Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 I. 1.

NON COMPLIANCE WITH PHILIPPINE ACCOUNTING STANDARDS PAS 21, Accounting for foreign currency denominated transactions a. Accounts Receivable - Dollar Transactions

Foreign currency-denominated transactions are recorded at their equivalent peso amount applying fixed exchange rate. Also, collection of these receivables were accounted for using the transaction rate regardless of the exchange rate at the time of collection, to wit:

Date S.I. # Customer FX(Gain)/Loss

S.I. Amount

Recorded O.R. date BSP Rate

Conversion Amount

2/11/10 21006 Numonyx $ 132,489.50 P6,172,685.81 3/16/10 45.73 P6,058,347.37 (P 80,951.08) 21146Numonyx 96,452.36 4,493,715.45 7/01/10 46.42 4,477,704.36 124,616.45 8/09/10 21162 Stream - India 56,012.95 2,514,981.46 9/20/10 44.25 2,478,797.09 ( 36,184.37) 8/09/10 21163 Stream India 38,773.35 1,740,923.42 9/20/10 44.25 1,715,875.83 ( 25,047.58)

b.

Year-end Dollar Conversion

Dollar deposits were not converted at the closing rate, to wit: Bank (Gain)/Loss China Bank Banco de Oro Union Bank Per Trial Balance P 2,595,986.15 6,125,583.22 113,403.31 $ 45,391.47 134,039.91 2,703.74 Per Pass book BSP Rate 12/31/2010 43.885 43.885 43.885 Peso Equivalent 12/31/2010 P 1,992,004.66 5,882,341.45 119,838.52 P ( P Criteria: Paragraph 21-23 of PAS 21 states: A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. The date of transaction is the date on which the transaction first qualifies for recognition in accordance with the International Financial Reporting Standards. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. At each subsequent balance sheet date: [PAS 21.23] Foreign currency monetary amounts should be reported using the closing rate. Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction. 603,980.48 243,241.76 6,435.21) 840,787.03 FX

Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined. 1

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Paragraph 28 of PAS 21 states: Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. Based on the above provisions, foreign currency denominated transactions should be recorded at their actual source currency amounts multiplied by the applicable prevailing exchange rate at the transactions dates. A foreign currency transaction is a transaction that is dominated or requires settlement in a foreign currency, including transactions arising when an entity: (a) Buys or sells goods or services whose price is dominated in a foreign currency ; (b) Borrows or lends funds when the amount payable or receivable are dominated in foreign currency ; or (c) Otherwise acquires or dispose of assets, or incurs liabilities, denominated in foreign currency. An entity shall record a foreign currency transaction, on initial recognition in the functional currency, by applying to the foreign to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. PAJE 1: Unrealized foreign exchange loss P 840,787.03 Cash in Bank P (To record foreign exchange losses on dollar accounts.) Management Disposition: 1. PAS 24, Related Party Transactions Observed situation: Included under accounts payable others are related party transactions amounting to P 7,244,613.74 for various advances from AN Managements. Criteria: PAS 24 requires that related party transactions and outstanding balances should be presented/disclosed separately in an entitys financial statements. PAJE 2: Accounts payable others Due to affiliated companies (To reclassify the account.) Management Disposition: P 7,244,613.74 P 7,244,613.74

840,787.03

2. PAS 39, Financial Instruments; Recognition and measurement, Provision for Impairment Observed situation Accounts receivable-others balance as of December 31, 2011 amounted to P 1,677,630.47. Out of this amount, 98.78% or P 1,657,124.52 were from 2010 and prior years. The company has only P 11,667,691.69 provision for impairment as of this date. Please see below for the receivable ageing:
2

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010

Age Accounts dated in the year 2010 Accounts dated in year 2006-2009 Accounts dated in year 2002-2005 Accounts dated in the year 2010 1997 and prior years

Amount P 20,505.95 80,937,472.21 57,310,594.29 3,026,346.92 4,155,104.19 P 145,429,517.61 P 346,625,509.42

Percentage 1.22 % 23.35 % 16.53 % 0.88 % 1.20 % 41.96 % 100.00 %

Criteria Par, 58 of PAS 39 requires, an entity shall assess at each balance sheet date whether there is any objective evidence that a financial asset is impaired. Impairment loss is provided when there is objective evidence that the company will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the impairment loss is determined as the difference between the assets carrying amount and the present value of estimated cash flows. Clients Comment:
3. PAS 2, Inventory Observed Situations: Below is the ageing analysis of work in progress account. P11,599,516.51 or 13.75% of these are from 2005 and prior years. This account is normally closed to Cost of Sales or if impaired, to expenses. 2005 and prior years Head Office Cebu Davao Cagayan General Santos P 9,644,574.56 P 643,148.06 740,263.53 571,530.36 11,599,516.51 P 2006-2009 24,748,325.59 P 24,654,190.65 688,187.24 1,114,381.05 62,819.87 51,267,904.4 P 2010 18,394,741.95 P 1,644,166.66 757,568.68 406,413.65 269,298.75 21,472,189.69 P Total 52,787,642.10 26,298,357.31 2,088,903.98 2,261,058.23 903,648.98 84,339,610.59

Criteria: Section 13.19 (PFRS for SMEs) Impairment of Inventories. Paragraphs 27.227.4 require an entity to assess at the end of each reporting period whether any inventories are impaired, if the carrying amount is not fully recoverable (eg because of damage, obsolescence or declining selling prices). If an item (or group of items) of inventory is impaired, those paragraphs require the entity to measure the inventory at its selling price less costs to complete and sell, and to recognise an impairment loss. Those paragraphs also require a reversal of a prior impairment in some circumstances. Recommendation The Company should review inventory on hand on periodic basis and identify any item that are obsolete, non-moving and/or overstocked. Items so identified may then be sold or set up provision for impairment. 3

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Clients Comment: I. REITERATION OF PRIOR YEARS OBSERVATIONS

Prior years audit recommendation have not been implemented Most of the findings and observations with respect to the management audit for 2009 were neither implemented nor acted upon, to wit: A. HOME OFFICE 1. Cash a. Non-preparation of bank reconciliation

No bank reconciliation or bank statements/passbooks were provided for the following accounts: Per Books Account (H.O.) Philam Savings Bank PCIB-Makati Philippine Savings Bank Global Bank Makati Philippine Veterans Bank Asia United Bank Clients Comment: The inactive accounts will be closed. b. Bank reconciliation BPI Mandaluyong Balances as of 2010 90,700.84 504,058.80 143,127.47 33,107.75 78,580.11 234,668.72 Balances as of 2009 90,654.01 504,058.80 143,127.47 33,107.75 78,580.11

As in the prior years, adjustments were not yet made on the reconciling items per bank reconciliation statements.

Account (H.O.) Per books Balance per bank reconciliation statement Difference P P

2010 6,192,472.19 P 6,759,333.99 566,861.80 P

2009 7,737,579.41 7,552,054.67 185,524.74

The bank reconciliation statement for the BPI Manadaluyong prepared by Ms. Fe included the following reconciling items without proper disposition: As of 2010 Recording errors Unrecorded deposits Outstanding checks Deposit in transit Unrecorded debit memos Systems error ( ( ( 873,405.20 7,384,983.52) 6,000.00 8,598.00) 5,683.85) ( P As of 2009 12,355.46 897,523.61 16,018,549.24) 19,261.00 5,683.85) 4

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Unrecorded disbursements: ( 292,261.55) Year 2008 Year 2009 Year 2010 Total Unrecorded Disbursements 292,261.55 292,261.55

1,065,009.04) 47,740.27 1,017,268.77 1,065,009.04

Clients Comment:

c.

Holding Written Checks

Checks were being written but not disbursed until cash was available or demand was made by the payee. These results in an understatement of cash and account payable, as the liability remains outstanding and the cash disbursed. Auditors Recommendations: Checks should be written only as cash is available, or if written and held for disbursement, an entry should be booked at each months closing, restoring cash and the related accounts payable for the amount of checks held. Preparation of bank reconciliations would be more efficient as the number of outstanding checks will be reduced. Clients Comment: d. Stale checks

Review of the Companys bank reconciliations revealed stale checks of P 905,215.57. Stale checks refer to checks which have not been encashed by the payees within a period of six months.

Auditors Recommendations: A periodic review should be performed on all outstanding checks, and a definite policy should be adopted to restore checks outstanding longer than a defined period of time to cash. This policy would reflect the Companys true cash position, in addition to strengthening controls in accounting for cash transactions. Year 2006 2007 2008 2009 2010 2009 P as of 2009 22,142.03 661,302.28 39,612.66 88,160.37 93,998.23 P 905,215.57 6,479,767.95 P 7,384,983.52 Months outstanding 48-19 36-47 24-35 12-23 6-11 0-5 % 0.30 % 8.95 % 0.54 % 1.19 % 1.27 % 12.25 % 87.75 % 100.00 %

Clients Comment: e. Cancellation of Paid documents 5

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Observation Liquidation of cash advances and its supporting documents are not effectively cancelled. Recommendation Once payments are made to vendors, all supporting voucher documentation should be stamped paid and initialled and dated by a person who is independent of the check preparation or voucher approval functions. Payment should be also only be made on the original invoice. These procedures will prevent the employee from using again the supporting documents and payment duplication. Clients Comment: f. Bank reconciling item of P 7,945,845.32

Bank reconciliation statement included a single amount of P 7,945,845.32 described as Reversal of outstanding checks and no adjustment was actually made in the books as of December 31, 2010. Auditors Recommendations: All bank reconciling items should be properly and adequately presented in the bank reconciliation statement as to the nature, timing and details of uncleared items. Clients Comment:

1.

Accounts Receivable Trade Observed Situations: a. Discrepancy in the accounts receivable trade Accounts Receivable trade per ageing Accounts Receivable - trade per schedule Difference Clients Comment: b. Accounts receivable balance of Baguio City Government P 346,623,499.48 346,390,353.96 P 233,145.52

It was noted that the account receivable from Baguio City government is not yet adjusted per clients comments on 2009 memorandum on internal accounting controls, to wit: Per books Per 2009 confirmation Difference Clients Comment: 1. Inventory Observed Situations: Discrepancy between BIR list and Inventory balance per book, to wit: Per book Raw materials P 52,799,830.68 6 P P 14,957,865.84 6,041,128.81 8,916,737.03

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Work in Process 84,339,610.59 Finished Goods 16,211,560.88 P 153,351,002.15 Less: Impairment 5,385,538.18 Per list submitted to BIR (pending) Difference Clients Comment: 2. Investments P P

147,965,464.07

As discussed in 2009, the company will book the decline in market value of the companys investments. But as of even date, no steps were taken to record the decline in value of the following investments, to wit:

a.

United Information Technologies P 150,816,000.00 9,577,571.00 13,347,074.44 12,655,410.21

Per Books Original Investment Interest on investments in 1999 2000 2001 Per Audit Original Investment Audited Financial Statement of UIT Retained Earnings ( P13,534,601 ) x 30.93% Difference

186,396,055.65 150,816,000.00

4,186,252.09)

146,629,747.91 P 39,766,307.74

PAJE 3: Comprehensive losses P 39,766,307.74 Investments P 39,766,307.74 (To record share in net losses of associated company using the equity method.) Clients Comment: b. Mimosa Country Club Shares Per books Market value Unrealized loss on Investment P P 2,745,000.00 450,000.00 2,295,000.00

PAJE 4: Unrealized loss on AFS P 2,295,000.00 Investments P 2,295,000.00 (To record decline in the market value of available for sale securities.) Clients Comment:

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010

1. Due to/from affiliates Observed Situation: Transactions affecting the company and the corresponding branch (inter-branch) accounts were frequently booked by one party and not the other, resulting to unreconciled inter-branch accounts. The Company does not reconcile its inter-company accounts with its parent company on a regular basis. Branch Cebu Davao Cagayan General Santos Home Office Books P 9,062,591.17 5,747,213.59 ( 6,592,484.75) 4,250,525.72 Branch Books Difference

P 51,328,446.71 P 61,006,064.90 ( 8,029,386.56) 413,946.96 ( 938,291.00) ( 3,867,932.49) ( 5,365,545.26) ( 1,100,758.98) P 56,451,320.39

P 12,467,845.73 P36,995,223.89 Recommendations

All inter-branch transactions should be recorded by the entities on a timely basis. The branch/party initiating a transaction should promptly inform the other branch to facilitate this process and to ensure that transactions are not missed or double-recorded. Additionally, inter-branch accounts should be reconciled on a monthly basis and the general ledger account structure should be changed to correspond with the accounts used by the Home Office. These procedures will provide for accurate inter-branch account balances and facilitate the proper elimination of inter-branch account balances upon consolidation. Clients Comment
2. Interest due to and from affiliates Observed Situation: Included in accrued expenses account of head office are interest due to/from affiliates which have not been cleared since 2003: Interest due to Cornersteel Systems Corporation (January to December 2003) Interest due to Energy Specialist Comp., Inc. (January to December 2003) Interest due to One Global Source (January to December 2003) Interest due from Cebu Branch (January to December 2003) Interest due from Davao Branch (January to December 2003 Interest due from Cagayan de Oro Branch (January to December 2003) Total Auditors Recommendations: We propose the following adjusting journal entry to correct the above errors: 8 P ( ( ( P 8,717,146.68 2,408,878.98 3,926892.38 4,129,847.99) 939,553.68) 342,251.06) 9,641,265.31

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 PAJE 5: Accrued expenses P 9,641,265.31 Due to/from Cebu Branch 4,129,847.99 Due to/from Davo Branch 939,553.68 Due to/from Cagayan de Oro Branch 342,251.06 Due to/from Cornersteel System Corp. P Due to/from Energy Specialist Comp., Inc. Due to/from One Global Source (To reclassify accrued expenses to affiliates account) Clients Comment: The company will book the proposed adjustment.

8,717,146.68 2,408,878.98 3,926,892.38

3. Customers deposit and accounts receivable deposit Observed situation As in prior years, a credit to customers deposit account and debit to accounts receivable accounts is made equivalent to the customers down payment when a new project is entered into and progress bill is rendered. This is done to recognize the receivables from the client and the customers deposit even if there is no actual cash collection. The company also debited the Accounts Receivable for Reversal account and credit Sales to accrue the down payment. This practice might result to overstatement of receivables since it is debited twice and adjustment is only made upon collection. To wit:
a)

Upon billing (Down Payment) Accounts receivable trade Customers deposit

xx xx

b)

Recognition of Sales (Down Payment) Accounts Receivable for Reversal xx Sales (To accrue sales equal to the down payment) Collection of Down Payment Cash in Bank Accounts receivable-trade (To close record down payment collection) xx

xx

xx

c) Upon completion of the project and final billing collection Accounts receivable trade xx Customers deposit xx Accounts Receivable for Reversal Sales Collection of final billing Cash in Bank xx Accounts receivable-trade (To record collection of final billing)

xx xx xx

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010

Criteria The Framework for the Preparation and Presentation and Financial Statements states that financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." Financial statements may be used by users for different purposes:

Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a longterm bank loan or debentures) to finance expansion and other significant expenditures. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business. Media and the general public are also interested in financial statements for a variety of reasons. Auditors Recommendations: We recommend that the Company follow the Philippine Accounting Standards (PAS)/Philippine Financial Reporting Standards (PFRS) to properly account for its transactions. Standard accounting practice requires a credit to customers deposit account only when collections (whether in cash or other similar forms) are received, viz: Cash xx
10

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010

Customers deposit (To record receipt of Customers Deposit)

xx

Again, standard accounting practice requires a debit to Accounts Receivable when there is a recognized sale or revenue account, viz: Accounts Receivable Trade Sales/Service income xx xx

Transaction analysis should be observed to identify the type of account involved, and then to determine whether a debit or credit to the account is required. And also there should be proper timing recognition of each transactions and balances to come up with real balances at the cut-off date. The company may use other account titles that can easily understand by its financial user and to simplify the recording of transactions such as: Account Receivable xx Sales xx (To accrue sales for the partial payment or down payment) Cash Sales (To record collection of the billings) Clients Comment Per inquiry with Ms. Josie, account receivable-trade is debited first and customers deposit account is credited to record the expected amount to be received or the down payment from the customer. Since it is probable and realizable Account Receivable for reversal is debited then to accrue sales. She added that Account Receivable for reversal will become zero upon collection of the full billing thus it has zero effect to the total Account receivable balance.
1. Due to and from Officers Observed situation: Below are various account title used for the advances to officers and payable to officers. Advances to Officers (bonuses, incentive) Notes payable at 9% p.a. Compounded interest on notes payable Accrued Expenses-others (bonuses, incentives) Advances from Officer P ( 41,052,851.19 3,500,000.00) ( 8,889,156.79) ( 9,567,070.40) ( 22,700,048.32) (P Auditors Recommendation: We propose to offset the receivable and payable to the officers. PAJE 7: Notes payable-Others P 3,500,000.00 Accrued interest on notes payable 8,889,156.79 Accrued Expenses-others 9,567,070.04 Advances from Officers 19,096,624.36 Advances to JBA/CNA P 41,052,851.19 (To offset receivable and payables to same officers.) 11 3,603,423.96)

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Clients Comment: The company will book the above adjustment.

2.

Liability accounts (H.O.) with debit balances: Observed Situation: We noted the following liability accounts (H.O.) with debit balances: 2010 A/P Fund Transfer ESCO Comfac Credit Cooperative Withholding tax payable Expanded HSBC Loan Payable P 314,797.80 P Auditors Recommendation: We recommend that the above accounts be analyzed to determine their accurate balances and proper adjustment be made to reflect current balances. Clients Comment: 2,350,000.00 P 138,185.81 486,706.33 2,978,549.44 P 2009 2,350,000.00 140,919.28 923.83 2,928,710.97

3.

Accrued Cost of Sales Observed Situation: The company, including the branches, are still crediting the accrued cost of sales account in setting up the cost of sales. This means overstating the assets and liabilities account. Details are as follows: 2010 Home Office Cebu Davao Cagayan de Oro General Santos P Auditors Recommendation: Management should require a detailed review of these accounts and make necessary adjusting entries. Under normal circumstances, cost of sales is set up with a credit to the proper asset account such as finished goods inventory and not a credit to a payable account as noted above. PAJE 8: Accrued Cost of Sales Inventory (To recognize inventory used in projects.) Clients Comment: P 42,757,150.74 P 42,757,150.74 33,026,498.11 P 1,700,613.35 2,095,263.14 5,513,530.94 421,245.20 42,757,150.74 P 2009 33,450,167.00 662,139.50 3,175,434.39 3,596,321.98 421,061.94 41,305,124.81

4.

Non-moving accounts 12

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Investments P 191,640,555.65 Due from AN Management 890,625.00 A/P Fund Transfer-ANMD ( 17,890,912.94) A/P Fund Transfer-ECSO 2,350,000.00 A/P Fund Transfer-OGI ( 650,000.00) Dividends payable ( 27,000.00) Advances from officers ( 22,700,048.32) Clients Comment: 5. Accounts and other payables Observed Situation: Schedules of the following payable accounts were not provided to the auditors. The following accounts were 76.75% of the total liabilities of the Company amounting P 498,274,210. Details of the accounts are as follows: 2010 Accounts payable trade Accounts payable Jufre Accounts payable others Total Clients Comment: According to Ms. Amor, the generation of the trade accounts payable is not available because of systems failure. They are still in the process of reconstructing the data. The Company does not prepare a detailed manual listing of outstanding invoices payable every month-end in lieu of the system generated reports. Recommendation: At the end of each month, a listing of all unpaid invoices on hand should be prepared and reconciled to the general ledger. Preparation of a detailed accounts payable listing would improve control over outstanding vendor invoices and provide management with information regarding upcoming cash disbursements needs. 6. Depreciation expense Observed Situation: Discrepancy on depreciation expense per trial balance against per lapsing schedule amounted to P 363,466.49, to wit; Depreciation expense per trial balance Depreciation expense per lapsing schedule Difference Clients Comment: A. CAGAYAN DE ORO 1. Cash in Bank Observed Situations: a. Bank Reconciliations were not supported by bank statements or pass books. 13 P 7,387,002.47 7,750,468.96 P 363,466.49 P 310,440,455 P 64,763,211 7,244,613 382,448,279 P 2009 331,257,587 65,525,550 396,783,137

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 b. Reconciling items from prior years were not yet entered in the books, to wit: Bank 2010 2009 and prior years P P P 194,579.40 16,272.00 P 40,579.40 154,000.00 P Total

Stale Checks

Union Bank RCBC One network

P 415,000.00 P

40,579.40 154,000.00 415,000.00 P P 609,579.40 16,272.00

415,000.00 P

Unrecoded deposit

RCBC P

P 291,679.02

Deposit in transitOne network Auditors Recommendation:

291,679.02

We recommend that management should monitor/review the bank reconciliation prepared by their accountant(s). Any reconciling items should be effected on the books on timely basis. Clients Comment: 1. Accounts Receivable Observed Situation: Below are the ageing of accounts. No provision for impairment was provided for the long outstanding balances. a. Age Accounts dated in the year 2010 Accounts dated in year 2006-2009 Accounts dated in year 2005 and earlier Total outstanding accounts receivable P Our analysis of Accounts Receivable trade revealed the following: Amount 8,083,173.51 841,595.19 5,263,025.18 Percentage 56.97 % 5.93 % 37.10 % 100%

P 14,187,793.88

b.

Analysis of accounts receivable-others Invoice Date 2004 2005 P P Amount 821,480.51 564,757.67 1,386,238.18 Percentage 59.26 % 40.74 % 100%

Clients Comment: 1. Advances to Officers & Employees Observed Situations: a. The following employees has significant unliquidated advances which is 79% of the total advances to officers and employees of P1,160,611.67. 14

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Bok, Retchie P 420,313.63 Dulaylungsod, Lemuel 82,646.74 Galagnara, Allain 158,166.85 Galagnara, Jerome 106,303.45 Nacua, Arien 52,252.41 Ralloma, Alexander 96,483.00 P b. 916,166.08

Test for personal advances of resigned employees were not tested because the employee alpha list was not provided. However, the following employees has significant balances: Bok, Retchie Dulaylungsod, Lemuel Galagnara, Allain Galagnara, Jerome P 96,854.95 286,563.80 56,654.47 111,686.47 551,759.69

P Clients Comment: 1.

Other Non-Current Assets includes defective units amounting to P 3,015,259.42. Observed Situation: Defective units reported have book value of P 271,756.08. No detailed review was made to determine the net realizable value of these items. Likewise, units for demo purposes issued in 1998 is still valued at P 203,712.56 and service units issued in 2004 valued at P 250,556.80, with no allowance for impairment. Clients Comment:

2.

Inter-company Balances Branch Cebu Davao General Santos Iloilo Bacolod Cagayan de Oro Books P ( ( ( P Clients Comment: 6,302,608.74 (P 4,408,565.49) 112,320.77) 110,939.99 147,906.51) 1,744,755.96 P Branch Books 311,798.63) P 502,196.71 ( 3,745,767.67 closed closed ( 3,936,074.75 P Difference 5,990,810.11 3,906,368.78) 3,633,446.90 110,939.99 147,906.51) 5,680,951.60

A. CEBU 1. Cash in Bank Observed Situation: Bank Reconciliations were not supported by bank statements or pass books. 15

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 Auditors Recommendation: We recommend that management should monitor/review the bank reconciliation prepared by their accountant(s). Any reconciling items should be effected on the books on timely basis. Clients Comment:

2.

Advances to Officers & Employees Observed Situations: a. The following resigned employees has significant unliquidated and personal advances, to wit: Personal Unliquidated Total P 23,397.75 19,928.12 2,982,194.93 9,791.19 2,419.20 21,340.85 40,527.35 3,099,599.39 P 5,359.96 30,279.48 39,626.00 20,023.93 95,289.37 P 23,397.75 19,928.12 2,982,194.93 15,151.15 32,698.68 21,340.85 39,626.00 60,551.28 3,194,888.76

Aguas, Arnold Amar,Dennis Inez, Nora Libres, Albert Magbanua, Ron Sullano, Fritz Ticar, Julious Balances below P10,000

Clients Comment:

1.

Accounts Payable Observed situation: Analysis of accounts payable trade revealed the following: Invoice Date 2005 2006 2010 P Amount 24,565.00 11,749.33 312,212.32 348,526.65 Percentage 7.49 % 3.37 % 89.14 % 100.00 %

P 2. Inter-company Balances Branch Davao General Santos Iloilo Bacolod P Cebu Books 7,600,486.34 (P 1,818,941.87 ( 1,502,920.35 1,397,363.62 12,319,712.18 (P

Branch Books 1,360,054.50) P 1,880,090.96) ( closed closed 3,240,145.46) P

Difference 6,240,431.84 61.149.09) 1,502,920.35 1,397,363.62 9,079,566.72

P Clients Comment:

16

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 A. DAVAO 1. Cash in Bank Observed Situations: a. Bank Reconciliations were not supported by bank statements or pass books. b. c. Included in the trial balance is the bank reconciliation of CSC or Cornersteel Corporation, an affiliate amounting to P 142,657.16 Reconciling items from prior years were not yet entered in the books, to wit: Bank 2010 2009 and prior years P P 9,898.40 5,000.00 14,898.40 P P Total

Stale Checks

BPI RCBC

P P

1,150.00 1,150.00

11,048.40 5,000.00 16,048.40

Unrecoded deposit Unrecoded Disbursement BPI Deposit in transit

BPI P

229,337.50 P P

P P 300.00 300.00

229,337.50

43,015.31 64,960.00

43,015.31 64,960.00 300.00 P 65,260.00

BPI P RCBC

P Auditors Recommendation:

64,960.00

We recommend that management should monitor/review the bank reconciliation prepared by their accountant(s). Any reconciling items should be effected on the books on timely basis. Clients Comment:

1.

Accounts Receivable Observed Situation: Below are the ageing of accounts. No provision for impairment was provided for the long outstanding balances. a. Our analysis of Accounts Receivable trade revealed the following: Age Accounts dated in the year 2010 Accounts dated in year 2006-2009 Accounts dated in year 2005 and earlier Total outstanding accounts receivable b. Analysis of accounts receivable-others Invoice Date Amount Percentage 17 P Amount 4,801,802.92 690,231.68 2,423,751.77 7,915,786.37 Percentage 60.66 % 8.72 % 30.62 % 100.00%

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 2002 P 437,573.43 2003 110,875.91 2004 291,598.58 2005 1,025,436.56 2006 ( 37,183.50) 2010 ( 468,950.49) P 1,359,350.49

( (

32.59 % 8.16 % 21.45 % 75.44 % 2.74 %) 34.90 %) 100.00 %

The negative balance for 2006 was explained as overpayment to JRDM Engineering, a supplier and for 2010, a deposit of Cornersteel Corporation for the account of Comfac Corporation. Clients Comment: 1. Advances to Officers & Employees Observed Situations: a. The following employees have significant unliquidated advances which is 72% of its total, 421,456.84. Bandal, Sheila Mae Beniz, Bernard Fernandez, Jeffrey Maldo, Janelli Monton, Charlie P 20,596.40 43,929.54 76,273.11 20,713.31 144,321.93 305,834.29

P b.

Test for personal advances of resigned employees were not tested because the employee alpha list was not provided. However, the following employees has significant balances: Fernandez, Jeffrey Gajelonia, Florentino Paraiso, Rene Tagaytay, Grace P 23,173.28 20,929.70 26,015.92 54,831.78 124,950.68

P Clients Comment: 1. Accounts Payable Observed situation: Analysis of accounts payable trade revealed the following: Invoice Date 2000 2004 2005 2006 2007 2009 P

Amount 473,661.36 168,473.26 114,459.51 219,330.98 19,431.75 7,500.00 1,002,856.86

Percentage 47.23 % 16.79 % 11.41 % 21.87 % 1.94 % 0.76 % 100.00 %

P 2. Inter-company Balances Branch Davao Books

Branch Books

Difference 18

Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 General Santos (P 3,393,729.51) P 3,745,767.67 P Iloilo 29,283.64 closed Bacolod ( 112,734.18) closed ( P Clients Comment: A. GENERAL SANTOS 1. Cash in Bank Observed Situations: a. b. Bank Reconciliations were not supported by bank statements or pass books. Reconciling items from prior years were not yet entered in the books, to wit: Bank 2010 2009 and prior years P P P P 32,087.78 11,855.76 43,943.54 129,260.00 41,253.76 170,513.76 P P P P 3,477,180.05 P 3,745,767.67 P

352,038.16 29,283.64 112,734.18) 268,833.10

Total

Stale Checks

Union RCBC

P P

872.13 872.13

32,087.78 12,727.89 44,815.67 129,260.00 41,253.76 170,513.76

Unrecoded deposit

RCBC Union

P P

Unrecoded Disbursement Union P Deposit in transit Union P RCBC

P P 167,237.90 167,238.90

8,030.00 477,521.68 P

8,030.00 477,521.68 167,237.90 P 644,759.58

P 477,521.68

Auditors Recommendation: We recommend that management should monitor/review the bank reconciliation prepared by their accountant(s). Any reconciling items should be effected on the books on timely basis. 1. Accounts Receivable Observed Situation: Below are the ageing of accounts. No provision for impairment was provided for the long outstanding balances. Our analysis of Accounts Receivable trade revealed the following: Age Accounts dated in the year 2010 Accounts dated in year 2006-2009 Accounts dated in year 2005 and earlier Total outstanding accounts receivable P Amount 63,136.20 6,552.00 116,394.52 186,082.72 Percentage 34.48 % 3.52 % 62.00 % 100.00%

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Comfac Corporation Memorandum on Internal Accounting Controls and Administrative Efficiency December 31, 2010 2. Advances to Officers & Employees Observed Situations: a. The following employees has significant unliquidated advances which is 80% of its total, P54,991.99. Abrao, Dennis Buensalida, Jenefil Matito, Alexis P 13,671.00 13,085.75 17,370.32 44,127.07

P b.

Test for personal advances of resigned employees were not tested because the employee alpha list was not provided. However, the following employees has significant balances: Chua, Wilma E. Matito, Alexis P P 15,141.50 62,538.49 77,679.99

1.

Inter-company Balances Branch Iloilo Bacolod P P Gensan Books 3,725.57 604,618.44 608,344.01 P Branch Books closed P closed P Difference 3,725.57 604,618.44 608,344.01

I.

Pending Documents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. VAT returns January to December 2010 Alphalist (BIR Form 1604CF and 1604E) Inventory List submitted to BIR Lapsing schedule Lease Contracts GIS/GFFS of Comfac Board Resolutions/Minutes of meeting GIS of ESCO and UIT Audited FS of ESCO Actuarial Valuation Loan agreement for the P5,000,000 loan Board resolutions/minutes of the shareholders meeting

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