October 7, 2010

The Executive Director (Business Improvement),

Interloop Limited
Faisalabad

Re: Internal Audit Report For Three Months December-2008 to

February-2009

We are pleased to submit our seventh report regarding internal audit of your
company for the period mentioned above.

PART-A
SCOPE OVERVIEW

Scope of the assignment has been discussed at various times in detail, latest
in the month of March 2009. Currently the Internal Auditors are working in
accordance with the scope submitted through an e-mail to Deputy Manager
(Audit) on March 13, 2009. This scope has been prepared in the light of
contract discussed at the time of inception of assignment and instructions
given to us from time to time. A copy has been attached in Annexure ‘A’.

PART-B
CURRENT SCENARIO

1. ACCESS OF INTERNAL AUDITORS TO SYSTEM

1.1 Access Provided

1.1.1 The extent of access of Internal Auditors to the system is same

as discussed in section 1.3 of fifth internal audit report for the months
June to August, 2008.

1.1.2 In connection with routine internal audit work, further excess to

some reports / forms in the system was required. A formal requirement
was forwarded through an e-mail to Deputy Manager (Audit) on
January 21, 2009.

2. REQUIREMENTS

1
2.1 Clarification of Term ‘Head of Department (HOD)’

2.1.1 Heads of Departments are a enjoying various powers and

authorization limits implied by the company policies related to HR & D.
However, these policies don not reveal clearly the meaning of term
HOD. In this context, we submitted our requirement via an e-mail to
Deputy Manager (Audit) on March 7, 2009 regarding definition of the
term “Head of Department (HOD)” as being used in various company
policies to avoid any misunderstanding regarding the this term which
may arise. The requirement is pending to the date of this report.
Extract from the said mail has been given in the Annexure ‘B’.

3. VOUCHERS STATUS
3.1 Vouchers Entered and Confirmed During the Period
Covered by this Report

3.1.1 Internal Auditors do not have access to such reports, if any,

confirming number or details of vouchers entered and confirmed in the
system. Therefore, we are unable to mention here precise number of
vouchers that were entered, forwarded, posted and confirmed
throughout the period covered by this report.

3.2 Vouchers Audited During the Period Covered by this

Report

3.2.1 As mentioned in previous report, vouchers are not being

confirmed through the system, therefore, we have been carrying out
the audit on hard copies of vouchers only and not through the system.

3.2.2 Because there is no audit through the system, we are unable to

mention here precise number of vouchers that were audited
throughout the period covered by this report. However, we have been
keeping manual record of ERP vouchers being audited by us. The
number of vouchers audited by us as per our record is given below.

Sr Voucher Type Voucher

. s
1. Payment Vouchers 2,751
2. Account Payable 9,576
Vouchers
3. Receivable Vouchers 368
4. Receipt Vouchers 1,340
5. Funds Transfer 347
Vouchers

2
Total 14,382

3
 PART-C
OBSERVATIONS AND RECOMMENDATIONS

4. PRE-AUDIT SERVICES
4.1 Issues relevant to Human Resource (HR) Department:

4.1.1 Claims relevant to Leave Fare Assistance (LFA):

a) Introduction: All executives of grade V & above are entitled to avail

their LFA after completing 12 months of service with the company. All
executives of grade IV who have completed 3 year of service in this
cadre are entitled to avail LFA. For grade IV to VI LFA will be paid
without the need to produce any documents. As per policy, LFA will not
be paid without accompanying annual leave. 50% of entitlement can
be disbursed in advance. For grade VII & above 50% amount of LFA will
be paid on production of traveling/boarding and lodging receipts (Car
mileage & other incidental expenses will not be treated) and the
balance will be paid without production of any documents.

b) 1
Issue 1: As mentioned in policy, 50% of entitled amount will be paid
on production of documents in case of employees of grade VII and
above. In a case Mr. Muhammad Shahid (Emp#102786) was required
to provide bills for Rs.19,200 while he provided bills for Rs.19,143 only.
The amount of difference i.e. Rs.57 was deducted from his claim.

c) Issue 2: Mr. Waheed uz Zaman (Emp # 101247) took advance for LFA
as per his entitlement and took annual leaves from 19-12-2008 to 26-
12-2008, as required by the policy. Subsequently, the same employee
applied for balance payment of his entitled amount. But the system
was showing his in-out as per attendance report. The application for
balance claim was returned to HR & D department for clarification but
it fetched no response nor did the employee claim the balance amount
again.

d) Actions Taken: Bills were forwarded after making necessary

corrections.

4.1.2 Staff Welfare Fund

a) Introduction: The Company has established a staff welfare fund for

the monetary support of non executive employees. Such support

1
Repeated point with updated information; Previous Report Reference: Para 3.1.1(b)

4
 includes sharing of financial burden on events like marriages of family
members, and medical treatment of dependents etc.

Moreover, company has established a structure of authority approvals

to ensure reasonable monetary support and payment of the same in
genuine cases only.

b) 2
Issue 1: We have been provided with the office order regarding
financial powers of the department heads (HOD) and the welfare fund
disbursement guidelines. Previously we used to report cases in which
the welfare disbursement allowed by relevant HODs was in excess of
monetary limits given in the disbursement guidelines provided to us.
The frequency of such cases has been decreased now and only one
such case was observed during the period covered by this report.
Nevertheless, the frequency of such cases is decreased; we consider it
necessary to include this issue in our report because our querries
regarding the matter are yet to be satisfied.

The justification provided by the management for crossing their

sanctioned limits is that the financial power of the HODs as per Office
Order no. IL/HO-344 date 26-01-2005 allows them to sanction such
fund upto Rs.2,000. Our observation is that, the Office Order
contradicts the guidelines which should be followed by the HOD at the
time of approving any application.

Moreover, the office order IL/HO-336 clearly mentions that a proper

procedure for disbursement of welfare fund would be introduced in due
course. This Office Order pertains to the period 2004-2005, but the
procedure is not formulated yet.

We had suggested that the Human Resource department should devise

the detailed procedure for disbursement of Welfare fund. Moreover,
the conflict between financial power of the department head and the
welfare limits as given in the relevant guidelines needs to be clarified
on priority basis.

c) Issue 2: Yearly budgets are allocated to all the departments for

disbursement of staff welfare fund in pursuance of point no.5 of the
office order IL/HO-336. In the previous oracle system, there was a
separate ledger account on which the allocated budged was credited
and then disbursed until the balance remains credit in the account. In
the new system it is not credited in the ledger account therefore the
limits utilized cannot be verified. For this reason we are unable to
verify whether the disbursements are made within allocated budget or
not.

2
Repeated point with updated information; Previous Report Reference: Para 3.1.2(b)

5
4.1.3 Advances to employees

a) Introduction: Various types of advances are granted to employees on

pre-determined basis. Approving authorities are required to approve
the advances up to the entitled amount viz. ascertained on the basis
defined in the loan policy issued vide Document No. ILP-06 (Revised)
dated 02 October 2004 for other employees and Document No. ILP-
014, dated 30 June 2006 for executives. These policies require
submission of undertakings, guarantees and mortgages for loans over
certain amounts or of certain types.

b) Issue 1: Some mistakes and errors observed in undertaking and

guarantee forms are detailed in the Annexure ‘C’.

c) Actions Taken: Cases mentioned in clause ( were returned to HR&D

Department for necessary corrections and were processed
subsequently after corrections.

4.1.4 Gratuity and Final Settlement:

a) Introduction: When an employee resigns or is terminated, his/her

gratuity is paid off as provided in the gratuity policy of the company
issued vide document number ILP-02, dated 13-05-2003 and final
settlement is paid off as per HR policy document ILP-15 dated 16-10-
2006. The procedure adopted in such case is as follows:

First of all the final settlement of employee is made by the HR, and
then it is approved by the DGM HR and concerned director (for fix
wage rate employees). Afterwards it is sent to the internal audit
department for pre-audit. Such final settlement includes the Final
Settlement Form, resignation or termination letter and his attendance
detail. The gratuity is calculated in accordance with the policy
guidelines. Internal audit department receives the documents for
verification after this procedure.

b) Issue 1: It is the responsibility of HR & D department to keep proper

control on preparation of final settlements. Some cases were found
where final settlements of some employees were prepared twice. This
indicates weaker controls over preparation of final settlements and
increases the risk of erroneous or fraudulent preparation of final
settlements. Identified cases are detailed in the Annexure ‘D’.

c) Issue 2: Final settlements of employees who remain absent from their

jobs without intimation are prepared after serving a notice to the
concerned employees and after giving certain time to them for
response as per Labour Laws and regulations. However, unreasonable
delays have been observed in preparation of final settlements of such

6
 employees in some cases. Detail of such cases has been given in
Annexure ‘E’.

d) Issue 3: The final settlements of leaving employees are prepared and

checked by the HR&D department before getting approval from the
authorities and sending them for pre-audit, calculation mistakes are
often observed in some cases. Few examples of such cases are
detailed in the Annexure ‘F’.

e) Actions Taken:

• Cases referred to in clause ( were stopped, because final

settlements of those employees had already been processed.
However, one case relating to spinning division mentioned in Serial
8 of Annexure ‘D’ was processed second time and earlier final
settlement was cancelled on approval of Director Sourcing.

• Cases referred to in clause ( were processed.

• Cases referred to in clause ( were processed after making

corrections and after discussing with relevant personnel in HR&D
Department.

4.1.5 Reimbursement of Traveling Expenses:

a) Introduction: Traveling expenses are reimbursed on specified rates

for actual mileage to the executives against out door duty. One side
mileages for tour to Lahore and Islamabad are fixed at 175 km and 350
km respectively. However, for any other location, it is taken on actual
basis.

b) Issue 1: For the verification of reimbursement claims against traveling

expenses, we do not have any reasonable measures to verify the
actual distance claimed by the employee.

c) Issue 2: Errors identified regarding reimbursement claims have been

detailed in Annexure ‘G’.

4.1.6Miscellaneous errors: Some miscellaneous errors and

mistakes in bills/documents have been reported in the Annexure ‘H’.

Actions Taken: Cases mentioned were processed after making

corrections and after discussing with relevant personnel in HR&D
Department.

5. POST AUDIT SERVICES

7
5.1 Account Payable Vouchers

5.1.1 3
Narration Mistakes And Other Clerical Mistakes

a) Introduction: Narrations as well as other particulars on vouchers

must show actual facts and figures. Although the narration mistakes do
not adversely affect the financial aspect of the transaction but
somehow they result in delivering wrong information and may cause
problems in subsequent tracking of information. We do not reject such
vouchers, but as internal auditor we prefer to intimate the same to
management for future betterment and same is not to be repeated in
future.

b) Issue 1: Clerical mistakes are found recurrently in the vouchers. Some

examples of such mistakes are given in the Annexure ‘I’.

c) Issue 2: Narration mistakes are also found in ERP payment advices

generated by HR&D Department. For example, advice number HR-
081200198 can be viewed in which employee number was wrongly
mentioned in the description.

d) Actions Taken: Vouchers containing narration mistakes are not

rejected usually. However, if such mistakes are regarding some key
information such as export invoice number or employee number then
they are returned for corrections. Payment Voucher mentioned in Sr.11
of the Annexure ‘I’ was rejected because cheque was wrongly prepared
in the name of some other employee.

5.1.2 Double Payment Due Insufficient System Control

a) Introduction: Advances to suppliers are paid in normal course of

business and all such advances are booked payable through
Prepayment Invoices if advance is allowed by the corresponding PO. If
the PO allows prepayment but a payable based on Standard invoice is
already generated, the system does not allow prepayment
subsequently. In case, the PO does not allow any advance to supplier,
Prepayment is not allowed by the system.

b) Issue 1: A case was identified where system allowed both Prepayment

and Standard invoices against a single PO. Resultantly, the payment
was also made with double amount erroneously. Purchase Order
number 31306 in Hosiery Division allowed Prepayment of Rs.42180
against purchase of certain store items but a Standard Payable invoice
of Rs.41180 was posted against this PO vide Account Payable Voucher
No.9030416. Subsequently, again a Prepayment invoice was posted
against the same PO through Account Payable Voucher No.9030636.
3
Repeated point with updated information; Previous Report Reference: Para 4.1.1(b)

8
 System allowed payment against both types of invoices and payment
was made with dual amount, i.e., Rs.80443. This issue was identified
on date subsequent to end of period covered by this report.

c) Action Taken: The payment was stopped and subsequently only

payment against standard invoice was made.

5.1.3 Grouping Of Party Accounts In Wrong Heads

a) Introduction: The accounts of suppliers have been categorized with

respect to the items being purchased from them. This grouping is
helpful, at the time of verification of payments, to determine the
applicable rate of tax to be withheld at source or whether tax is not to
be deducted.

b) 4
Issue 1: It has been observed that accounts of many suppliers have
been grouped in wrong heads. This creates confusion in understanding
the nature of transactions with those parties and their liability of WHT.
The identified cases have been detailed in Annexure ‘J’.

c) Actions Taken: This issue was discussed with relevant person in

accounts department and grouping heads of parties are being
corrected gradually. List given in annexure has also been forwarded to
the said person. Vouchers were passed as it has no effect on the
amounts and validity of payments.

5.1.4 Problems with Purchase Orders (POs)

a) Introduction: Purchase Orders (POs) are generated by sourcing

department for every item to be purchased and are approved by the
authority. The whole process of purchase is based on the terms of
approved PO. Prospective supplier, details of goods, quantity, shipping
terms, billing terms, payment terms and other terms and conditions
relevant to purchase are specified in the PO.

b) 5
Issue 1: Sometimes PO shows conflict in terms and conditions shown
in notes. For example, PO shows tax at certain rate is to be deducted
on payments against particular purchases but subsequently this note is
not followed at the time of payment because the transaction/supplier
was exempted from deduction of WHT. Similarly, payment terms have
also been found conflicting on same PO. Some known examples of
such cases have been detailed in Annexure ‘K’.

Recommendation: The note of tax to be withheld should be with

respect to subject matter of the purchase transaction instead of party.
4
Repeated point with updated information; Previous Report Reference: Para 4.1.2(b)
5
Repeated point with updated information; Previous Report Reference: Para 4.1.3(b)

9
c) Issue 2: Sometimes PO wrongly shows Sales Tax to be paid at a
certain rate on some purchases. In such cases actually subject matter
is either exempted from tax or tax is payable on some different rate.
Similarly, Sales Tax and Excise Duty payable on purchase are not
mentioned in the PO. Some known cases have been detailed in
Annexure ‘L’.

d) Issue 3: PO is prepared prior to any purchase transaction and then

purchase is done accordingly. However, cases were found in which PO
was prepared subsequent to purchase. Although, system does not
allow preparation of GRN prior to PO date but DCN/Invoice and IGP are
evident that purchase was done before preparation of PO. Following
two cases can be viewed for the reference:

DCN / Invoice
Sr. GRN No. PO No. IGP No. IGP Date PO Date
Date

13-09- 13-09-
1 23679 19194 3463 12-09-2008
2008 2008

18-02- 20-02-
2 2636 2058 1017 11-02-2009
2008 2009

e) Actions Taken: Cases mentioned in clauses ( to ( had on financial

effect on particular transactions therefore the vouchers were passed
on basis of confirmed information regarding the individual cases.
Implausible terms on PO are not followed while processing the actual
transaction.

5.1.5 Problems With Goods Received Notes (GRNs)

a) Introduction: Purchases are booked through ‘Account Payable

Vouchers’ which should be supported by various documents such as
purchase orders, delivery challans, inward gate passes, suppliers’
invoices, goods received notes and other evidences of purchase. The
value of transaction is determined primarily on the basis of goods
received as per Goods Received Note (GRN) and rates approved as per
Purchase Order (PO). The additional supports just confirm the
occurrence and accuracy of the purchase transactions.

With the introduction of the new system, PO and GRN are prepared in
new system and general controls are applied within the system. For
example, goods received as per GRN should have same specifications
as approved in the relevant PO.

10
 b) 6
Issue 1: GRN shows the details of relevant PO against each quantity
received. This information includes the total quantity ordered as per
PO, quantity received and balance quantity on the date of GRN. In this
regard following points have been noted:

• In the columns showing PO details, GRNs are showing zero

balance quantity after receipt of any quantity.

• Received quantity is shown as current receipt in both columns

that are showing PO details and GRN details

GRNs against PO # 22067 can be viewed for reference.

Recommendation: We suggest that information regarding the relevant

PO in the GRN may be shown as follows:

• The column showing received quantity must show the

cumulative receipt to the date of GRN because the current
received quantity is shown in columns showing GRN details.

• The column showing balance quantity of the PO must show the

balance of PO on the date of GRN, that is, the total quantity
ordered by PO as reduced by cumulative receipt to the date of
GRN.

c) Issue 2: Considerable gaps have been observed between receipt of

goods and preparation of GRN. Identified cases have been detailed in
Annexure ‘M’

d) Issue 3: Some miscellaneous issues regarding preparation of GRNs in

Spinning and Energy Divisions are detailed in Annexure ‘N’.

e) Actions Taken: These problems are related to format of document

which needs corrections and other ancillary information but had no
direct financial effect on respective transactions. Therefore, the
vouchers were passed.

5.1.6 Booking of Advances / Prepayments

a) Introduction: Prepayments are made in the normal course of

business against some purchases. As the ERP system requires every
payment to be booked as payable at first and no amount can be paid
directly, the Account Payable Vouchers, for the purpose of payment,
are prepared with following two invoice types:

6
Repeated point; Previous Report Reference: Para 4.1.4(b)

11
 • Standard Invoice Type; these are related to standard
payments against invoices of suppliers in the normal course of
business.

• Prepayment Invoice Type; these are related to prepayments

against purchases to be made afterwards, against purchase
orders allowing the advance payments to vendors.

The system allows prepayments for those purchases only for which a
Purchase Order (PO) is prepared. For those purchases or hiring of
services which are without PO, prepayment voucher is not allowed by
ERP.

b) 7
Issue 1: Sometimes some other advances are required to be paid for
which no PO is prepared or advance payment is not allowed by the PO.
For example, advance payment of clearing charges to Customs
Authorities. In such cases system does not allow a prepayment
voucher. To book such prepayments/advances the following procedure
is adopted:

• A dummy invoice is booked as payable in that supplier’s

account

• Once the invoice is posted, the system allows both, a debit

note and payment, against that invoice.

• Payment is made against that invoice

• A debit note is posted with same amount which stands as

debit balance (advance payment) in the supplier’s account.

Booking of dummy invoices for advance purpose is overriding the

system’s control that every payable should be booked on valid
supplier’s invoice. Although no case indicating any error or fraudulent
has been observed but this practice provides a loophole for errors and
chance of fraud. Advances are being paid to Super Care Services
(Janitorial Contractor) in this way.

Recommendation: A proper procedure to account for such advances /

prepayments should be formulated with implementation of proper
controls and approval of such transaction. Instead of dummy invoices,
some specific document may be generated with proper back up
records. Our recommendation in this regard has already been
discussed in detail in an e-mail. Exract of relevant portion is given in
Annexure ‘O’

7
Repeated point; Previous Report Reference: Para 4.1.5(b)

12
 c) Actions Taken: As mentioned in above, we have passed our
recommendation but cases are still found and procedure is still
followed. However, the payments cannot be stopped as there is no
alternative process formulated yet.

5.1.7 8
Long term loans are booked as short term loans:

a) Issue: All the Long Term Loans, being issued to employees in respect
of Loan Policy as mentioned in para , are being booked under the head
Short Term Loans.

b) Actions Taken: As discussed in previous report the issue was

discussed with relevant person in accounts department and it was
stated that this issue is in their consideration and it requires
modifications in the payroll system too. Vouchers were passed
highlighting the issue. This issue still exists in the vouchers.

5.2 Payment Vouchers

5.2.1 Deduction of Withholding Tax (WHT) at source

c) Introduction: Company is also liable to deduct tax on certain

payments, in observance of provisions of Income Tax Ordinance 2001.
Tax is deducted on payments to suppliers on rates specified by the
said Ordinance.

d) Issue 1: The Company does not deduct tax on payments to certain

contractors. For example, packing, loading and mixing contractors in
Spinning Division. Similarly, tax not withheld on payments to
contractors providing goods transportation services in the Hosiery
Division. Whereas, Company is liable to deduct tax u/s 153 of Income
Tax Ordinance, 2001 on every amount exceeding Rs.10,000 against
rendering of services.

e) 9
Issue 2: Tax is not being deducted at source, from the payment made
to Faisal Transport Company, against transport services for Interloop
Spinning Division. Whereas the company is liable to deduct tax @2% of
payment for services u/s 153 of Income Tax Ordinance. The reason
provided to us was that the service charges (Rs.27,000) have been
agreed as without deduction of tax at source in the relevant contract.
In our opinion any contract against any provisions of law is void from
ab initio in accordance with provision of Contract Act, 1872 of Pakistan.
The company should revise the contract and deduct the tax at source
to discharge its liability under the law.

8
Repeated point; Previous Report Reference: Para 4.1.7
9
Repeated point; Previous Report Reference: Para 4.2.2(c)

13
 f) Actions Taken: Vouchers were passed as per previous practice as the
payments cannot be stopped.

6. STORES AUDIT OF SPINNING AND ENERGY DIVISIONS

6.1 Problems With POs and GRNs

6.1.1 Problems regarding POs and GRNs, during the store audit of
Spinning and Energy Divisions, are the same as discussed in
Paragraphs and above, combined with problems regarding payable
vouchers.

6.2 Issues Regarding Gate Passes

6.2.1 Manual Gate Passes are being prepared in Spinning and Energy
divisions. The issue is that these Gate Passes are being prepared.
Manual Gate Passes are simple preprinted slips which are filled
manually and often mistakes occur therein. Moreover, these slips being
used for gate passes are not even pre-numbered serial wise. This
practice results to no trace of records regarding how many gate passes
have been prepared in a day and how many were cancelled or re-
prepared for correction.

6.2.2 Some miscellaneous cases of wrong IGP have been given in

10

Annexure ‘P’.

At the end we place on record our appreciation for the cooperation extended
to us by the management and staff during our routine work.

Truly yours,

Hyder Bhimji & Co.

Chartered Accountants

CC:
• Executive Director Finance
• Senior Manager Accounts and Taxation

10
Repeated point with updated information; Previous Report Reference: Para 5.3.2

14
 Report Ref: Part A; Scope Overview Annexure ‘A’

INTERLOOP LIMITED

SCOPE FOR INTERNAL AUDIT

Following audit verifications were undergone, keeping in mind the intention of

management towards internal audit services.

i. Pre-audit Services:

Pre-audit services of Hosiery Division include the following areas:

i- Cash payments of HD-I & II

- Bills relevant to HR department
1 Final settlement bill
2 Gratuity payment
3 Arrears of salaries
Reimbursement of traveling expenses
4 by executives
5 LFA bills
6 Advances to employees
7 Welfare fund
8 Medical bills
9 Casual staff wages
10 Expenses relevant to project care
11 Work allowance
12 Unpaid salaries

- Bills relevant to Admin. Department

1 Mess bills
2 Janitorial services bills
3 Hired transport bills
4 Cycle stand bills
5 Fuel bills
Repair and maintenance bills of
6 vehicles
7 Drinking water bills
8 ERP Guests entertainment bills
Reimbursement of miscellaneous
9 expenses
10 Staff entertainment bills

15
 - Bills relevant to Corporate Department
1 Corporate kitchen bills
2 Fuel bills of vehicles
Reimbursement of staff traveling
3 expenses
4 Miscellaneous expenses

- Bills relevant to City office/ Domestic Sale

Division
1 Reimbursement of expenses

Pre-audit services of Spinning & Energy Divisions include the following areas:

Pre-audit of

1 Wages And Salaries

2 Overtime Payments
3 Gratuity Payments
4 Loans And Advances
5 Final Settlements
6 Badlee Payments
7 Arrears
8 Medical Bills
9 Welfare Bills
1
0 LFA
1
1 Contractors' Payments For
1 Loading Unloading
2 Packing
3 Mixing
4 Canteen
5 Conveyance

1
2 Other payments
1 Administrative, Entertainment And
Sundry Expenses
2 Construction And Repairing Bills
3 Brokers' Commission Bills
4 Cotton Fare (Bilty Payments)

1
3 Stores
1 Goods receipt notes
(GRN)
1
4 Cotton Appraisal Statements

16
Above mentioned areas are audited in the context of company policies, financial
powers of authorities and already running practices.

17
ii. Post- Audit Services:

a) Accounts Payable Module:

• Account Payable Vouchers
• Account Payable Vouchers (FCY)
• Payment Vouchers
b) Accounts Receivable Module:
• Account Receivable Vouchers
• Account Receivable Vouchers (FCY)
• Receipt Vouchers
c) Cash Management:
• Fund Transfer Voucher
d) Inventory Management:
• GRNs (Spinning Stores)
e) General Ledger (GL):
• JVs

iii. Physical verification of Work-In-Process:

Physical verification of stock in process is done on the 1st day of each month. The
physically available stock is verified from stock lists provided by the production
department.

18
Report Ref: Para Annexure ‘B’

Requirements Regarding Definition Of The Term “Head Of

Department (Hod)” are as follows:

1. A comprehensive and complete definition of the term “Head of Department

(HOD)” in relation to application of company policies.

2. A complete list of all the departments functioning in the company and their
significant sections including name of the director governing each
department.

3. A complete list of all the HODs (nominated by competent authority i.e., not
less than director concerned) in the company and their respective
departments as on the date latest preparation of said list. Please append the
copies of nomination orders duly signed by the authorities.

4. A notification is required, on timely basis, from appropriate

person/department regarding any subsequent change in the list referred to in
clause 3 above, duly approved by competent authority. In this regard, please
note that it is the right of internal auditors to be informed of any change in
management or in board of directors formally by the responsible/authorized
management personnel. The onus of giving notification, on timely basis,
regarding any said change lies with the personnel who have relation with, or
are assigned the responsibility to notify such change. The expectation is
illogical and impracticable that the internal auditors are aware of any
changes without formal intimation and that they should require formal
notifications on their own. The internal auditors may require such
notifications to clear any misunderstanding but it should not be considered
their obligation to require for changes each time.

5. A guideline regarding the work of internal auditors, up to the date of

provision of above requirements, in which HODs are being considered
approving authorities.

19
Report Ref: Para ( Annexure ‘C’

INTERLOOP LIMITED

Issues found in undertakings and

guarantee forms

Employee Loan
Sr. Remarks
Code Name Type
1 104122 M. Naveed Short Term The guarantor of the loan was already
a guarantor for another loan.
2 105014 Umer Daraz Short Term The guarantor of the loan was already
Ahmed a guarantor for another loan.
3 103460 M. Irfan Short Term Employee # of the guarantor was
wrongly written.
4 Not M. Jameel Short Term Guarantee was signed by witness and
mentioned
the actual guarantor signed at place of
on
Undertakin witness.
g
5 101734 Shafqat Masih Short Term Employee # of witness was wrongly
written.
6 703323 M. Nazir Shakir Short Term Approved amount of loan was
Rs.15,000 but guarantee form showed
Rs.10,000.
7 106200 M. Yaseen Short Term Employee # of the witness was
wrongly written.
8 704708 M. Irfan Short Term Employee # of the witness was
wrongly written.
9 700306 M. Anwaar Short Term Name of borrower was wrongly
written.
10 100325 M. Shafiq Long Term Mortgage condition was not attached.
11 109675 Naeem Ahmed Short Term Name of the borrower was written in
stead of guarantor in the undertaking.

20
Report Ref: Para ( Annexure ‘D’

INTERLOOP
LIMITED

Double Preparation of Final Settlements

Second
Date of Date of
S Divisio Employee Audit for preparatio
r. n # Employee Name First n

1 HD-01 705950 Muhammad Asif 24-11-2008 05-12-2008

2 HD-01 706026 Muhammad Imran 06-01-2009 29-12-2008
3 HD-02 816724 Ishtiaq Ahmed 27-02-2009 23-02-2009
4 HD-02 816721 Husnain Razzaq 27-02-2009 23-02-2009
5 HD-02 814999 Nasir Ali 27-02-2009 23-02-2009
6 HD-01 705556 M. Imran 02-03-2009 09-03-2009
7 HD-01 815152 Nadeem Akhter 18-03-2009 13-03-2009
8 Spinning 108388 Shahid Imran 26-12-2008 28-01-2009

21
Report Ref: Para: ( Annexure ‘E’

INTERLOOP LIMITED

Late preparation of Final Dues related to

employees

Termination Difference in
Sr. Employee No. Absent date
date days
1 704959 25-04-2008 03-11-2008 193
2 704586 18-04-2008 03-11-2008 200
3 704316 08-04-2008 03-11-2008 210
4 703787 24-06-2008 03-11-2008 133
5 704177 27-07-2008 03-11-2008 100
6 702972 28-10-2008 01-01-2009 66
7 700375 14-08-2008 01-01-2009 141
8 105089 13-10-2008 05-01-2009 85
9 701134 30-10-2008 01-01-2009 64
10 104697 24-10-2008 05-01-2009 74
11 704686 20-08-2008 03-11-2008 76
12 705168 09-08-2008 27-10-2008 80
13 705013 12-08-2008 03-11-2008 84
14 705238 01-08-2008 03-11-2008 95
15 704888 01-08-2008 03-11-2008 95
16 704089 01-08-2008 03-11-2008 95

22
Report Ref: Para ( Annexure ‘F’

INTERLOOP
LIMITED
Issues Related to Final
Settlements

DATE OF EMPLOY AMOUNT

SR Divisio ACTUAL DIFFERE
RELIEVIN EE BILLED BY REMARKS
NO. n AMOUNT NCE
G NUMBER H.R.
Rupees Rupees Rupees
04-11-
1 Spinning 109958 (6058) (6388) 330 Uniform was not deducted
2008
22-11- Unpaid salary was wrongly included in
2 HD-1 103847 2210 2270 (60)
2008 calculation
04-12- Gross salary was wrongly used for
3 Spinning 109827 (6000) (5815) (185)
2008 calculation
01-01- Gross salary was wrongly used for
4 Spinning 110030 (6630) (6830) 200
2009 calculation
Total earning was less than minimum
20-01-
5 HD-02 705397 4054 4197 (143) wage but included in the calculation of
2009
Final Settlement
20-01-
6 HD-02 814779 5596 5827 (231) Mistake in calculation of working days
2009
23-01- Mistake in calculation of over time
7 HD-02 814935 6404 6577 (173)
2009 hours
23-01- Mistake in calculation of over time
8 HD-02 814847 5192 6288 (1096)
2009 hours
25-01-
9 HD-02 705424 4054 3815 239 Mistake in calculation of working days
2009
26-01- Annual leaves were not included in
10 HD-02 107620 5331 7754 (2423)
2009 calculation
02-02-
11 HD-02 815025 6923 6692 231 Mistake in calculation of working days
2009

23
 03-02-
12 HD-02 705485 5350 5127 223 Mistake in calculation of working days
2009
11-02-
13 HD-02 815125 1615 1788 (173) Over time was not included
2009
13-02- Gross salary was wrongly used for
14 HD-02 816724 3625 3346 279
2009 calculation
16-02-
15 HD-02 815205 2769 3000 (231) Mistake in calculation of working days
2009
20-02-
16 HD-02 815212 3000 3346 (346) Over time was not included
2009

24
Report Ref: Para ( Annexure ‘G’

INTERLOOP
LIMITED

Miscellaneous Issues Related to Reimbursement Claims

S Employ
r. ee # Particulars Date Issue

1 100376 Visit to 29-12- Amount of reimbursement claim was

Islamabad 2008 wrongly calculated as Rs.5850 instead of
Rs.3900

2 107096 Visit to 23-12- Employee was entitled to lodging expenses

China 2008 @ USD 100 per day but he claimed @ USD
125 per day. Total amount of claimed as
USD 975 instead of USD 850.

3 106761 Visit to 31-12- Employee stayed for 5 nights but claimed 6

China 2008 nights stay. Amount was claimed as USD
1100 instead of USD 975.

25
Report Ref: Para Annexure ‘H’

INTERLOOP LIMITED

Miscellaneous Issues Related to HR Bills

Sr Divisi
. on Subject of bill Date Issue
1 HD-I Arrears of salary 17-12- Employee name was wrongly mentioned.
2008
2 HD-I Arrears of salary 18-12- • Figures were totaled wrongly.
2008
• Application for leave by an employee
attached as supporting was showing
wrong particulars. The payment to that
employee was stopped and claim was
cancelled subsequently.
3 Spinni Salaries of Daily 02-01- Mistakes in calculation of Working days
ng wagers (Females) 2009 and overtime hours.
4
Spinni Salaries of Daily 02-01- Mistakes in calculation of overtime hours.
ng wagers and 2009
contractual
employees
5 HD-I Arrears of salary 13-01- Figures were totaled wrongly. Rs.21058
2009 were billed instead of Rs.14484
6 HD-I Arrears of leave 12-02- Leave balance was wrongly calculated.
encashment 2009 Rs.9453 were billed instead of Rs.7953
7 HD-II Arrears of leave 12-02- Leave balance was wrongly calculated.
encashment 2009 Rs.10510 were billed instead of Rs.8110

26
Report Ref: Para ( Annexure ‘I’

INTERLOOP LIMITED

Narration Mistakes in Vouchers

Sr. Voucher
No. Voucher Type # Description of Mistake
1 Account Receivable 8060281 Quantity of goods was wrongly
Journal Voucher mentioned
2 Account Payable 8070022 Wrong employee number in
Voucher description
3 Account Payable 8070035 Wrong employee number in
Voucher description
4 Account Payable 8070735 Wrong ST invoice number
Voucher
5 Account Payable 8084487 Invoice number was wrongly
Voucher mentioned
6 Account Payable 8084493 Invoice number was wrongly
Voucher mentioned
7 Account Payable 8084531 Invoice number was wrongly
Voucher mentioned
8 Account Payable 8090948 Description of goods was wrongly
Voucher mentioned
9 Account Payable 8100993 PO # was wrongly mentioned
Voucher
10 Account Payable 8123608 Employee number and name were
Voucher wrongly mentioned.
11 Payment Voucher 9010054 Employee number and name were
wrongly mentioned.
12 Account Payable 8105737 Sales Tax Invoice number was
Voucher wrongly mentioned
13 Account Payable 8095139 Invoice date was wrongly mentioned
Voucher
14 Account Payable 8095105 Invoice date was wrongly mentioned
Voucher

27
Report Ref: Para ( Annexure ‘J’

INTERLOOP LIMITED
Booking of parties in wrong
heads

Sr. Supplier Current

Party Related to
No. Code Name Grouping Head

Clearing and
1 10077 Intertek Pakistan Other Services Forwarding
2 10106 Al Qamar Traders Other Services Yarn
Transportation
3 10156 Azad Hakeem Goods Other Services Services
4 10181 Chemsol (Pvt) Limited Store Supplies Chemical
5 10277 Global Tech. Dyes & Chem. Oil And Lubricants
6 10309 New Chemical Centre Store Supplies Chemical
Clearing and
7 10330 OOCL Pakistan Other Services Forwarding
Orient Water Services Dyes and
8 10334 (Pvt) Ltd Store Supplies Chemicals
9 10456 Rana Classic Elastic Other Services Yarn Conversion
Kuehne & Nagel (Pvt) Clearing and
10 10534 Ltd. Other Services Forwarding
Clearing and
11 10640 TCS Logistics (Pvt) Ltd. Other Services Forwarding
World Wide Clearing and
12 10686 International (Pvt) Ltd Other Services Forwarding
Dyes and
13 10741 Chem Tech Int Store Supplies Chemicals
14 10805 Pakistan State Oil Co. Store Supplies Oil and Lubricants
15 10916 A.R. Traders Store Supplies Packing Materials
Lasani Goods Transport Clearing and Transportation
16 10983 Co. Forwarding Services
17 10985 M. Yousaf & CO. Store Supplies Oil And Lubricants
18 11042 Holly Well Ent. Conversion Ser. Yarn
19 11181 Master Textile Mills Other Supplies Yarn
Akbar & Akbar Clearing and Transportation
20 11447 Associates Forwarding Services
Sitara Goods Transport Transportation
21 11467 Co. Other Supplies Services
Sealand Containers Clearing and Transportation
22 11494 Transport Co Forwarding Services

28
Report Ref: Para ( Annexure ‘K’

INTERLOOP
LIMITED

Issues Related to Purchase Order

(PO)

Sr
PO # Division Date Issue
#
1 252 Energy 15-01- Conflicting payment terms. PO allows both 100%
2009 advance and 50% advance.
2 26782 Hosiery 23-12- Conflicting payment terms. PO allows both 100%
2008 advance and 50% advance.

Terms show that PO requires tax to be deducted

at 3.5% on total payment and No tax deduction.
3 28620 Hosiery 16-01- Terms and conditions require both 3.5% tax to
2009 be deducted and 6% tax to be deducted.
4 29182 Hosiery 25-01- Conflicting payment terms. PO allows both 50%
2009 advance and 60% advance.

Terms show that PO requires tax to be deducted

at 3.5% on total payment and but subject matter
is imported material and party has provided
undertaking as well.
5 225 Energy 22-12- Conflicting payment terms. PO allows both 100%
2008 advance and 50% advance; 30% after 15 days;
10% Hydraulic test; 5% after delivery & 5% after
6 month.
6 26645 Hosiery 20-12- Conflicting payment terms. PO allows both 100%
2008 advance and 10% advance.

29
Report Ref: Para
( Annexure ‘L’

INTERLOOP
LIMITED

Issues Related to GST in Purchase Order (PO)

Sr Divisio
PO # Date Issue
# n
1 Spinnin 1797 05-12- PO shows GST @ 15% whereas; invoice shows GST @
g 2008 16%.
2 HD-I 1509 15-07- GST @ 16% and Excise Duty 1% payable in purchase
1 2008 of goods was not mentioned on PO.
3 HD-I 1721 15-08- GST @ 16% and Excise Duty 1% payable in purchase
7 2008 of goods was not mentioned on PO.
4 HD-I 1946 17-09- GST @ 16% and Excise Duty 1% payable in purchase
3 2008 of goods was not mentioned on PO.

30
Report Ref: Para ( Annexure ‘M’

INTERLOOP LIMITED

Delayed Preparation of GRNs

Difference in DCN
Sr. No Division GRN No. GRN Date DCN Date GE Date Date and GRN
Date (Days)
24-01- 21-10- 27-11-
1 Energy 321 2009 2008 2008 96
22-01- 06-01- 12-01-
2 Energy 313 2009 2009 2009 17
22-01- 27-12- 05-01-
3 Energy 317 2009 2008 2009 27
22-01- 25-12- 30-12-
4 Energy 314 2009 2008 2008 29
22-01- 20-12- 11-01-
5 Energy 315 2009 2008 2009 34
22-01- 05-01- 05-01-
6 Energy 316 2009 2009 2009 18

31
Report Ref: Para ( Annexure ‘N’

INTERLOOP
LIMITED

Miscellaneous Issues Related to GRNs

Sr GRN
Division Date Issue
# #
1 Spinning 2546 03-02- GRN shows quantity received 112.500 Kgs
2009 whereas; weight slip shows 160 Kgs
2 Spinning 1678 06-01- Delivery Challan was showing date 04-12-
2009 2008 whereas GRN was prepared on 03-01-
2009. DC date was also wrongly mentioned
on the GRN
3 Spinning 2279 01-12- DCN and IGP were showing an item received
2008 but was not entered in GRN. It was stated
that item was manually rejected without
entering in system and preparation of
rejection note. Outward Gate Pass was
obtained as evidence which was not priorly
attached with GRN.

32
 Report Ref: Para
( Annexure ‘O’

Extract from E-mail:

From: Touqeer Qamar [mailto:tqamar@interloop.com.pk]
Sent: Friday, March 13, 2009 3:41 PM
To: 'Syed Sajjad Ahmad'
Subject: Recommendations

Issue 2: In Accounts Payable, system allows prepayments for only those

purchases whose Purchase Order is prepared. For those purchases or hiring of
services which are without PO, prepayment voucher is not allowed by ERP, In that
case accounts department booked dummy invoice for advance payment and then
post a debit note with the same amount in order to stand the debit amount in the
party account. Booking of dummy invoices is overriding the system’s controls and
provides a loophole for errors and increases the chances of fraud.

Recommendation: A proper document named “Advance Payment Order” should

be created for the payments mentioned above. This document will be the
replacement of Purchase order which should contain all the terms and conditions
of the advance payment. It should be serially numbered and duly approved by the
relevant authority. A comparison of flow of transactions is provided for your
convenience.

Existing Prepayment Flow Proposed Prepayment Flow

S
r. Particulars Dr. Cr. Sr. Particulars Dr. Cr.
1 Advances to
) AP Clearing - 1) suppliers -

Party A/c - Party A/c -

Dummy invoice Entry posted on the basis of Advance
posted payment order

2
) Party A/c - 2) Party A/c -

AP Clearing - Bank A/c -

Debit Memo posted Payment made

3
) Party A/c - 3) Expense -
Advances to
Bank A/c - suppliers -
Standard invoice
Payment made applied

4
) Expense -

33
Party A/c -
Standard invoice
applied

34
Report Ref:
Para Annexure ‘P’

INTERLOOP LIMITED

Issues Related to Inward Gate Passes (IGPs)

Sr Divisi GRN
IGP # Issue
# on #
1 HD-I 2141 2672 Name of the supplier was wrongly mentioned as
9 Noor Fatima Printers whereas goods received
from Hira Tahir Printers
2 Spinni 2429 810 Quantity received as per GRN and DCN was 6
ng liters but the gate pass was showing 16.5 liters.
Gate pass was subsequently corrected.
3 Spinni 2276 694 GRN was showing goods received from Chenab
ng Mills Store. PO was also prepared with the name
of Chenab Mills Store. IGP and delivery challan
were showing supplier name as Mehran
Industrial Store. Subsequently delivery challan
from Chenab Mills Store was presented and IGP
was also changed accordingly.
4 Spinni 2759 1163 IGP was showing quantity received 1 item
ng whereas actual receipt was 6 items.
5 Spinni 2681 1064 IGP was showing quantity received 1 kg whereas
ng actual receipt was 6 kgs.
6 HD-I 2123 2158 Wrong UOM used. IGP was showing quantity
7 received 12.92 kg whereas actual receipt was
12920 kg.
7 Energy 389 193 Quantity as per GRN and DCN was 2 items but
IGP was wrongly prepared of 21 items.

35