interloop ia report dec-feb 2008

April 11, 2023

The Executive Director (Business Improvement),Interloop LimitedFaisalabad

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

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.

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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 Vouchers

1. Payment Vouchers 2,751

2. Account Payable Vouchers 9,576

3. Receivable Vouchers 368

4. Receipt Vouchers 1,340

5. Funds Transfer Vouchers 347T o t a l 14,382

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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) 1Issue 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 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) 2Issue 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

1 Repeated point with updated information; Previous Report Reference: Para 3.1.1(b)2 Repeated point with updated information; Previous Report Reference: Para 3.1.2(b)

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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.

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 (b) 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

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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 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 (b) 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 (c) were processed.

Cases referred to in clause (d) 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’.

4.1.6 Miscellaneous 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

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5.1 Account Payable Vouchers

5.1.1 3Narration 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. 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.

3 Repeated point with updated information; Previous Report Reference: Para 4.1.1(b)

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b) 4Issue 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) 5Issue 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.

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:

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

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

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

e) Actions Taken: Cases mentioned in clauses (b) to (d) 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)

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)

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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.

b) 6Issue 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)

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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) 7Issue 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’

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 8Long 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 4.1.3, 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.

7Repeated point; Previous Report Reference: Para 4.1.5(b) 8Repeated point; Previous Report Reference: Para 4.1.7

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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) 9Issue 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.

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 5.1.4 and 5.1.5 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 10Some miscellaneous cases of wrong IGP have been given in Annexure ‘P’.

9 Repeated point; Previous Report Reference: Para 4.2.2(c)10 Repeated point with updated information; Previous Report Reference: Para 5.3.2

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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

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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 department1 Final settlement bill2 Gratuity payment3 Arrears of salaries4 Reimbursement of traveling expenses by executives5 LFA bills6 Advances to employees7 Welfare fund8 Medical bills9 Casual staff wages10 Expenses relevant to project care11 Work allowance12 Unpaid salaries

- Bills relevant to Admin. Department1 Mess bills2 Janitorial services bills3 Hired transport bills4 Cycle stand bills5 Fuel bills6 Repair and maintenance bills of vehicles7 Drinking water bills8 ERP Guests entertainment bills9 Reimbursement of miscellaneous expenses10 Staff entertainment bills

- Bills relevant to Corporate Department1 Corporate kitchen bills2 Fuel bills of vehicles

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3 Reimbursement of staff traveling expenses4 Miscellaneous expenses

- Bills relevant to City office/ Domestic Sale Division1 Reimbursement of expenses

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

Pre-audit of

1 Wages And Salaries2 Overtime Payments3 Gratuity Payments4 Loans And Advances5 Final Settlements6 Badlee Payments7 Arrears8 Medical Bills9 Welfare Bills10 LFA11 Contractors' Payments For

1 Loading Unloading2 Packing3 Mixing4 Canteen5 Conveyance

12 Other payments1 Administrative, Entertainment And Sundry Expenses2 Construction And Repairing Bills3 Brokers' Commission Bills 4 Cotton Fare (Bilty Payments)

13 Stores1 Goods receipt notes (GRN)

14 Cotton Appraisal Statements

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

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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.

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Report Ref: Para 2.1.1 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.

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Report Ref: Para 4.1.3 (b) Annexure ‘C’

INTERLOOP LIMITED

Issues found in undertakings and guarantee forms

Sr.Employee

Loan Type RemarksCode Name

1 104122 M. Naveed Short Term The guarantor of the loan was already a guarantor for another loan.

2 105014 Umer Daraz Ahmed Short Term The guarantor of the loan was already a guarantor for another loan.

3 103460 M. Irfan Short Term Employee # of the guarantor was wrongly written.

4 Not mentioned on Undertaking

M. Jameel Short Term Guarantee was signed by witness and the actual guarantor signed at place of witness.

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.

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Report Ref: Para 4.1.4(b) Annexure ‘D’

INTERLOOP LIMITED

Double Preparation of Final Settlements

Sr. Division Employee # Employee NameDate of Audit

for FirstSecond Date of

preparation

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

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Report Ref: Para: 4.1.4 (c) Annexure ‘E’

INTERLOOP LIMITED

Late preparation of Final Dues related to employees

Sr. Employee No. Absent date Termination date Difference in days

1 704959 25-04-2008 03-11-2008 1932 704586 18-04-2008 03-11-2008 2003 704316 08-04-2008 03-11-2008 2104 703787 24-06-2008 03-11-2008 1335 704177 27-07-2008 03-11-2008 1006 702972 28-10-2008 01-01-2009 667 700375 14-08-2008 01-01-2009 1418 105089 13-10-2008 05-01-2009 859 701134 30-10-2008 01-01-2009 64

10 104697 24-10-2008 05-01-2009 7411 704686 20-08-2008 03-11-2008 7612 705168 09-08-2008 27-10-2008 8013 705013 12-08-2008 03-11-2008 8414 705238 01-08-2008 03-11-2008 9515 704888 01-08-2008 03-11-2008 9516 704089 01-08-2008 03-11-2008 95

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Report Ref: Para 4.1.4 (d) Annexure ‘F’

INTERLOOP LIMITED

Issues Related to Final Settlements

SR NO. Division DATE OF

RELIEVINGEMPLOYEE

NUMBERAMOUNT

BILLED BY H.R.ACTUAL AMOUNT DIFFERENCE REMARKS

Rupees Rupees Rupees 1 Spinning 04-11-2008 109958 (6058) (6388) 330 Uniform was not deducted

2 HD-1 22-11-2008 103847 2210 2270 (60) Unpaid salary was wrongly included in calculation

3 Spinning 04-12-2008 109827 (6000) (5815) (185) Gross salary was wrongly used for calculation

4 Spinning 01-01-2009 110030 (6630) (6830) 200 Gross salary was wrongly used for calculation

5 HD-02 20-01-2009 705397 4054 4197 (143) Total earning was less than minimum wage but included in the calculation of Final Settlement

6 HD-02 20-01-2009 814779 5596 5827 (231) Mistake in calculation of working days

7 HD-02 23-01-2009 814935 6404 6577 (173) Mistake in calculation of over time hours

8 HD-02 23-01-2009 814847 5192 6288 (1096) Mistake in calculation of over time hours

9 HD-02 25-01-2009 705424 4054 3815 239 Mistake in calculation of working days

10 HD-02 26-01-2009 107620 5331 7754 (2423) Annual leaves were not included in calculation



13 HD-02 11-02-2009 815125 1615 1788 (173) Over time was not included

14 HD-02 13-02-2009 816724 3625 3346 279 Gross salary was wrongly used for calculation

15 HD-02 16-02-2009 815205 2769 3000 (231) Mistake in calculation of working days

16 HD-02 20-02-2009 815212 3000 3346 (346) Over time was not included

19

Report Ref: Para 4.1.5 (c) Annexure ‘G’

INTERLOOP LIMITED

Miscellaneous Issues Related to Reimbursement Claims

Sr. Employee # Particulars Date Issue

1 100376 Visit to Islamabad 29-12-2008 Amount of reimbursement claim was wrongly calculated as Rs.5850 instead of Rs.3900

2 107096 Visit to China 23-12-2008 Employee was entitled to lodging expenses @ 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 China 31-12-2008 Employee stayed for 5 nights but claimed 6 nights stay. Amount was claimed as USD 1100 instead of USD 975.

20

Report Ref: Para 4.1.6 Annexure ‘H’

INTERLOOP LIMITED

Miscellaneous Issues Related to HR Bills

Sr. Division Subject of bill Date Issue

1 HD-I Arrears of salary 17-12-2008 Employee name was wrongly mentioned.

2 HD-I Arrears of salary 18-12-2008 Figures were totaled wrongly.

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 Spinning Salaries of Daily wagers (Females)

02-01-2009 Mistakes in calculation of Working days and overtime hours.

4 Spinning Salaries of Daily wagers and contractual employees

02-01-2009 Mistakes in calculation of overtime hours.

5 HD-I Arrears of salary 13-01-2009 Figures were totaled wrongly. Rs.21058 were billed instead of Rs.14484

6 HD-I Arrears of leave encashment

12-02-2009 Leave balance was wrongly calculated. Rs.9453 were billed instead of Rs.7953

7 HD-II Arrears of leave encashment

12-02-2009 Leave balance was wrongly calculated. Rs.10510 were billed instead of Rs.8110

21

Report Ref: Para 5.1.1 (b) Annexure ‘I’

INTERLOOP LIMITED

Narration Mistakes in Vouchers

Sr. No. Voucher Type Voucher # Description of Mistake1 Account Receivable Journal

Voucher8060281 Quantity of goods was wrongly mentioned

2 Account Payable Voucher 8070022 Wrong employee number in description

3 Account Payable Voucher 8070035 Wrong employee number in description4 Account Payable Voucher 8070735 Wrong ST invoice number5 Account Payable Voucher 8084487 Invoice number was wrongly mentioned6 Account Payable Voucher 8084493 Invoice number was wrongly mentioned7 Account Payable Voucher 8084531 Invoice number was wrongly mentioned8 Account Payable Voucher 8090948 Description of goods was wrongly mentioned9 Account Payable Voucher 8100993 PO # was wrongly mentioned10 Account Payable Voucher 8123608 Employee number and name were wrongly

mentioned.11 Payment Voucher 9010054 Employee number and name were wrongly

mentioned.12 Account Payable Voucher 8105737 Sales Tax Invoice number was wrongly mentioned13 Account Payable Voucher 8095139 Invoice date was wrongly mentioned14 Account Payable Voucher 8095105 Invoice date was wrongly mentioned

22

Report Ref: Para 5.1.3 (b) Annexure ‘J’

INTERLOOP LIMITED

Booking of parties in wrong heads

Sr. No.

SupplierCurrent Grouping Head Party Related to

Code Name

1 10077 Intertek Pakistan Other Services Clearing and Forwarding2 10106 Al Qamar Traders Other Services Yarn3 10156 Azad Hakeem Goods Other Services Transportation Services4 10181 Chemsol (Pvt) Limited Store Supplies Chemical5 10277 Global Tech. Dyes & Chem. Oil And Lubricants6 10309 New Chemical Centre Store Supplies Chemical7 10330 OOCL Pakistan Other Services Clearing and Forwarding8 10334 Orient Water Services (Pvt) Ltd Store Supplies Dyes and Chemicals9 10456 Rana Classic Elastic Other Services Yarn Conversion

10 10534 Kuehne & Nagel (Pvt) Ltd. Other Services Clearing and Forwarding11 10640 TCS Logistics (Pvt) Ltd. Other Services Clearing and Forwarding12 10686 World Wide International (Pvt) Ltd Other Services Clearing and Forwarding13 10741 Chem Tech Int Store Supplies Dyes and Chemicals14 10805 Pakistan State Oil Co. Store Supplies Oil and Lubricants15 10916 A.R. Traders Store Supplies Packing Materials16 10983 Lasani Goods Transport Co. Clearing and Forwarding Transportation Services17 10985 M. Yousaf & CO. Store Supplies Oil And Lubricants18 11042 Holly Well Ent. Conversion Ser. Yarn19 11181 Master Textile Mills Other Supplies Yarn20 11447 Akbar & Akbar Associates Clearing and Forwarding Transportation Services21 11467 Sitara Goods Transport Co. Other Supplies Transportation Services22 11494 Sealand Containers Transport Co Clearing and Forwarding Transportation Services

23

Report Ref: Para 5.1.4 (b) Annexure ‘K’

INTERLOOP LIMITED

Issues Related to Purchase Order (PO)

Sr # PO # Division Date Issue

1 252 Energy 15-01-2009 Conflicting payment terms. PO allows both 100% advance and 50% advance.

2 26782 Hosiery 23-12-2008 Conflicting payment terms. PO allows both 100% 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 16-01-2009 Terms and conditions require both 3.5% tax to be deducted and 6% tax to be deducted.


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 22-12-2008 Conflicting payment terms. PO allows both 100% advance and 50% advance; 30% after 15 days; 10% Hydraulic test; 5% after delivery & 5% after 6 month.


24

Report Ref: Para 5.1.4 (c) Annexure ‘L’

INTERLOOP LIMITED

Issues Related to GST in Purchase Order (PO)

Sr # Division PO # Date Issue

1 Spinning 1797 05-12-2008 PO shows GST @ 15% whereas; invoice shows GST @ 16%.

2 HD-I 15091 15-07-2008 GST @ 16% and Excise Duty 1% payable in purchase of goods was not mentioned on PO.



25

Report Ref: Para 5.1.5 (c) Annexure ‘M’

INTERLOOP LIMITED

Delayed Preparation of GRNs

Sr. No Division GRN No. GRN Date DCN Date GE Date Difference in DCN Date and GRN Date (Days)

1 Energy 321 24-01-2009 21-10-2008 27-11-2008 962 Energy 313 22-01-2009 06-01-2009 12-01-2009 173 Energy 317 22-01-2009 27-12-2008 05-01-2009 274 Energy 314 22-01-2009 25-12-2008 30-12-2008 295 Energy 315 22-01-2009 20-12-2008 11-01-2009 346 Energy 316 22-01-2009 05-01-2009 05-01-2009 18

26

Report Ref: Para 5.1.5 (d) Annexure ‘N’

INTERLOOP LIMITED

Miscellaneous Issues Related to GRNs

Sr # Division GRN # Date Issue

1 Spinning 2546 03-02-2009 GRN shows quantity received 112.500 Kgs whereas; weight slip shows 160 Kgs

2 Spinning 1678 06-01-2009 Delivery Challan was showing date 04-12-2008 whereas GRN was prepared on 03-01-2009. DC date was also wrongly mentioned on the GRN

3 Spinning 2279 01-12-2008 DCN and IGP were showing an item received 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.

27

Report Ref: Para 5.1.6(b) Annexure ‘O’

Extract from E-mail:

From: Touqeer Qamar [mailto:[email protected]] Sent: Friday, March 13, 2009 3:41 PMTo: '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

Sr. Particulars Dr. Cr. Sr. Particulars Dr. Cr.

1) AP Clearing - 1) Advances to suppliers -

Party A/c - Party A/c -

Dummy invoice posted Entry posted on the basis of Advance 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 -

Bank A/c - Advances to suppliers -

Payment made Standard invoice applied

4) Expense -

Party A/c -

Standard invoice applied

28

Report Ref: Para 6.2.2 Annexure ‘P’

INTERLOOP LIMITED

Issues Related to Inward Gate Passes (IGPs)

Sr # Division GRN # IGP # Issue

1 HD-I 21419 2672 Name of the supplier was wrongly mentioned as Noor Fatima Printers whereas goods received from Hira Tahir Printers

2 Spinning 2429 810 Quantity received as per GRN and DCN was 6 liters but the gate pass was showing 16.5 liters. Gate pass was subsequently corrected.

3 Spinning 2276 694 GRN was showing goods received from Chenab 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 Spinning 2759 1163 IGP was showing quantity received 1 item whereas actual receipt was 6 items.

5 Spinning 2681 1064 IGP was showing quantity received 1 kg whereas actual receipt was 6 kgs.

6 HD-I 21237 2158 Wrong UOM used. IGP was showing quantity 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.

29

interloop ia report dec-feb 2008

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