DRAFT

FINDINGS AND OBSERVATIONS

Based on the documents reviewed, information collected, and interviews conducted during the course
of the examination, the Team finds as follows:

A. Underpayment in the amount of USD26,018.74

The documents and information reviewed by the Team during the course of the examination
indicate that an amount of USD26,018.74 from the company represents an underpayment to
Shis Beauty Furniture Co., Ltd. The following is a summary of the evidence and information
supporting the Team’s findings:
Breakdown of the underpaid amount:

Date Particulars Amount

1/10/2008 Partial payment for Shipment no. 2 -550.00
4/3/2008 Full payment for shipment no. 3 and Freight Payment -550.00
11/27/2008 $15,000 @49.15 payment for S-7 15,000.00
3/2/2009 Payment for Shis 12,000.00
8/30/2009 Swap Fee 39.67
9/4/2009 3rd partial payment for S-11 19.46
10/1/2009 4th partial payment for S-11 10.00
10/22/2009 Full payment for S-11, c/o Bell, Fedex 32.06
11/5/2009 Partial payment for SA dated Nov. 25, 2008 c/o bellflower 17.55
Total – Under (Over) payment 26,018.74*
*Please refer to Annex A.

A review of the documents pertaining to purchases made by the Company from Shis Beauty
Furniture Co., Ltd. for the years 2007 to 2009 showed that most of the transactions have no
supplier’s invoice attached. There are also transactions in which the part of the purchase orders
were hand written. Please refer to Annex A.
Implication:
Supplier’s Invoice is an integral part for accounting the money owed to suppliers and updating
purchases accounts. It allows an entity to record a payment made to the supplier, post an invoice
to create the accounting update the supplier account balance, print or email purchase order
documents to the supplier and to be a check and balance for the inventory received into stock.
Recommendation:
The team recommends for further review of the documents, since the team were not yet able to
examine the delivery receipt documents and other documents that may help to analyze and to give
a sufficient and strong support to the conclusion.
Management Comments:
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B. Overpayment in the amount of USD4,186.83

The documents and information reviewed by the Team during the course of the examination also
indicate that an amount of USD4,186.83 from the company represents an overpayment to Foshan
City Maxdon Furniture Co., Ltd. The following is a summary of the evidence and information
supporting the Team’s findings:
Breakdown of the overpaid amount:

Invoice No. Invoice Amount Amount per Examination Difference

P/I NO. YJI3042011 21,488.16 21,486.16 2.00
P/I NO. YJ30062011 20,137.12 21,849.32 -1,712.20
P/I NO. 005-12092011 10,055.17 12,531.80 -2,476.63
Total – Under (Over) payment -4,186.83*
*Please refer to Annex B.

A review of the documents pertaining to purchases made by the Company from Foshan City
Maxdon Furniture Co., Ltd. for the year 2011 showed that most of the orders increased before the
final payment was made. Please refer to Annex B.
Implication:
Although the practice of increasing the order which is partially paid is not prohibited, a closer
monitoring is necessary to ensure that the amounts already paid partially are not included in the
additional request for inventories. Such monitoring will help the Company to check the money
owed to supplier, without relying too much to the suppliers pro forma invoice.
Recommendation:
The team recommends for further review of the documents, since the team were not yet able to
examine the rest of the years and the delivery receipt documents and other documents that may
help to analyze and to give a sufficient and strong support to the conclusion.
Management Comments:

C. Inventory Management

Inventory management is primarily about specifying the shape and percentage of stocked goods.
With the key objective of determining or controlling stock levels within the physical distribution
system, functions to balance the need for product availability against the need for minimizing stock
holding and handling costs. It leads to optimal inventory levels. This area includes all activities
involved in the procurement of inventory.
Presently, the Company is using Excel and manual counting for its inventory management which
may be subject to human error and more open for an opportunity for fraud or theft. Such manual
process took up a lot of precious time and resources. Also, the said process does not operate in
real time or allow multiple users to access them at the same time. For a manufacturing Company,
with a lot of inventories to consider, an automated system may help. An automated system, in
contrast, enables multiple employees to track items across several locations, all while monitoring
orders and shipments for those items.
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D. Internal Control Issues

Internal controls are policies and procedures put in place to ensure the continued reliability of
accounting systems. Accuracy and reliability are paramount in the accounting world. Without
accurate accounting records, managements cannot make fully informed financial decisions, and
financial reports can contain errors.
Internal control systems help relieve ethical dilemmas, increase accountability, deter fraud and
improve the quality of financial information used by creditors and investors; however, an internal
control system is only as good as its design. Since every company must create a unique system,
some controls may be either cumbersome or insufficient.
A deficiency in internal control over financial reporting exists when the design or operation of a
control does not allow management or employees, in the normal course of performing their
assigned functions, to prevent or detect misstatements on a timely basis.
D.1 Check vouchers were signed without the necessary attachments.
A check voucher is a document used to make a request an issuance of payment by check either
for a procurement of service or goods. It requires at least one supporting back up attachment
before submission and signing. This is to provide justification for the payment. Such attachment
may pertain to invoices, receipts, and other documentation to be used as a reference for the
requested payment.
Implication:
Routing and signing a check voucher, without at least one valid attachment to support the
requested payment may result to misappropriation of an entity’s cash. Although within the
management of the entity there is a signed check voucher to support the outflow of cash, the
management may be left wondering on where the money were appropriated.
Recommendation:
Strict implementation of a policy which provides that a check voucher must be supported with at
least one valid document to be used as a justification for the requested payment.
Management Comments:
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D.2 Check vouchers and supporting documents, were not stamped as paid and no dates were
indicated as to when the amount was credited to the Company’s bank account.
Generally, check voucher is accomplished by the Company if payment is to be made, and
subsequent stamping by the accounting department that it is already credited to the Company’s
bank account is necessary. The stamp will serve as a proof that the accounts already included in
one check voucher is already paid and will no longer be included in a subsequent check voucher.
Implication:
Without properly establishing that a particular check voucher is already paid or credited to the
Company’s bank account, and without stamping the supporting documents (i.e.invoices) a
subsequent check voucher may include the same particulars, resulting into double payments or
misappropriation of cash of the Company.
Recommendation:
Check vouchers must be properly monitored, all particulars must be specific, and the supporting
documents must be properly monitored, so that no double payment will be made. The stamping
and the date when the amount is credited will also help on the timing of recording for the payments
and for its proper monitoring.
Management Comments: