DETAILED REPORT 27 January 2012 For : Mr. ABETO A.

UY Chairman Internal Audit Department Audit of SCP Prime Cut Sheets Inventory AVE, BMY, NLO, ECC IAD Report.2012.001

From : Re Cc : :

We conducted the audit of Prime Cut sheets inventory from December 14, 2011 to January 21, 2012 with the objectives of determining the _________________________: Last December 10 and 13, 2011, Materials Management Department and Internal Audit Department conducted a special count of the Prime Cut Sheets due to nonavailability of product. Although based on records; there are sufficient stocks on hand. After the special count, it shows that the overall variance is equivalent to negative One thousand One hundred Seventy Three (1,173) pieces of cut sheets. ( See schedule 1). Validation of Source documents against FG Ledger System We have 192 kinds of cut sheets found in the FG Ledger System excluding all kinds with zero balance. We have validated all the source documents against the ledger provided by MMD. These ledgers have the countersigned by the inventory analyst at the ending balance of each specification of cut sheets. Also, Plant Accounting provided the beginning balance of each kind of cut sheets signed by the Inventory control supervisor. We have noted the following: In PTR document, 100 pieces of PTR used in recoiling line was used in the roll forming line. In PTR no 15617 dated July 23, 2011, 25 pieces of AZ (0.35) x 915 x 9 was classified as Prime. The FL Supervisor countersign in the PTR without indicating the purpose of the latter. Upon inquiry with Plant accounting, these 25 pieces is classified as Seconds in the ledger. In SRR no. 13904 dated December 7, 2011, 24 pieces of AZ (0.35) x 915 x 8 classified as prime was erroneously posted in AZ (0.35) x 915 x 10. Upon inquiry with Plant Accounting, Ms. Liwayway Castillo directly unposted the said 24 pieces and outrightly changes it.

See Annex A for document flow chart.

Reconciliation of MMD and Plant Accounting Observation: The reconciliation of MMD and Plant Accounting is purely based on documents such as PTR, DR, FGRR, SRR, MTR, MRR and adjustments. As of this date, the reconciliation report of MMD and Accounting for month of June to November is not available due to pending approval in the office of the Plant Manager. No one check the accuracy of the reconciliation report made by the MMD and Plant Accounting.

Recommendation: MMD should reconcile first its actual product against their records before reconciling with Plant Accounting. MMD FG Warehouse should conduct a weekly cycle count for the Finished Good Cut Sheets to check if their actual product is reconciled with their records.

Production and Warehouse Activities Observation: Possible combination of various items with different classification/specification in one (1) standard pack of FG Cut sheets (roll forming) due to an improper implementation of segregating produced finished products during production. Manipulation of produced FG Cut sheets concerning its total number of Quantity and classification, possibly performed by production operator/technician for he has only given the right to record all produced finished products. Transferred of FG Cut sheets from staging area/production to warehouse directly made by Materials Handling Operator (MHO)/Forklift Operator upon the instruction of Receiver/Issuer (RI), even without a written or verbal notification to production personnel. Segregation and Reclassification Report (SRR) and Production Transfer Report (PTR) was approved/noted most of the times by QC Supervisor and FL Supervisor but should be made by QC Head and Production Head, respectively. Quality Control Inspector (QCI) controlled tagging of produced FG Cut sheets (prime and seconds).

Undocumented Procedures/Methods: Any available Production operator/technician within the shift schedule counter checked the total number of Quantity produced of Finished Products according to its classification and specification.

Cut off documents (PTR & SRR) normally made one (1) hour before of the shift schedule in production process. First in First out of Finished Product has been applied and practiced of both departments (Production & MMD).

Recommendation: There should be a prcised and more effective way of segregating FG Cut sheets (roll forming) during production. Recording of all produced finished products must be performed by production personnel not directly involved in production process. Note: segregation of duties should be applied. The Production personnel should provide a detailed monitoring sheet for every Finished Products transferred to warehouse.

See Annex B for the comparison of the established procedures and actual observation Warehouse Dispatch Activities Observation: FG Warehouse is divided into three sections: FG Prime headed by Bernie Lim, FG Non Prime headed by Sabino Ramos, and FG Dispatch headed by Dennis Bermejo. They used some methods like putting a colored sticker in Delivery Receipts, Finished Goods itself, and in the listing given to Material Handling Operator to make the identification and loading of the Finished Goods for dispatch easier. All schedules for dispatch are held during the first shift (7:00am 3:00pm) only. The succeeding shifts are for receiving of finished products from production or crating of finished products for inter-island shipments. For each shift, FG warehouse sections have two R/I (Receiver/Issuer) and one Material Handling Operator. The FG Warehouse used First In, First Out method as basis for their loading/dispatching of finished good products. The traffic coordinator make some alterations in the delivery receipts like changes in the trucking company and Plate number without informing the Plant Accounting who prepared the delivery receipts. Although, changes may be seen by the Plant Accounting during posting. According to traffic coordinator, he is authorized to make changes in the delivery receipts especially when it comes to Truckers information. Some delivery receipts were signed by Ms. Brenda Motes for Ms. Melanie Mismanos. Memorandum regarding authorization of Ms. Brenda Motes to sign in the delivery receipts was not given.

During the observation, FG Warehouse provided us some documents that they used in loading/dispatching of finished good products like dispatch record, Daily Issuance of Prime stock to FG Dispatch, Crating Requirements, Daily Loading Plan, and Listing of all FG products for loading.

Undocumented Procedures/Methods: According to the FG Warehouse personnel, they are using the First In, First out (FIFO) method in loading/dispatching of finished good products.

Recommendation: There should be an official document for issuance of finished good products from FG Warehouse section to FG Dispatch section. FG Warehouse should have one receiver who will receive the Finished Good Products from the production/segregation and one issuer who will issue the Finished Good Products for dispatch. Any alterations in the Delivery receipts should be countersigned by the Plant Accounting. Only authorized signatory should sign in the delivery receipts or otherwise, they should provide a notice regarding such authorization.

See Annex C for the comparison of the established procedures and actual observation. Prepared by: RCPaster/DEVCariaga Internal Auditors Reviewed by: Rafael D. Salazar Senior Audit Supervisor

Noted by: Getre Y. Pechayco Internal Audit Head