04 July 2012 FOR FROM SUBJECT CC : : : : ABETO A.

UY Chairman INTERNAL AUDIT DEPARTMENT UPDATE ON BPSC AUDIT OF CASH BMY, ECC, JCC

We submit the result of our audit of cash conducted last June 19, 2012 to July 7, 2012 at Bicol Premium Steel Corporation Legaspi City. Initial objective was to determine the accountability of the Legaspi Office Cashier in view of the reported discrepancy by the Treasury Manager. 1. CASH MANAGEMENT AND CONTROL 1.1. Petty Cash Fund and Revolving Fund 1.1.1. Cashiers Accountability o As of the audit date June 19, 2012; we have accounted the cashiers accountability as summarized below: PER RECORD Petty Cash Fund/Revolving Fund Accountability: 41,047.50* PER COUNT 35,215.56** DIFFERENCE (5,831.94)

*Petty Cash Fund (Per Record) Petty Cash Fund Borrowed from Employees. See Annex A Total **Petty Cash Fund (Per Count) Bills and Coins Checks (For Replenishment) Schedule 1 Unreplenished Expenses Schedule 2 15,294.41 19,506.15 20,000.00 21,047.50 41,047.50

Advances Schedule 3 Total Cash & Non-Cash Items

415.00 35,215.56

1.1.2. Practice Standard Procedure o Based on the memorandum issued by Mr. EC Castro to BPSC personnel, the following standard procedures are as follows: BPSC maintains Petty Cash Fund and Revolving Fund in both Legaspi and Naga at P10,000.00 each or a total of P40,000.00. These are under the custody of treasury staffs. Petty Cash Fund is used to pay expenses of up to P1,000.00 per payment. Revolving Fund is used to pay expenses of up to P1,999.00 per individual payment. All Hardware and supplies are paid via check even when the amount is less than P2,000.00 Expenses of P2,000.00 and above are paid via check.

1.1.3. Procedural Deviation o There were fourteen (14) instances that Payment Request Form of employees without approval by the General Manager but the employees was able to claim their advances and reimbursements amounting to Php2,602. See Schedule 4 Expenses more than PHP 1,999 are withdrawn from PCF, instead of paying through check. See Schedule 5

1.1.4. Physical Control o There is no cash box to secure Petty Cash Fund and undeposited collections, Collections and personal money of the Cashier are co-mingled.

1.1.5. Internal Control o The Cashier also performs the following: - Encode Provisional Receipt in the Peachtree Accounting System. - Prepare the Accounts Receivable schedule. The other two functions defeat the internal control of check and balance. o We were not able to find any cash count conducted by the previous Finance Head to check the Cashier. Although two (2) instances of cash count documentation was found dated June 13, 2012 and June 14, 2012. It must be noted that the cash count was conducted only after the visit of the Treasury Manager.

Recommendation: Recommended Internal Control and action plans are as follows: a. Finance department BPSC must strictly observe the Policy on Petty Cash Fund and Cash Advances especially the required documentation. b. Adequate segregation of duties reduces the likelihood that errors (intentional or unintentional) will remain undetected by providing for separate processing by different individuals at various stages of a transaction and for independent reviews of the work performed. The basic idea underlying segregation of duties is that the person recording the receipt should not be the same as that making the deposit. Additionally, a person independent of recorder and depositor responsibilities should reconcile the deposit to the general ledger. c. Make timely deposits. The sooner you deposit cash/checks the less exposure to theft or loss of funds. Ideally deposits should be made within 24 hours or the next banking day. d. Daily cash count by the Finance Head of the cashiers accountabilities for the day. Safekeeping of fund and collection at the end of the day must be assigned to the Finance Head. The Finance Head will also act as the alternate cashier. Another matter of concern is the management and control with regards to extension office in Naga. No senior employee to monitor and implement controls for the cashier. 1.2. Collections 1.2.1. Undeposited Collections o As of the audit date June 19, 2012; we have accounted the total undeposited collections as summarized below: PER RECORD Collections. 658,805.47 PER COUNT 657,330.94 DIFFERENCE (1,474.53)

See Schedule 6 and 7 for Undeposited Collection per Record and per Count.

Recommendation: Cash receipts should be deposited intact on the next banking day. Passbook should always be updated.

1.2.2. Unauthorized Use of Collection o Collection was short by Php1,474.53 because the temporary cashier (Marivic Sabater) used the Cash Collections for Cash Advances & Reimbursements on June 18, 2012 without the approval of GM. However, the said amount was returned on June 20, 2012.

Recommendation: Policy on Receipts and Collections states that Collections must not be comingled with other Treasury Funds such as petty cash fund and revolving fund. Collections must be intact for deposit. Therefore, Collections must not be used for any other purpose such as payment for cash advance or reimbursement of employees. 1.2.3. Daily Collection Report o Nine (9) Instances of DCR non-preparation. There are instances of delay of deposit and unreflected collections in the daily collection report. However, these items reflect on the other business day.

Recommendation: Prepare the Daily Collection Report with the attached the Provisional Receipts and validated Bank Deposit Slip. 1.2.4. Internal Control o Same as control in Fund

1.2.5. Accounting of Provisional Receipt

6451 6501 6551 6601 6651 6701 6751 6801 6851 6901 6951 7001 7051 7101 7151 7201

6500 6550 6600 6650 6700 6750 6800 6850 6900 6950 7000 7050 7100 7150 7200 7500

6479 Missing 6523, 6531, 6541, 6550 Missing 6565, 6568, 6569 Missing 6635, 6647 Missing 6673 6674, 6676, 6682, 6683, 6699 Missing 6716, 6718 Missing 6752, 6756, 6761, 6762, 6765, 6766, 6770, 6774, 6778, 6785, 6786, 6799, 6800 Missing 6824, 6825, 6829, 6830, 6831, 6847, 6848 Missing 6857, 6858, 6861, 6872, 6877, 6890, 6894, 6897, 6984 Missing missing 6984 - Missing complete 7054, 7062, 7072-7079 Missing complete 7176 last used Unused and intact

Fifty Eight (58) Provisional Receipts are still unaccounted as of audit date.

Recommendation: Maintain a log of all Provisional receipts used and issued. The log can be in manual or electronic format and should contain the amount received, the name of the payer, purpose of the payment and its form (cash or check). The Pink Copy of the Provisional Receipt must not be detached and maintained in the booklet and acknowledged by the Sales Engineers. 1.2.6. Practice for Hold and Bounced Check o Six (6) instances of bounced check. No clear cut guidelines or documentation with bounced checks. Only the cashier knows the bounced checks.
Customers' Name Mapland Holdings and Real Estate Development, Inc. Mapland Holdings and Real Estate Development, Inc. Mapland Holdings and Real Estate Development, Inc. Monbil Construction Electro Dynamic Const. & Devt Inc Steven Construction Bank/Check no. LSBI 5295808 LSBI 5517263 LSBI 5517264 BDO 0096500 BDO 0239734 LBP 004690 Date 01-Oct-11 17-Mar-12 21-Mar-12 30-Apr-12 17-Jun-11 25-Apr-12 Amount 27,000.00 25,640.00 25,160.00 30,703.69 54,600.00 297,899.30

Eight (8) checks amounting to Php 203,901.05 are still undeposited even though it is already matured and ready for deposit.

Recommendation:

a.

To ensure proper cash projection, utilization, and collection, the Finance Head and the GM must be informed of any bounced check and for deferment of deposit. b. Customers request for any deferment in deposit must be documented and evaluated by Finance Head and GM.

1.2.7. Multiple Application of Payment o Twenty (20) instances of customers payments equivalent to Sales Contract amount was divided into multiple partial deposits. These instances affect the Accounts Receivables Account. See Schedule 8 Sixteen (16) instances of bank deposits were divided into multiple customers whose payments are either full or partial. Three of the sixteen deposits are for check clearing but still managed to divide it into multiple customers. These instances affect the Accounts Receivables Account. See Schedule 9

Recommendations: The practice of multiple application of collection to various customers should be stopped immediately. The above practice is a possible indication to cover-up fraudulent activities. We were not able to question the Cashier the motive of her actions. 2. ACCOUNTS RECEIVABLE In view of the findings in collections, we opted to conduct a limited random checking of Accounts Receivable with the following results: 1. Three (3) instances of documented collection not reflected in Cash Receipts Journal and Accounts Receivable. 2. One (1) instance of bounced check but no adjustments made in the Accounts Receivable. 3. Six (6) instances of check collection (one check) wherein the application of payment was made to various customers accounts. See Schedule 10 Therefore, we have reservation on the correctness of the presented Accounts Receivable listing and balances as of audit date . Furthermore, inquiry with the General Manager indicates that no updated listing was provided to him since February of 2012. Recommendation:

a. The new Finance Head should facilitate the preparation of Financial Statements and bank reconciliation. b. Conduct actual confirmation of the Accounts Receivable with the customers including those recently closed in year 2012.

3. OTHER CONCERN 3.1. Cash advances treated as outright expense o Thirty-seven (37) cash advances through Check Voucher verified for the period of April 27, 2012 to June 16, 2012 have no liquidation statement submitted and treated as outright expenses instead of advances to officers and employees. See Schedule 2

Recommendation: Strictly observe the requirements stated in the Policy on Petty Cash Fund and Cash Advances. 3.2. Special Transactions 3.2.1. No documented approval from management was found regarding the following: a. House Account Commission. See Annex C b. 2011 Christmas Party Budget. See Annex D 3.2.2 Branch Managers Cash Advance as of July 4, 2012 amounted to Php46,937.48. We checked 36 documentations of Managers cash advances, reimbursements and liquidations and noted the following: a. Nine (9) Cash advances have no approval of Alan S. Yu. b. Five (5) Liquidations of expenses have no approval of Alan S. Yu. c. Three (3) Reimbursements of expenses have no approval of Alan S. Yu. d. One (1) Cash advance intended for General Managers Plane Ticket have no approval of Alan S. Yu. e. One (1) Cash advance intended for Emergency Purchase of Battery have no approval of Alan S. Yu. See Schedule 11