July 29, 2011 AP Siak Internal Auditors P.

del Rosario Street, Cebu City Dear AP Siak: In accordance and with reference to your findings, the management has come up with the following comments and actions. 1. The controller was temporarily taking cash for personal purposes with the intention to repay the company but up to the time of Siaks examination, no repayment has occurred. To cover up cash shortages, the outstanding checks were understated during preparation of the bank reconciliation statement. Comment: We reviewed the situation and found out that the outstanding checks are really understated. Action: We will further investigate the situation and will take steps to recover the amount used for personal purposes. We will also make necessary correcting entries. In addition, an internal review will be conducted to revise some of the policies and procedures and put in place proper internal control and processes that will strengthen accountability and transparency. 2. A check issued to TAG Baligya, a regular vendor, had been recorded twice in the cash disbursements book to cover a cash shortage. Comment: A check issued to TAG Baligya was recorded twice however, we have made a correcting entry on this dated November 25, 2011. Action: We will provide the copy of the correcting entry made. 3. The company had overstated cash by transferring funds at year-end to another account but failed to record the withdrawal until after year-end. Comment: Yes, cash is overstated and theres a failure to record withdrawal until after year-end. Action: We will make adjustments in the opening balance of next accounting period by recording the withdrawals and bring the cash valance in its true amount. 4. Customers with smaller balances simply send in cash payments most of the times. The client has an automated cash receipts process, but the employee opening the cash pocketed the cash and destroyed customers remittance advices. Comment: The management agrees with the finding that the client has an automated cash receipts process, but the employee opening the cash pocketed the cash and destroyed customers remittance advices particularly to those customers with balances simply send in cash payments most of the times.

Action: The management should delegate the other duty thus, we will hire another employee to perform the duty of issuing the cash receipts. Therefore, the previous employed employee is obliged to only receive and record the cash received. In addition, a supervisor is to daily check the cash received and reconcile it with the cash receipts issued and lastly the money being collected is to be deposited to the bank. It is also the supervisors duty to frequently check the customer remittance advices as a measure to stop this malpractice. The management also should have a back-up file of all recorded cash payments so as with the cash receipts. 5. Customers with smaller balances simply send in cash payments most of the times. The client has an automated cash receipts process, but the employee opening the cash pocketed the cash and destroyed customers remittance advice that showed either an additional discount for the customer or a credit to the customers account. Comment: Yes, such fabrication of customers accounts by the collecting employees occurred. Action: We will take disciplinary actions with the employees that range from warning letters, reprimands to suspicions, cost recovery and termination of employment. 6. Cash remittances are not deposited in a timely fashion and are sometimes lost. Comment: A clear-cut policy is in place; cash remittances are deposited daily as evidenced by our deposit slips, receipts and reconciled book balances thus, not lost. Action: We will authorize you to check our deposit slips and receipts and inspect our books for reconciliation of amounts and balances. 7. The client has not recorded substantial bank service charges. Comment: The management agrees that there are unrecorded substantial bank service charges. Action: We will check our bank reconciliation statements and record all bank service charges transactions so as to achieve an accurate bank reconciliation statement. 8. Bank reconciliation is not periodically done. Comment: Yes, bank reconciliation is not periodically done. Action: We will make sure that business transactions regarding book reconciliation items are updated so as that bank reconciliations will be periodically done. 9. Disbursement have occurred without proper approval. Comment: The management agrees that there are disbursement that have occurred without proper approval. Action: The management will then not process disbursements unless the proper approval is attached.

10. The client violates working capital covenants with a lending institution. Comment: Yes, the company have violated working capital covenants with a lending institution. Action: We will conduct proper investigation on the matter set forth and apply necessary measures to correct and avoid, in the forth coming years, such unlikely behavior. We look forward to meeting you for further discussions regarding the matters set forth. Sincerely, Carel Mae L. Cabaron Manager