ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

1.

AUDIT
OBSERVATIONS
SEPTEMBER 2008

FOR

THE

YEAR

ENDED

30

It is pertinent to state that one of the objectives of the companys management

and its personnel is to provide reasonable assurance that its financial reporting
is reliable, its operations are effective and efficient and that it complies with
applicable laws and regulations effectiveness process. It accordingly designs a
system of internal control through its policies, processes and procedures to
ensure the achievement of this important objective. Internal control consists of
the following components:
a.

The control environment;

b.

The companys risk assessment process;

c.

2.

The information system, including the related business processes

relevant to financial reporting, and communication;

d.

Control activities; and

e.

Monitoring of controls
GOING CONCERN ASSUMPTION

We observed that the financial ratios of the company and some components of
the financial information indicate existence of material un-certainty as
disclosed in the financial statements as well as reported by us. The company
continues to operate and its six years data at a glance published with its annual
report show a steep rise in its accumulated loss from Rs. 579 millions in year
2002 to Rs. 939 millions in the year 2008.
There are issues that have remained unresolved since long and reflected under
long term loan, deferred income liabilities, growers loan contingencies not
acknowledged as debts or un-provided for reasons disclosed or unresolved.
These factors further indicate lack of companys ability to resolve issues
despite of passage of time and the incentive provided by the government in this
respect. The risk of cancellation of approval also hangs though so far it has
been contested and continues to be valid.
We recommend that the management should plan early resolution of the issues
so as address the going concern problem faced by it
Implication:
The continuation and long duration of the uncertainty reflects inability of the
companys management in breaking the stalemate to overcome the financial
problems. Continuity of production and increase in loss also creates an adverse
image of the companys management.

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ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

Managements Comments:
The management is aware and well abreast of the issues of uncertainty that has
haunted the sugar Industry in Sindh as a whole owing to non- availability of
sugar cane in the area, high prices of sugar cane that caused increase in cane
cost and imprudent imports that further depressed the selling price of sugar
below the cost and forced the company to take various temporary initiative of
selling in advance to remain afloat.
The management is contesting the issues on merit and expects that there will be
an early outcome of its efforts. The management provided cash flow
projections in support of its assertion that while the issues are being tackled
there is not going to be any adverse impact to aggravate the situation.
3.

IT ENVIRONMENT
The companys IT infrastructure (hardware, operating systems, etc) and
application software that it uses to support business operations at site and office
has been in use since the last several years. The software is fox pro based. The
fox pro based software has however become obsolete and is open to risk of
adjustment of closed transaction and subsequent alteration of balances and
record. The same is the case with Cane Accounting software used at the factory.
The company also has payroll, stores and other stand alone systems and
software instead of an integrated system.
The software that company uses has weak security controls. It uses FoxPro
based software, which is already obsolete. Voucher posting, editing & deletion
can be done if the person gets access to the software misstatement of account
balances would be possible. There is a high risk of unauthorized access to data
that may result in destruction of data or improper changes to it. There is also a
risk of unauthorized changes to data in Master files. Moreover we were not
provided with any evidence of disaster recovery plan in case of software
collapses.
Implication:
Based on above findings, there is a high risk of misstatements in presentation
of financial statements along with the chances of fraud & error in account
balances. The objective of ensuring reliability of companys financial reporting
system is at risk. It permits the possibility of altering data entered and no
matter how effective is the control environment the risk is there and grows with
the time.
Recommendation:

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The entry of any person to login software program should be restricted.

Password should be changed on periodical basis to avoid un-authorized

access to accounting software.

ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

Company should invest for new software (not based on FoxPro) which
gives a long term benefits in terms of security & fair presentation of
financial statements.

Cane accounting program should be integrated with General Ledger.

We recommend that a new accounting software system and hardware system be

arranged with the objective of improving the controls and all related systems
should be integrated so that duplication is reduced and risk of errors of
omission and commission is avoided.
Managements Comments:
It considers that the staff is well versed with the system and entries in the
system are only made after proper authorization and in presence of two
officers. The management is cognizant of the issue and shall take necessary
decision as soon as its financial position permits it to do so.
4.

RECORD OF MARKET RATES BASED ON WHICH

DELIVERY ORDERS FOR SUGAR IS ISSUED
a)

During our examination of the evidence in

support of the sale of sugar and molasses, we observed that there is no
written policy approved by the Board with regard to the fixation of
sugar price i.e. that whether the price is to be fixed on the date of
advance or on the date of delivery.
The rate of sugar is fixed on the basis of enquiry made by the
concerned person. On fixation of rate of sugar, the price fixed and
quantity sold is communicated by DGM to the person maintaining
memorandum record of sales instead of issuing an invoice in this
regard. There is an absence of control at this stage as the handwritten
chit is not serially numbered and dated and also reflects on the
transparency in concluding the deals. We recommend that the BOD
should look into this matter and take necessary action in this regard.
We observed that the companys staff does not keep record of how
rates are fixed for orders placed by customers for sugar and molasses.
The transaction is however approved by the top management on a
plain piece of chit.

b)

Sale of Sugar to Brokers

The Company practice is of issuing delivery orders prior to
commencement of production to brokers against advance payment.
The rate of sugar is agreed at the time of issuance based on prevalent
wholesale market rate. The Company also makes spot sales to broker
during the production at agreed rates and issues delivery order. The
broker sell the delivery order to customers independent of the
Company that lifts the goods form the mill.
We recommend that a comprehensive agreement shall be made to
cover all transactions between the Company the broker during a year.

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ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

Implication:
The procedure is not in line with the requirement of good governance and of
transparency of how transactions are concluded in the best interest of the
company and its shareholders. Lack of documentation reflects weakness in the
system of internal control on pricing of sales.
Management Comments:
The management has been obtaining approval of the Board as well as selling
sugar and molasses based on market prices with in built margin for
transportation and profit for wholesalers. The management has noted
observation of the auditors about unwritten policy and handwritten chit and
shall accordingly evolve a system of a written policy and formal approval in its
place.
5.

DORMANT BANK ACCOUNTS

We observed during our Audit there are some Dormant Accounts in Head
Office & in Mill having following inefficiencies:

Latest bank statements not available.

No reply to confirmation received.

No activity found in last 3 years.

We also found that some banks having Negative balances

Implication:
Accuracy of the cash and bank balances could not be ascertained and risk of
misuse of companys bank account.
Recommendations:
We recommend that these Dormant Accounts should be closed.
Management Comments:
It shall follow up the matter and take decision necessary to address the issues.

Page - 4

ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

6.

COMPLIANCE WITH THE REQUIREMENT OF SECTION 218 OF

THE COMPANIES ORDINANCE, 1984-INCRESE IN DIRECTORS
REMUNERATIONS
We observed that remuneration of directors was increased during the year with
the approval of Board of Directors in the meeting held May 29, 2007.
However, the company did not provide information that show how it circulated
the information to its shareholder as required by section 218 of the Company
Ordinance 1984.
Implication:
Non-compliance with the relevant provision(s) of Section 218 of Companies
Ordinance 1984 exposes the company to the risk of fine for the default in terms
of sub-section 6 of section 218.
Recommendation:
Whenever the remuneration increased / variation, the abstract should be
circulated within 21 days to its share holder in terms of section 218 subsections 2.
Management Comment:
The matter shall be looked into and addressed though it feels that it did comply
with the said requirement.

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ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

7.

INTERNAL AUDIT
Observation
Being a mandatory requirement of the Code of Corporate Governance as issued
by the Securities and Exchange Commission of Pakistan, the Company hasnt
established an internal audit department.
Implication
Functions of internal auditing in particular examining, evaluating and
monitoring the adequacy and effectiveness of designed controls will not be
effective in the absence of an effective internal audit function. Following critical
control processes are missing:

reviewing the accounting and internal control systems, monitoring

their operation and recommending improvements thereto;
examination financial and operating information (which may include
detailed testing of transactions, balances and procedures);
reviewing the economy, efficiency and effectiveness of non-financial
controls of an entity; and
reviewing compliance with laws, regulations and other external
requirements and with management policies and directives.

Recommendation
For having an effective internal audit function, the management must consider
whether:

The work is performed by persons having adequate technical training

and proficiency as internal auditors and the work of assistants is
properly supervised, reviewed and documented;
Sufficient appropriate audit evidence is obtained to be able to draw
reasonable conclusions;
Conclusions reached are appropriate in the circumstances and any
reports prepared are consistent with the results of the work performed;
and
Any exceptions or unusual matters disclosed by internal auditing are
properly resolved.

Management Comments
We will forthwith make necessary steps to make ensure the compliance of Code of
Corporate Governance during current financial year with regard to internal audit.

Page - 6

ABC
Chartered Accountants

ABC SUGAR MILLS LIMITED

Management Letter September 30, 2008

8.

STORES, SPARES AND LOOS TOOLS

Observation
We observe that there are number of slow moving items in store, spare and loose tools
inventory. We recommend that company should carry out exercise in order to identify
slow moving and obsolete items and make adequate provision
Implication
The assets of the company may be overstated.
Recommendation
We recommend that the company should carry out a proper physical verification on
periodic basis to identify the slow moving stores, so that the provision against such slow
moving can be made and the financial reflect true and fair view.
Management comment
The company shall take such exercise and do needful in this respect in year 2009.
9.

ADVANCES

Observation
The books of the company reflects surcharges amounting to Rs.5,360,889 booked as
creditors since several year that have to date remained unpaid. In the same manner there
are balances unpaid since over 3 years to sugar cane growers of aggregate amount of
Rs.35 Million
Implication
Such balances are exposed to be taken to income by the Income Tax
Department.
Recommendation
We recommend that the management shall investigate the matter and initiate necessary
effort for the adjustment of these.
Management comment
The company shall take such exercise and do needful in this respect in year 2009.

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ABC
Chartered Accountants