting
records for fixed assets and the efficiency of operation.
Management Response

2. FIXED ASSETS NOT IDENTIFIABLE
Observation
The fixed assets of the company are not readily identifiable in the fixed assets
records. It may, therefore, be difficult and time consuming to ascertain those fixed
assets which have been sold but are still appearing in the fixed asset register. Also,
this increases the likelihood of the depreciation charge being overstated by
depreciation continuing to be charged on non-existing assets.
Recommendation
The company should put identification marks on the all the items of fixed assets,
whether fully depreciated or not and maintain a list of such identification as a part of
the fixed assets records. The identification marks can take the form of sticker with
identification numbers.
This will improve the accuracy of the accounting records for fixed assets and offer
greater control over the whereabouts of each asset.
Management Response

3. NO COMPREHENSIVE PHYSICAL VERIFICATION OF ASSETS - 1
Observation
During our review of property, plant and equipment, we noted that a full physical
counts has not been carried out for some years.
Recommendation
We recommend that a full physical count of property, plant and equipment is carried
out periodically to safeguard the assets and ensure the accuracy of the reported
figures of fixed assets. This procedure will also enable management to assess
whether there are items appearing in the fixed asset register which are not physically
present.
A physical count could be carried out once a year or on a rolling basis by

department or category throughout the year reducing the pressure on staff during the
annual accounts closing process.
Management Response

Observation
We noted that the Group does not have a policy for carrying out physical verification
of assets. In A& Co W.L.L this resulted in scrapped items, that were disposed of in
1992, continuing to be reflected on the fixed assets listing until 1995.
In the absence of physical verification management may not be able to identify the
obsolete and damaged assets. Further, there is no assurance that these assets are
being effectively used in the operating activities or existing with the Group.
Recommendation
We recommend that the Group should consider establishing a policy for regular
verification of fixed assets. This would ensure the existence of assets included under
the fixed asset listing and increase security of assets, as misappropriations and errors
would be detected on a timely basis.
Management Response

Observation
The Company does not have an established policy concerning the periodic physical
verification of property, plant and equipment.
Recommendation
We recommend that the company implement a procedure covering the physical

verification of fixed assets which should encompass the following elements:
Ø Plant, equipment and other long life assets should be subject to a periodic
physical verification. We recommend that such a check should be carried out on
a two year cycle.
Ø Any discrepancies arising from the physical verification check should be subject
to follow up investigation.
Ø Assets verified should be reconciled with the fixed asset register and in
conjunction with this exercise management should check that the asset register
reconciliation with the corresponding fixed assets accounts in the General Ledger.
The above checks will ensure that the fixed asset register is accurate and identify any
assets that have been scrapped or misappropriated on a timely basis.
Management Response

6. NO CYCLICAL PHYSICAL VERIFICATION OF ASSETS
Observation
We have noted that whilst the company has conducted a physical verification of its
assets within the past year, it does not have a policy of carrying out physical
verification of assets on cyclical basis.
Physical verification of fixed assets will allow the company to assess assets present
condition and location and will help to identify damaged and lost items.
Benefits include of a cyclical basis over irregular full scale verifications include:
Ø reviewing the accountability of employees with responsibility for assets on a

more timely basis,
Ø increasing the chance of detecting and deferring fraud
Ø cyclical basis allocates the time burden and is easier to co-ordinate than a full
scale physical verification
Recommendation
We recommend that management implement a cyclical programme of checking its

fixed assets with a recommended two year coverage target.
Management Response

7. PROPERTY, PLANT AND EQUIPMENT IDENTIFICATION NUMBERS - 1
Observation
We noted that fixed asset items are not labelled for identification purposes. This
makes it difficult and time consuming to agree assets to the fixed asset register.
Recommendation
We recommend that all fixed asset items be appropriately labelled for identification
purposes, given a fixed asset number and this number recorded in the fixed asset
register. This makes the physical verification process more efficient as assets can be
quickly identified and it reduces the risk that assets are double counted.
Management Response

8. PROPERTY, PLANT AND EQUIPMENT IDENTIFICATION NUMBERS - 2
Observation
We noted that the fixed asset register does not include individual asset identification
numbers.
Affixing an identification number to the individual asset would enable the Company
to trace a particular item to the fixed asset register and improve accountability in
respect of fixed assets. Furthermore, this will facilitate the physical verification of
Property, plant and equipment.
Recommendation
We recommend that identification numbers be attached to all items of property,

plant and equipment and that these identification numbers recorded in the fixed
asset register.
Management Response

9. DEPRECIATION RATES NOT RECORDED IN FIXED ASSETS REGISTER
Observation
We noted that the fixed assets register does not record the rate of depreciation
charges related to the assets. Due to incomplete records it is difficult to calculate the
appropriate depreciation charges related to deferent type of assets under each
category.
Recommendation
We recommend that the depreciation rates be reported in front of each item of the
particular fixed assets category to facilitate the verification of depreciation charges.
Management Response

10. TITLE TO ASSETS NOT IN THE NAME OF THE COMPANY
Observation
We have noted a number of assets and liabilities, whose title are in the name of the
shareholders, which are assigned to associated entities. These assets and liabilities
are brought to account in the financial statements of these associated entities.
Examples of these include:
Ø Title to villas recorded in A& Co. W.L.L. are in the name of Mr John
Ø Title to land recorded in A& Co. is in the name of Mr Elton
Ø Title to land recorded in Al- Rahim W.L.L. is in the name of Mr Robert
These arrangements are acceptable to the extent that:
(i) a letter supporting the assignment to the beneficiary, signed by the title holder,
exists, and;
(ii) control of the assets or responsibility for the liabilities assigned should vest in
with the beneficiary to whom these are assigned.
We further note that some assets and liabilities are often transferred between Group
entities, possibly to shelter the financial position of weaker entities.
Assignment must be used where effective control has been transferred in reality and
not as a means of propping up entities with a weak financial position.
Recommendation
We recommend that assets and liabilities be assigned by title holders to beneficiaries

entities only when actual control occurs. Each transfer must be supported by a letter
of assignment by the title holder in favor of the beneficiary.
Management Response

11. NO WRITE DOWN OF ASSET VALUES
Observation
At the 31 December 200X the Company was holding used, ex-rental vehicles with a
carrying value of UD 2.3 million. These vehicles have been transferred to the
“assets for resale” account prior to 200X and have been held by the Company for at
least a year.
No depreciation is charged on these vehicles from the day they are transferred to the
assets for resale account and we are concerned that they may be recorded above
net realisable value. We reviewed the sales price of vehicles sold in 200Y and
compared this to their carrying value as follows:
Registration Carrying value Sales price

Number 31 December 200X UD
UD
142506 23,730 11,000

144315 26,580 12,000
145372 41,171 19,000
148576 35,988 12,000
150127 38,970 8,000
As can be seen from above the vehicles are being sold at substantially less than their
carrying value.
We also noted the following cases where vehicles included in the assets for resale
account have been leased to customers on 3 January 200X:
Registration
Number
69188
71049
149438
149564
149743
Recommendation

We recommend that management review the value of each vehicle included in assets
for resale and create a provision so that these assets are not recorded at above their
net releasable value.
If vehicles included in the asset for resale account are being leased to customers
these vehicles should be returned to the fixed asset register and depreciated. This
will help management to control the movement of assets and know which vehicles
are available for rental.
Management Response

12. ESTIMATED USEFUL LIFE ASSESSED AS HIGHER THAN EXPECTED USEFUL LIFE
Observation
The XYZ Tower Building is currently being depreciated over 50 years which
appears to be in excess of the buildings useful life. When an asset is depreciated
over a period longer than its useful life the asset will be overvalued and the
depreciation expense will not be correctly matched to the benefit, resulting in profits
being misstated.
Recommendation
We recommend that management review the useful life of the Group’s assets on a
regular basis to ensure that depreciation rates are reasonable.
Management Response

ACCOUNTS PAYABLE AND PURCHASES
INDEX
1. RECONCILIATION OF CORPORATION’S ACCOUNT ..................................................... 2
2. DELAY IN RECEIPT OF SUPPLIER’S INVOICES ............................................................. 3
3. SUPPLIER STATEMENT RECONCILIATIONS NOT PERFORMED REGULARLY ................. 4
4. FAILURE TO IDENTIFY ACCRUALS FOR GOODS RECEIVED NOT INVOICED ................ 5
5. INADEQUATE DOCUMENTATION SUPPORTING PURCHASES ......................................... 6
6. NON-CANCELLATION OF PAYMENT VOUCHERS AND SUPPORTING DOCUMENTS ....... 7
7. LACK OF CONTROL OVER CASH PURCHASES ............................................................ 8
8. DRY DOCKING, M AINTENANCE AND GENERAL PROVISIONS ...................................... 9
9. STAFF LOANS AGAINST END OF SERVICE BENEFITS................................................. 10
10. LOCAL PURCHASE ORDERS .................................................................................... 11
11. NON-CANCELLATION OF SUPPORTING DOCUMENTS ATTACHED TO PAYMENT

VOUCHERS .............................................................................................................. 12
12. M AINTENANCE OF JOB CARDS ............................................................................... 13
13. NO DISCOUNT REPORT GENERATED ...................................................................... 14

1. RECONCILIATION OF CORPORATION’S ACCOUNT
Observation
We noted a long outstanding receivable balances from ABC Corporation of UD

684,000 relating to 1996 and 1997 claims has no corresponding provision
recorded. The accountant could not provide us with details of these claims and it
appears that no follow up was being performed. The longer these claims are left,
without follow up, the greater the chance that they will not be collected.
During our final audit visit in February 2000 we were provided with the
reconciliation of the ABC Corporation balance for the month of September 1999.
No reconciliation of the account balance has been performed for periods after
September 1999, even though, the detailed statement of account had been received
for the months of October and November 1999. The Partnership has a significant
number of high value transactions with ABC Corporation.
If this account is not reconciled on a timely basis disputes may occur or claims, such
as those noted above, may not be collected. The longer this reconciliation is left the
harder and more time consuming it will become to complete.
Recommendation
We recommend that the following action be taken:
• Responsibility for following up of claims should be allocated to certain staff

members, who should follow up all outstanding balances on a timely basis.
This will help to make these staff members more accountable. If a balance is
disputed it should be brought to the management’s attention and provided
for.
• The reconciliation of the ABC Corporation’s account should be prepared

monthly, as soon as the detail statement of account has been received. Any
differences should be followed up on a timely basis.
Management Response

2. DELAY IN RECEIPT OF SUPPLIER’S INVOICES
Observation
We noted that there is a delay in receiving supplier invoices from operations

department.
The impact is in delay as follows:
• Work in progress balance is overstated because of jobs which cannot be

closed on a timely basis
• Difficulties are subsequently encountered in the reconciliation of the supplier
account balance at end of the month due to the existence of unidentified
liabilities
Recommendation
We recommend that the delay in receiving invoices from operation department be

overcome with the implementation of a register of supplier invoices. All supplier
invoices received would be passed to the accounts department for registration at
the time of mail opening. After being entered into the register these invoices would
be sent to the respective departments for action. This register will then facilitate the
follow up of outstanding supplier invoices.
Management Response

3. SUPPLIER STATEMENT RECONCILIATIONS NOT PERFORMED REGULARLY
Observation
We noted that the accounts department does not carry out reconciliations on a
regular basis between suppliers’ statements and the underlying accounting records.
This could result in accounting errors relating to transactions with a specific supplier
not being identified on a timely basis. Errors may include mispostings either by the
supplier or the accounts department, duplication of postings, invoicing by the
supplier for goods not received by the company, goods being received by the
company in one period but not accounted for until the next, etc.
Where errors are not identified promptly and quickly resolved there is the possibility
of prolonged, complex disputes with suppliers.
Recommendation
We recommend that statements are requested from all suppliers. The suppliers’
balances should then be reconciled to the company’s accounting records on a
regular basis (preferably monthly) and differences investigated and resolved.
Management Response

4. FAILURE TO IDENTIFY ACCRUALS FOR GOODS RECEIVED NOT INVOICED
Observation
The company’s procedures for identifying goods received for which no invoice has
been processed do not ensure that all accruals are identified (further detail
regarding the company’s procedures will probably be necessary).
As a result the accounting records for the period may be inaccurate as the purchases
for the period may be understated due to an accrual being omitted. The purchases
figure may also be overstated, being inflated by purchases relating to the previous
period that were not accrued for.
Recommendation
The company should ensure that all goods received notes that are not matched with
a suppliers invoice are costed and accrued for.
Management Response

5. INADEQUATE DOCUMENTATION SUPPORTING PURCHASES
Observation
We noted a number of instances where purchases made by employees on the

company’s behalf were not properly supported by invoices and receipts. This has
resulted in the apparent misclassification of expenses.
Allowing expenses to be reimbursed without appropriate supporting documentation

also increases the possibility of erroneous or unauthorised purchases being made. It
also increases the possibility of fraud as expenses can be claimed even if no
purchases had been made.
Recommendation
All relevant staff should be informed that expenses incurred on the company’s behalf
will not generally be reimbursed without adequate supporting documentation.
For practical reasons it is likely that a small number of instances will arise where it
will not be possible to adhere to this procedure. Staff should be advised what
procedures to follow in such situations. These procedures should include approval
by a specified executive.
Management Response

6. NON-CANCELLATION OF PAYMENT VOUCHERS AND SUPPORTING DOCUMENTS
Observation
The company does not cancel payment vouchers and their supporting documents
after payment has been made. There is therefore a risk of duplicate payments being
made for the same invoice.
Recommendation
All payment vouchers and their supporting documents should be stamped “PAID”
immediately after payment.
Note
It may be more appropriate to stamp ‘POSTED’ after invoices have been posted to
the suppliers account. Where this is the case both the above paragraphs would
need amending.
Management Response

7. LACK OF CONTROL OVER CASH PURCHASES
Observation
We noted cases where cash proceeds from the sale of goods were not banked
intact. Instead cash disbursements were paid directly from sales proceeds without
any adjusting book entries being made. This practice has resulted in both the sales
and purchases figures being understated in the books of account. It has also
reduced control over the level of cash purchases made by the company.
Recommendation
Whenever possible the company should bank cash sales proceeds intact and cash
purchases should be paid out of the petty cash imprest system. However, in
situations where this is not possible, adjusting accounting entries must be made.
These entries should be supported by invoices or receipts to support the cash
purchases, and be properly authorised.
Management Response

8. DRY DOCKING, MAINTENANCE AND GENERAL PROVISIONS
Observation
The group has a policy of making a provision for vessel dry-docking and
maintenance for costs to be incurred in future. Actual dry docking expenses
are charged against this provision. The purpose of making this provision is to
spread dry-docking expenses between dry-dockings. The provisions are made
in such a way that the amount of provision on the dry docking date
approximates the actual expenses to be incurred. Management determines the
provisions on the basis of estimates made by the technical staff.
IAS 37 prohibits the company to make provisions for the dry-docking

expenses.
Recommendation
We request that the management of the company review’s its accounting

policy to allow the capitalisation and amortisation of the actual dry-docking
expenses over the dry-docking cycle of each vessel.
Management Response
E KNOWLEDGE RESOURCE CENTRE PAGE 9

9. STAFF LOANS AGAINST END OF SERVICE BENEFITS
Observation
We observed that loans are given to employees without reviewing the end of service
benefit balance. In some instances, loans were given to employees that were
greater than the EOSB balances.
Recommendation
We recommend that adequate controls be implemented prior to disbursement of

loans to employees. Such controls should include documented approval from the
partner if a loan balance exceeds an EOSB balance. These controls will ensure that
the company’s exposure to staff debtors is covered.
Management Response

10. LOCAL PURCHASE ORDERS
Observation
During the course of our audit we noted several instances where LPOs were raised
after orders for the goods were placed orally over the telephone and the goods
received. Furthermore, we also noted that presently LPOs are not authorised by
the respective managers.
Recommendation
A system should be introduced to ensure that purchase orders are raised for all
purchases promptly. All purchase orders should be approved and signed by the
respective managers. This provides documented evidence that the person
responsible for the authorisation process has fulfilled his responsibility.
Management Response

11. NON-CANCELLATION OF SUPPORTING DOCUMENTS ATTACHED TO PAYMENT

VOUCHERS
Observation
We noted that the supporting documents attached to the payment vouchers are not
cancelled with a ‘PAID’ stamp or otherwise defaced after the payment has been
made. There is therefore a risk of duplicate payments being made for the same
invoice.
Recommendation
All payment vouchers and their supporting documents should be stamped “PAID”
or defaced immediately after payment to avoid the risk of duplicate payments being
made.
Management Response

12. M AINTENANCE OF JOB CARDS
Observation
We understand that detailed job cards are not maintained to record the costs on
long term software development and maintenance contracts.
We believe that detailed job cards would be beneficial to this company. Advantages
of maintaining detailed job cards include:
• Costs can be monitored on the individual projects, which will help to control
costs,
• Projected revenue can be compared to actual revenue, and;
• Costing information can be accumulated and used to project the cost of
similar work orders in the future, helping to accurately estimate the amount
to be billed.
Recommendation
We recommend that detail job cards be maintained so that costs on individual job
orders can be monitored and controlled.
Management Response

13. NO DISCOUNT REPORT GENERATED
Observation
We noted that the Company does not generate discount reports for sales. The
discount structure is often predetermined for credit customers whereas, a 25%
discount ceiling is set cash customers. We noted, however, that in the absence of
discount reports there is no clear control on the discount being offered for cash
customers. Management are unaware of the average level of discounts being offered
by salesmen.
Recommendation
We recommend that a monthly discount report be generated for all divisions. These
should be reviewed by all divisional managers on a monthly basis. The profit and
sales forecast for future months should be made after taking into account the average
discounts being offered.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - INVESTMENTS
INDEX
1. VALUATION OF INVESTMENTS IN LAND ..................................................................... 2

2. INVESTMENT STRATEGY.............................................................................................. 3

1. VALUATION OF INVESTMENTS IN LAND
Observation
Trading holds investments in land of UD 44 million. These plots of land were

purchased from 1974 to 1981 and as a result has been held for a significant period
of time. No independent valuation of this land has been performed to ensure that the
carrying value is above cost.
Recommendation
We recommend that independent valuations be performed on investments in land.

This will ensure that the carrying value of this land can be realised.
Management Response

2. INVESTMENT STRATEGY
Observation
We note that the Company has significant cash balances placed on deposit with a
number of financial institutions. In order that the Company derives maximum benefits
from this resource, it is important that it is properly managed. Accordingly, a
formally documented investment strategy setting out the short, medium and long term
investment objectives of the Company is considered appropriate. Once prepared, it
should be presented to the Board of Directors for their review and endorsement.
We emphasis that in the absence of documented and approved strategies and

operational guidelines for investments, it is possible that investment decisions may
not comply with the Company’s policies and overall business objectives.
Recommendation
Documentation and regular monitoring of the Company’s investment strategy and

operational guidelines is an essential high level control aimed at safeguarding the
assets of the Company. Formal documented approval of medium to long term
investment strategies is an important component of risk management procedures and
is in line with best practices. We therefore recommend that management reviews
the investment portfolio and develops a formal documented investment strategy.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - OTHER LIABILITIES
INDEX
1. UNCLAIMED DRAFTS .................................................................................................. 2
2. SALES PROMOTION PROVISION .................................................................................. 3
3. COMMISSION PAYABLE PROVISION ............................................................................ 4
4. INCORRECT CALCULATION OF AIRFARE PROVISION.................................................. 5
E KNOWLEDGE RESOURCE CENTRE P AGE 1 1

1. UNCLAIMED DRAFTS
Observation
We noted that the company is transferring all unclaimed drafts aged over one year,
to its sister company.
We understand that these should be transferred to Central Bank. In the absence of

approval from the Central Bank, we believe it is appropriate to retain these in the
books of the company to ensure compliance with Central Bank regulation and
conditions of trading.
Recommendation
We recommend that unclaimed drafts be retained within the accounts of Exchange.
Management Response

2. SALES PROMOTION PROVISION
Observation
A sales promotion provision has been created during 1993 and 1994 and carried
forward so that the provision was UD 520,000 at 31 December 1999. It can be
seen that this provision has not been used in 5 years and as a result appears that it is
no longer required.
Recommendation
We recommend that management review the need for this provision and reverse it if
it is not required.
Management Response

3. COMMISSION PAYABLE PROVISION
Observation
A provision for commission payable has been created during 1994 and carried
forward so that the provision was UD 371,068 at 31 December 1999. It can be
seen that this provision has not been used in 5 years and as a result appears that it is
no longer required.
Recommendation
We recommend that management review the need for this provision and reverse it if
it is not required.
Management Response

4. INCORRECT CALCULATION OF AIRFARE PROVISION
Observation
The “PAYPACK” package, implemented for payroll accounting, automatically

calculates the provision for employee airfare entitlements on a monthly basis.
However, we noted certain cases where this provision had been incorrectly
calculated, an example of this is the entitlement for Mr. Smith.
Recommendation
We recommend that the group information technology department investigate the

reasons for such incorrect calculations and the necessary amendments should be
made in the program.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - AFFILIATES
INDEX
1. RELATED PARTY BALANCES - 1........................................................................................................................2
2. RELATED PARTY BALANCES - 2........................................................................................................................3
3. DISCLOSURE OF RELATED PARTY BALANCES .............................................................................................4
4. RELATED PARTY TRANSACTIONS ....................................................................................................................5
5. NO RECONCILIATION OF INTER COMPANY BALANCES ...........................................................................6
6. INTER-COMPANY BALANCES NOT RECONCILED ON A REGULAR BASIS .............................................7
7. AMOUNT DUE FROM XYZ COMPANY.............................................................................................................8
8. BALANCE RECEIVABLE FROM ABC CONTRACTING COMPANY W.L.L................................................9
9. INTER COMPANY PROFIT ELIMINATION ......................................................................................................10

1. RELATED PARTY BALANCES - 1
Observation
At the 31 December 200X there were substantial related party payables and
receivables outstanding which have been accumulating over a number of years. In
some cases no interest is charged on these balances and in effect they are interest
free loans. This makes it difficult to assess the true performance of each individual
Group entity and ultimately results in successful entities supporting the poor
performing entities.
An additional disadvantage is the hidden administration cost attributable to the time

consuming process of reconciling these balances due to their size and age.
Recommendation
We recommend that management review and settle all outstanding related party
payables and receivables. This will reduce time in maintaining these accounts and
give a clear picture as to the individual entity’s performance.
Management Response

2. RELATED PARTY BALANCES - 2
Observation
At the 31 December 200X there were substantial related party payables and
receivables outstanding which have been accumulating over a number of years. In
most cases no interest is charged on these balances and in effect they are interest
free loans. This makes it difficult to assess the true performance of each individual
Group entity and ultimately results in successful entities supporting the poor
performing entities.
An additional disadvantage is the hidden administration cost attributable to the time

consuming process of reconciling these balances due to their size and age.
We also noted cases where there were significant differences and disputed items
between Group entities. Examples of these include:
Ø Amount payable to AM by AC
• Balance included in AM’s accounts UD 759,986

• Balance included in AC’s accounts UD 950,361
The majority of this difference is due to invoices raised in 1996 and 1997,
disputed by AC.
Ø Amount payable to AM by AF
• Balance included in AM’s accounts UD 20,569,778

• Balance included in AF’s accounts UD 21,122,023
This difference had not been reconciled as at 15 March 2000.
Recommendation
We recommend that management review all outstanding related party payables and
receivables, resolve and clear the disputed balances and settle accounts payables.
This will reduce time in maintaining these accounts and give a clear picture as to the
individual entity’s performance.
Management Response

3. DISCLOSURE OF RELATED PARTY BALANCES
Observation
We noted cases where related party balances have been disclosed as trade
accounts receivable. Examples include:
• Partners’ current accounts totaling UD 1,271,378 have been included under

trade accounts receivables. These balances represent services provided by
the Division to the Partners and as a result should have been recorded in
their current accounts and deducted from retained earnings.
• Amounts receivables of UD. 328,700 from XYZ Co. (an affiliate) have been
included in accounts receivables.
Recommendation
We recommend that a list of related parties be created, reviewed and authorised by

senior management. This should be then be updated for any additions to related
parties. At year end, using this list, the accounting staff should carefully review the
accountants payable and receivable sub ledgers and identify all related party
balances so that they can be separately disclosed.
Management Response

4. RELATED PARTY TRANSACTIONS
Observation
We noted related party transactions which were not made on an arms length basis
and were not properly supported. Examples of these include:
• Used cars were transferred by AF Company to AU Company based on

their net book value plus UD 5,000. This resulted in AF making a profit on
these transfers for the year end 31 December 200X of UD 640,000. We
reviewed a sample of used car sales to third parties and found that these
cars were sold at substantially less than the transfer price.
• AS Company charged AM Company UD 850,000 for the supply of labour

and the use of their workshop. This charge was not supported with time
sheets and no detailed calculation was provided to us. It is unlikely that AM
will be able to pay this outstanding balance due to its financial situation.
These transactions undermine the assessment of the true performance of each

individual Group entity and once again results in successful entities supporting the
poor performing entities. This in turn hides operational problems, increasing the
chances these entities will fail.
Recommendation
We recommend that management discontinue the use of non arms length

transactions, such as those noted above, designed to support the poor performing
entities. Management should review the activities of the poor performing entities and
make the necessary structural changes to enable these operations to become
profitable. If the performance of these entities can not be improved in the short term
then management should consider winding up the entity, otherwise they will continue
to act as a financial drain on the Group’s profitability.
Management Response

5. NO RECONCILIATION OF INTER COMPANY BALANCES
Observation
We have noted that the newly implemented Oracle Financials software does not
properly deal with inter-company balances between the various subsidies within the
Mannai Group.
We appreciate that management is aware of this system shortcoming and have

implemented the interim solution of routing all interc-ompany transactions through
XYZ Corporation, with a manual reallocation to be performed at year end.
However the nature of group operations results in a high number of inter-company
transactions.
The implications of non reconciliation of inter company balances include:
• absence of a true record of all transactions in the Company’s books of

account.
• correct inter-company balances are not being presented to management for
decision making purposes
• Cost of staff time diverted to additional procedures required by this system
weakness
Recommendation
We recommend that management make the resolution of this system weakness a

priority.
Management Response

6. INTER-COMPANY BALANCES NOT RECONCILED ON A REGULAR BASIS
Observation
We noted that the company does not reconcile its accounts with other group
companies on a regular basis.
This resulted in significant delays in the preparation of the financial statements as a

number of disputes arose when reconciling the year end balances.
The failure to reconcile the balances throughout the year thereby caused extra work
for the accounts department at an busy time. Another consequence has been a
number of unexpected write-offs at the year end as some group companies refused
to accept certain charges invoiced by the company.
Recommendation
We recommend that inter-company accounts be reconciled on a regular basis,

preferably quarterly in addition to year end.
Management Response

7. AMOUNT DUE FROM XYZ COMPANY
Observation
We have noted that a receivable due from XYZ Company of UD 2,500,542 has
been accumulating since 1996. XYZ Company has been incurring losses and this
receivable represents financing provided by XYZ Company W.L.L.. We are
concerned that XYZ Company may not have the resources to repay this receivable
and that it may not be fully recoverable.
Recommendation
We recommend that management review this situation and consider providing for
this receivable balance.
Management Response

8. BALANCE RECEIVABLE FROM ABC CONTRACTING COMPANY W.L.L.
Observation
We noted that ABC Contacting Company W.L.L. owes significant amounts to the
majority of the entities in the Group. The recoverability of these amounts is highly
doubtful as ABC has made significant losses resulting in a negative net assets
position.
We have also noted cases where customers are refusing to pay outstanding balances
owed to Group entities until ABC settles amounts payable to these customers.
Recommendation
We recommend that:
• The receivables from ABC be reviewed by management and that if the

recoverability is doubtful, a specific provision be created.
• Management of the other Group entities should be careful when providing

credit to customers to which ABC owes money.
Management Response

9. INTER COMPANY PROFIT ELIMINATION
Observation
We noted that there have been inter company transactions involving the transfer of
to fixed assets at selling prices, resulting in inter company profits. The finance
department does not eliminate the related profit on a monthly basis.
We understand that there is no impact on the income statement as a result of not

reversing the transactions of sales and cost of sales, but, on the other hand, the sales
and cost of sales of the company as a whole would have been overstated by the
same amount.
There are instances, however, where inter company sales and cost of sale have not
been reversed. Examples are transfers from spare parts to work in progress.
Those amounts were not eliminated at end of the year because they were not
material to the financial statements of the company.
Recommendation
We recommend that the finance department should reverse all sales and cost of
sales with the related profits resulting from inter company transactions, on a monthly
basis to avoid overstatement of sales and cost of sales, as well to avoid accounting
for any unrealised profit. We further recommend that all such transfers should be
made at cost.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - SHAREHOLDERS
INDEX
1. SHARE CAPITAL NOT IN AGREEMENT WITH COMMERCIAL REGISTRATION ............... 2
2. DURATION OF COMPANY EXCEEDED PER ARTICLES OF ASSOCIATION ....................... 3
3. LEGAL RESERVE ......................................................................................................... 4
4. PARTNERSHIP AGREEMENT ......................................................................................... 5
5. INTEREST ON SHAREHOLDERS CURRENT ACCOUNT ................................................... 6
6. M INUTES OF THE PARTNERS / DIRECTORS M EETINGS ................................................ 7

1. SHARE CAPITAL NOT IN AGREEMENT WITH COMMERCIAL REGISTRATION
Observation
We noted that the share capital of the Partnership has been increased but the
commercial registration has not been updated to reflect this increase.
Recommendation
We recommend that the commercial registration for these companies be updated on

a timely basis to reflect these and any future changes in share capital.
Management Response

2. DURATION OF COMPANY EXCEEDED PER ARTICLES OF ASSOCIATION
Observation
The Company’s duration of term as per Clause No. 4 of the Articles of Association
expired in 199X. Under this clause, the Company’s duration can be extended for a
further period of ten years after obtaining the approval of the shareholders in a
general assembly meeting.
Recommendation
We recommend that this matter be rectified as soon as possible by obtaining the

required approval.
Management Response

3. LEGAL RESERVE
Observation
The Company’s article of association require 25% of the net profit for the year to be
transferred to the legal reserve. However, the Company is currently only transferring
10% of the net profit for the year to the legal reserve.
Recommendation
We recommend that the Company’s article of association be amended to allow a

10% transfer of net profit for the year to legal reserve account.
Management Response

4. PARTNERSHIP AGREEMENT
Observation
We noted that the partnership agreement has not been finalised and has been under
negotiation for a number of years. This could result in disagreements and disputes in
the future on items that should have been agreed before the operations commenced.
Recommendation
We recommend that the partnership agreement be finalised and signed by the

partners as soon as possible.
Management Response

5. INTEREST ON SHAREHOLDERS CURRENT ACCOUNT
Observation
We noted that the interest on shareholders current account is credited to a bank

account instead of interest income. Ultimately this income finishes up within the
exchange gain income.
Interest income is unrelated to exchange gains income and must be classified

separately. Furthermore, this treatment prevents directors and management from
being able to reliably assess the performance of exchange trading.
Recommendation
We recommend that interest on shareholders current accounts be credited to a new

separate general account to be created specifically for this purpose, leaving only
exchange gains and losses to collected within the ‘Exchange Gain/loss’ general
ledger account.
Management Response

6. M INUTES OF THE PARTNERS / DIRECTORS M EETINGS
Observation
Minutes of the partners / directors meetings are not maintained. It is a requirement of

the Utopian Regulations for Companies to keep minutes of the meetings of the
partners and directors meetings. The regulations also require that at least one
meeting of the partners / directors must be held each year to approve annual
accounts and to appoint auditors.
Recommendation
We recommend that the company should keep minutes in order to comply with the
requirements of the Local Regulations for Companies.
Management Response

PRO FORMA MANAGEMENT LETTER POINTS - REVENUES
INDEX
1. INTEREST ON INSTALMENT CREDIT SALES - 1............................................................ 2
2. INTEREST ON INSTALMENT CREDIT SALES - 2............................................................ 3
3. SALES DISCOUNTS - 1................................................................................................. 4
4. SALES DISCOUNTS - 2................................................................................................. 5
5. ONLINE UPDATE OF SALES RETURNS ......................................................................... 6
6. SALES RETURNS ......................................................................................................... 7
7. DELAY IN INVOICING .................................................................................................. 8
8. CONTROL OVER CASH SALES PROCEEDS................................................................... 9
9. M ONTHLY RECONCILIATION OF CASH SALES AT SERVICE STATION....................... 10
10. INVESTMENT INCOME COLLECTION PROCESS ........................................................ 11
11. SALES SUMMARY .................................................................................................... 12
12. CONTROL OF CASH INVOICES ................................................................................ 13
13. PRICE LIST OF M OTOR VEHICLES NOT EVIDENCED BY SIGNATURE OF CHAIRMAN14
14. NO WRITTEN APPROVAL FOR NON STANDARD DISCOUNT GIVEN TO CUSTOMERS15
15. NO EFFECTIVE SYSTEM FOR ACCOUNTING FOR COMMISSION INCOME ................. 16
16. RECORDING OF CANCELLED INVOICES ................................................................... 17

1. INTEREST ON INSTALMENT CREDIT SALES - 1
Observation
Interest income earned on instalment credit sales is currently being recorded in the
year the credit agreement is signed.
International Accounting Standard 18, “Revenue”, paragraph 30, requires interest

income to be recognised on a time proportion basis. The current policy contradicts
requirements of IAS 18 and distorts profits by recognising the interest income before
the interest is actually earned.
Recommendation
Although the effect may not be considered to be material to the financial position and
results of the group as a whole, we nevertheless recommend that the Company
comply with the requirements of IAS 18 by allocating the interest income over the
period of the credit agreement and carry forward interest income relating to future
periods as unearned income.
Management Response

2. INTEREST ON INSTALMENT CREDIT SALES - 2
Observation
Interest income earned on instalment credit sales is currently being recognised over
a period of 4 years commencing with the year the installment credit sales agreement
is signed.
We noted that interest paid on discounting of cheques with banks during the year
was netted of against interest received on instalment credit sales. This results in an
understatement of interest expense of the year.
International Accounting Standard 18, “Revenue”, paragraph 30, requires interest

income to be recognised on a time proportion basis. The current policy contradicts
requirements of IAS 18 and distorts profits by not recognising interest expense for
the year and deferring the interest expense to next 3 years by understatement of
interest income on instalment credit sales.
Recommendation
We recommend that the Company comply with the requirements of IAS 18 by

allocating the interest income over the period of the credit agreement and carry
forward interest income relating to future periods as unearned income. The interest
charge on discounting of cheques must be recognised as an expense of the period in
which benefit is availed.
Management Response

3. SALES DISCOUNTS - 1
Observation
We noted that discounts are debited to sales account. As a result it is not possible
for the management to monitor discounts provided, to the sales made, and to spot
any unusual trends.
Discounts on spare parts sales are solely decided by the spare parts manager This
could result in excessive discounts being given and a reduction in the gross margin.
Recommendation
We recommend that a separate account be created in the general ledger for

discounts. As a result, the gross value of sales and discounts can be separately
accounted for. This will allow management to monitor discounts provided and
investigate unusual fluctuations.
Management Response

4. SALES DISCOUNTS - 2
Observation
We noted that the managing partner approves the limits of discounts for each model
of cars that can be allowed by the respective level of staff. Further, discounts
allowed exceeding the discount structure, are authorised by the managing partner.
However, we noted that in more instances, such discounts allowed has not been
authorized on the documents. Inquiry from the accounts staff revealed that they
received verbal instructions from the managing partner for those transactions.
This practice allows to misuse the authority given to other management staff.
Recommendation
We recommend that the discount structure should be reviewed and approved

periodically as applicable to the circumstances. Further, if it may be practical for the
managing partner to approve a weekly counter statement covering the details of
invoices subject to special discount for that week..
Management Response

5. ONLINE UPDATE OF SALES RETURNS
Observation
The current computerised accounting system allows online updating of sales and
stock issues, however the online update facility has not been used in the following
areas:
• Accounts receivables are not updated by the system for sales returns.
• Accounts payables are not updated by the system for payment and journal
vouchers entered.
Recommendation
We recommend that management investigate integrating the system so that sales

returns automatically update the accounts receivable module and payment and
journals vouchers automatically update the accounts payable. The extension of
online updating of these transactions will provide efficient processing and up to date
information.
Management Response

6. SALES RETURNS
Observation
We noted that the Company does not maintain a sales return account in its nominal
ledger. The current practice is to account for the sales returns through the
preparation of a “Material Return Voucher” (MRV) which is netted off the revenue
account in the nominal ledger.
Recommendation
We recommend that separate sales return accounts be maintained in the nominal

ledger. This would assist management in :
• monitoring the incidence and volume of sales returns
• analyse the cause of sales returns and as a result help to take corrective
and preventive action
• reassessing the sales and marketing efforts
• review the pricing policies, product quality and departmental efficiencies.
Management Response

7. DELAY IN INVOICING
Observation
Material supplied through delivery notes are invoiced at a later date, with no
guidelines for determining the period within which invoices may be raised. At present
the computer department generates a report on all such deliveries and a copy of this
is forwarded to the respective departments. There is no evidence of any review of
these by the division heads and no formal follow up procedures have been
established.
Delays in invoicing for material supplied often leads to delay in the settlement of
accounts by the customer.
Recommendation
We recommend that the Company implement guidelines for determining the number
of days within which all deliveries must be invoiced. This would reduce the time gap
between the delivery of goods and settlement of the invoice thereby improving the
liquidity position of the Company.
Management Response

8. CONTROL OVER CASH SALES PROCEEDS
Observation
We noted that the company’s business is such that it involves a high volume of cash
transactions.
We note also there insufficient controls to protect the company’s cash balances and
cash sales. Any teeming and lading or misappropriation of cash would go
undetected for prolonged period. This weakness is supported by our detection of
the teaming and lading fraud.
Recommendation
We recommend that the following control procedures be implemented:
• surprise cash counts to be conducted by a responsible officials of company

covering all locations during the year.
• reconciliations of cut off numbers to book records to be carried out on a

regular basis by a person independent of maintaining financial records. This
will ensure that the cut off numbers of cash invoice as reported in the daily
cash collection report reconcile to physical records. Subsequent differences
should be investigated and reported to management immediately.
Management Response

9. M ONTHLY RECONCILIATION OF CASH SALES AT SERVICE STATION
Observation
We noted that company issues manual cash invoices to its customers at service
station. At present company does not have a system by which it reconciles the cash
sales to the cash invoices at regular intervals.
Recommendation
We recommend that accounts department reconcile sales on a monthly basis. The

accounts department should collect the third copy of the cash invoices booklet and
prepare a sales summary. The sales as per the daily collection report prepared by
the cashier should be then be tied up with sales summary prepared and any
differences should be investigated.
Management Response

10. INVESTMENT INCOME COLLECTION PROCESS
Observation
We noted that the collection process of investment income could be improved. In

some cases, rent due is collected in cash or cheques.
Recommendation
We recommend that all properties rented to parties (companies and individuals)

should be covered by post dated cheques. The process of cash collection on or
after the due date to be discontinued to avoid undue problems on collection and
possible misuse of company funds.
Management Response

11. SALES SUMMARY
Observation
We noted that the sales summary for car sales are prepared approximately covering
two weeks period. We found this summary to be untidy and not providing
information of suitable precision in reconciling relevant movements like cash sales,
credit sales, instalment sales, down payments received for instalment sales and
overall cash collection etc.
Further, daily cash collection could not be reconciled to the sales summary. This
weakness provides a loophole for mis-appropriation of company funds, errors and
mistakes in the relevant accounts to go undetected.
Recommendation
We recommend that the accounts department prepare daily sales summary in

respect of car sales disclosing precisely each type of sale and overall daily cash
collection. This should then be reviewed and approved by the accountant. The daily
sales summary should be summarised in to a monthly sales summary for journalising
to the ledger. Finally, the total for daily collection should be banked in full on the
following working day. A supporting for the deposit voucher should clearly indicate
the different sources of collections.
Management Response

12. CONTROL OF CASH INVOICES
Observation
We noted that manual cash invoices in other locations are do not appear to be
adequately monitored and reviewed by the accounts department.
The absence of such a control provides a window of opportunity for fraud of the
nature already experienced by the company.
Recommendation
We recommend that the accounts department should review daily sales summary
listings with a person in accounts department being given responsibility for checking
the sequence order of invoice numbers. Additionally the accountant should visit the
location on a random basis without a prior notice and check and initial the running
invoice sequence.
Management Response

13. PRICE LIST OF M OTOR VEHICLES NOT EVIDENCED BY SIGNATURE OF

CHAIRMAN
Observation
We noted that the company has a price list for vehicles which is revised in response
to changes to selling strategies. At present the price list does not disclose the period
for which it is applicable and is not evidenced as approved by the Chairman. This
may lead to under/excess charge to customers, which might effect the company’s
reputation in the market.
Recommendation
We recommend that the price list of vehicles should be evidenced by the signature
of a responsible official of the company. The period for which particular price list is
valid should be disclosed. Alternatively, the revised price list should mention the date
from which it is applicable and mention the reference no. for the earlier price list
Management Response

14. NO WRITTEN APPROVAL FOR NON STANDARD DISCOUNT GIVEN TO

CUSTOMERS
Observation
We noted that no written approval of the Chairman was available for non standard
discounts i.e., in excess of price list. On discussion with the Chief Accountant
indicated to us that it is on verbal instructions of the Chairman and this practice is
being followed by the company.
In spite of this the risk exists that a non standard discount maybe offered customer s
which is not authorised by the chairman, thus causing unnecessary loss to the
company.
Recommendation
We recommend that accounts department prepare a invoice wise weekly summary

of discounts offered to customers, listing the price as per the price list, discount
offered and sale price. The summary should be approved by the Chairman on a
weekly basis to formalise the discount given as per verbal orders.
Management Response

15. NO EFFECTIVE SYSTEM FOR ACCOUNTING FOR COMMISSION INCOME
Observation
We noted that commission income earned on drafts and telex transfers are not
separately accounted for. Instead management rely on the memorandum records
which reports quantities of drafts and telex transfers issued during the year.
Accordingly management have no reliable means of reliably assessing the

performance of commission activities as the income is mixed in with exchange gains.
Recommendation
We recommend that the company amend its chart of accounts to permit commission
on telex transfers and drafts to be coded to new separate general ledger accounts.
Management Response

16. RECORDING OF CANCELLED INVOICES
Observation
We noted that when an invoice is cancelled, it is removed completely from the

computer records making it impossible to verify the reasons for the cancellation and
of the completeness of sales invoices.
Recommendation
We recommend that when an invoice is cancelled a hard copy of the cancelled

invoice be retained on file in order to maintain the completeness of the invoice
sequence.
Management Response

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SUMMARY GUIDANCE OF AUDIT MANUAL VOLUME II AND STANDARD

WORDING FOR MANAGEMENT LETTER POINTS

1. Policy And Procedure Summary

1.1 The guidance in International Auditing Practices Statement, Communications with

E KNOWLEDGE RESOURCE CENTRE P AGE 1

E KNOWLEDGE RESOURCE CENTRE P AGE 2

2. Guidelines for the Wording of Written Communications on Internal Control

“Our review of the company’s system of internal control is carried out to

E KNOWLEDGE RESOURCE CENTRE P AGE 3

2.3 We encourage management to respond to our comments in which case we can

E KNOWLEDGE RESOURCE CENTRE P AGE 4

1. NO ACCOUNTING POLICIES AND PROCEDURES M ANUAL........................................... 3

2. NO CONTROL AND ADMINISTRATIVE PROCEDURES M ANUAL ................................... 4

3. NO BUSINESS PLAN AND STRATEGY........................................................................... 5

4. NO INTERNAL AUDIT FUNCTION ................................................................................. 6

5. INADEQUATE INTERNAL AUDIT FUNCTION ................................................................. 7

6. INADEQUATE M ANAGEMENT INFORMATION SYSTEM.................................................. 9

7. INACCURATE M ANAGEMENT INFORMATION SYSTEM ............................................... 10

8. NEW M ANAGEMENT INFORMATION SYSTEM ............................................................ 11

9. M ANUAL PREPARATION OF PAYROLL ...................................................................... 12

10. PERSONNEL RECORDS NOT UPDATED.................................................................... 13

11. ABSENCE OF EMPLOYMENT CONTRACTS FOR STAFF............................................. 14

12. LACK OF JOB DESCRIPTIONS FOR STAFF ............................................................... 15

13. INADEQUATE SEGREGATION OF DUTIES IN PAYROLL SYSTEM................................ 16

14. LACK OF BUDGETARY CONTROL - 1 ....................................................................... 17

15. LACK OF BUDGETARY CONTROL - 2 ....................................................................... 18

16. LACK OF BUDGETARY CONTROL - 3 ....................................................................... 19

17. LIQUIDITY CONCERN - 1.......................................................................................... 20

18. LIQUIDITY CONCERN - 2......................................................................................... 21

19. INADEQUATE CASH M ANAGEMENT......................................................................... 22

20. INADEQUATE INSURANCE COVER............................................................................ 23

21. OPEN CHEQUES ISSUED TO THE CUSTOMS DEPARTMENT ....................................... 24

22. COLLECTIONS FROM SALES OUTLETS AT FRANCHISE COUNTERS ......................... 25

E KNOWLEDGE RESOURCE CENTRE P AGE 1

23. NO PETTY CASH EXPENSE SUMMARY..................................................................... 26

24. DE-RECOGNIITION OF PRE-OPERATING COSTS ...................................................... 27

25. DE-RECOGNIITION OF DEFERRED EXPENDITURE..................................................... 28

26. LACK OF EMPLOYEES FIDELITY INSURANCE ........................................................... 29

27. REVIEW AND APPROVAL OF PAYMENTS NOT EVIDENCE BY SIGNATURE................. 30

28. DIFFERENCE BETWEEN GENERAL LEDGER AND PDC SUB-LEDGER.......................... 31

29. INCONSISTENT USE OF LOCAL PURCHASE ORDERS (LPO)..................................... 32

30. NO HOLDING COMPANY......................................................................................... 33

31. ASSETS NOT REGISTERED IN THE NAME OF THE COMPANY.................................... 34

32. NO FORMAL USER PROGRAM CHANGE PROCEDURE .............................................. 35

33. INADEQUATE STORAGE OF DAILY BACK UPS ......................................................... 36

34. FOREIGN CURRENCY TRANSLATION AT INCORRECT RATES ................................... 37

35. CHART OF ACCOUNTS NOT ALIGNED TO HEAD OFFICE REQUIREMENTS ............... 38

36. DIVISIONAL BRANCH RESULTS .............................................................................. 39

E KNOWLEDGE RESOURCE CENTRE P AGE 2

1. NO ACCOUNTING POLICIES AND PROCEDURES M ANUAL

We recommend that the company consider the preparation and maintenance of

The manual should include, as a minimum:

Ø Organisation of the finance department

Ø Accounting policies of the company

Ø Accounting procedures and controls for each transaction type

Ø Financial reports to be prepared, and the checking and distribution of each of

Ø Standard accounting entries

E KNOWLEDGE RESOURCE CENTRE P AGE 3

2. NO CONTROL AND ADMINISTRATIVE PROCEDURES M ANUAL

At present there is no comprehensive control and administrative procedures manual

In the absence of a consolidated procedures manual the risk exists that:

Ø certain new activities may not be covered by existing directives