Chandler Bing Co.

273 Birch St. Lancaster 1

Manila
October 1,2019

The Board of Directors

Friends System Inc.
Philippines

Dear Mr. Geller,

We have finished examining the financial statements for the year ended December 31,2018
and have rendered an opinion at September 30,2019. During our audit we noted certain matters
involving the internal control system of the company that are presented for your consideration. We
evaluated the system as required by the general accepted auditing standards. Our evaluation may not
bring light to all the weakness of the system that exists. However, we aim to make comments and
suggestions regarding certain conditions found during the audit, that we hope will be useful to the
management.

We have not performed any substantial auditing procedures beyond the date of our
aforementioned report on the company’s financial statements. This letter is solely for the internal
information of the management.

Petty cash fund

During our audit we have found that there is no maximum amount for individual disbursements from
petty cash fund is established by the company. This may result to theft, misuse and additional
expenditures.

We suggest that the company should use imprest system wherein a maximum/fixed amount of cash is
decided for the day-to-day disbursements. All disbursements should be documented with receipts
also, appoint an individual to be custodian of the petty cash fund. This will help control and minimize
costs.

Collection

We have test examined the cashed from collections by an employee and found out that the checks
endorsed were blank. Hence, anyone can encash the checks endorsed which will result to loss.

We suggest that the company should pre-number checks and stamp checks “for deposit only” and list
the checks on a log book.
Payroll

We have seen the review of payroll summaries from start of the month to the end and showed that no
deductions are sometimes deferred upon instructions of the office manager who concedes to officers
or employees’ requests for deferment. Overpayment can be a result of this.

We suggest to have one person prepare the payroll, another authorize it, and another create payments,
to avoid negligence or failing to remember by the employees. Or at least insist on having someone
review and authorize the payroll before payments are sent to employees.

Computation of withholding taxes

The computation of withholding taxes checked during interim work, were not in accordance with
semi-monthly withholding table. Misstatement can result to overpayment or underpayment to the bir
which may lead to penalties.

We suggest that the company must assign someone that would double check the computation of
withholding taxes and reconcile with the semi-monthly withholding table.

Journal Entries

We have seen that the entries on the books are not made on a timely basis. This may result to
misstatements of account balances because the records will not reflect the actual balances on hand.

We suggest that entries should be made upon occurrence and there should be a supervisor who
reviews documents, adjustments, entries, reconciliations, completeness, accuracy and numerous other
control procedures in the cycle.

Purchases

Purchases commitments were not recorded in any form. Because of this income may be overstated
and liabilities may be understated. The company may not also determine if it is committed to
purchases at more than current prices or in excess of requirements which may result in a loss to the
company.

We suggest to record commitments in written form and in order to identify unrecorded purchase
commitments you should :

a) Review the steps taken by the management to identified significant purchase commitments;

b) Request from suppliers details of any purchase commitments outstanding as of year end;

c) Review selected invoices received.

Control on documents

There is no control to ensure that all the purchases are reviewed and authorized by a responsible
official also identification of customers is not properly recorded. If not checked misstatement may
occur.

We suggest to assign an individual to review purchases documents and there should be a procedure
that include records of the employees who created, changed and approved documents so that the
company can avoid mistakes.
Designation of tasks

The inventory custodian or person who have access to inventories also prepare or check the shipping
record. (e.g. delivery receipts). This may result to overstatement of sales and accounts receivable
because they can introduce fictitious shipping records to cover up inventory shortages.

Please consider assigning another individual for the preparation of shipping documents and increase
the extent of the following year end procedures:

a) Review or prepare an overall reconciliation of beginning inventories, recorded purchases,

sales and ending inventories.

b) Review unexplained shortages as a result of the physical inventory count.

******

We would be pleased to discuss these comments and recommendations with you anytime.

Respectfully yours,

Rachel Green