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 MANUAL......................................

2. NO CONTROL AND ADMINISTRATIVE PROCEDURES MANUAL...............................

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

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

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

6. INADEQUATE MANAGEMENT INFORMATION SYSTEM............................................

7. INACCURATE MANAGEMENT INFORMATION SYSTEM............................................

8. NEW MANAGEMENT INFORMATION SYSTEM..........................................................

9. MANUAL PREPARATION OF PAYROLL.....................................................................

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

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

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

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

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

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

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

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

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

19. INADEQUATE CASH MANAGEMENT.......................................................................

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

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

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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 1

 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

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

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

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

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

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

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

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

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

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

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

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

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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 2

 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

1. NO ACCOUNTING POLICIES AND PROCEDURES MANUAL

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:

 Organisation of the finance department

 Accounting policies of the company

 Accounting procedures and controls for each transaction type

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

of these

 Chart of accounts

 Standard accounting entries

Management Response

E KNOWLEDGE RESOURCE CENTRE PAGE 3

 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

2. NO CONTROL AND ADMINISTRATIVE PROCEDURES MANUAL

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:

 certain new activities may not be covered by existing directives

 procedures may be applied in an inconsistent manner

 procedures might not be updated on a timely basis

 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

E KNOWLEDGE RESOURCE CENTRE PAGE 4

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 5

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 6

 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

5. INADEQUATE INTERNAL AUDIT FUNCTION

Observation

We have observed several issues in relation to the Internal Audit Department

(IAD) which require attention:

 The size of the IAD appears to be small in relation to the nature and level
of the company’s operations and activities.
 There are no formalised procedures or work programs for the department.
 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
 It would also appear that the follow up of IAD findings and reports by
Head Office is not in a structured manner.

Implication

 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.
 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.
 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
 If Head Office follow up of IAD findings is not always clear, the
credibility and effectiveness of the Internal Audit department may be
undermined.
 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

 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.
 The IAD should be provided with a clear organisational function, including
authority and responsibility to carry out its duties effectively. The IAD

E KNOWLEDGE RESOURCE CENTRE PAGE 7

 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

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.
 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.
 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.
 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.
 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

E KNOWLEDGE RESOURCE CENTRE PAGE 8

 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

6. INADEQUATE MANAGEMENT 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:

 Cost of sales,
 General and administration expenses,
 Selling and distribution expenses,
 Depreciation and finance charges,
 Debtors’ and creditors turnover ratio,
 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:

 Monthly Balance sheet and profit & loss account

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

Management Response

E KNOWLEDGE RESOURCE CENTRE PAGE 9

 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

7. INACCURATE MANAGEMENT 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

E KNOWLEDGE RESOURCE CENTRE PAGE 10

 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

8. NEW MANAGEMENT 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

E KNOWLEDGE RESOURCE CENTRE PAGE 11

 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

9. MANUAL 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

E KNOWLEDGE RESOURCE CENTRE PAGE 12

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 13

 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

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:

 Job description
 Term of contract
 Probation period
 Salary and benefits, including end of service benefit
 Notice of termination
 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

E KNOWLEDGE RESOURCE CENTRE PAGE 14

 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

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:

 Executive responsibilities, if any e.g. immediate superior; approval

authorities

 Operational responsibilities of the individual, e.g. specific duties to be

performed; supervision of staff who report to the individual

 Administrative responsibilities which relate, indirectly, to the performance

of the job

 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

E KNOWLEDGE RESOURCE CENTRE PAGE 15

 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

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:

 Payroll reports should be prepared by the accounts assistant and then

checked and authorised by the Chief Accountant.

 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.

 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

E KNOWLEDGE RESOURCE CENTRE PAGE 16

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 17

 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

15. LACK OF BUDGETARY CONTROL - 2

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

E KNOWLEDGE RESOURCE CENTRE PAGE 18

 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

16. LACK OF BUDGETARY CONTROL - 3

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.

E KNOWLEDGE RESOURCE CENTRE PAGE 19

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 20

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 21

 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

19. INADEQUATE CASH MANAGEMENT

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

E KNOWLEDGE RESOURCE CENTRE PAGE 22

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 23

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 24

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 25

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 26

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 27

 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

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:

 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.

 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.

 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

E KNOWLEDGE RESOURCE CENTRE PAGE 28

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 29

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 30

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 31

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 32

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 33

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 34

 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

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:

 User name initiating the request.

 Date of the request.
 Specifications of changes required.
 Required completion date for request.
 Authorisation of request by user department manager.
 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

E KNOWLEDGE RESOURCE CENTRE PAGE 35

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 36

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 37

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 38

 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

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

E KNOWLEDGE RESOURCE CENTRE PAGE 39