EXECUTIVE SUMMARY

24 October 2011 IAD Report 2011-10-001 For: Mr. ABETO A. UY Chairman

From: Internal Audit Re: Cc: Audit of SCP CGL Cleaning Line AVE, BMY

As per your instruction, we conducted a review of the cost incurred relative to SCP Cleaning Line. Construction-in-Progress related to the SCP CGL Cleaning Line as of September 30, 2011 is Php14, 714,409.97 with the following breakdown: Particulars a. Services b. Materials c. In house Labor d. In house Materials e. Other expenses Total Amount . Php 10,624,124.68 2,198,604.25 656,784.95 1.032,097.92 202,798.17 Php 14,714,409.97

Additional works already completed by the contractors but without the corresponding approved Purchase Order or Amended Purchase Order and still unpaid are as follows: Recorded in the books but w/out approved PO/APO Unrecorded in the books w/out approved PO/APO Total Unpaid Additional Works Php Php 748,681.31 1,359,675.17* 2,108,356.48

Note: * We were not able to validate the correctness of the scope and billing with regards to the additional work due to our limited technical knowledge on the said subject matter. Total Cost of CGL Cleaning Line as of September 30, 2011 is Php16, 074,085.14 if we include the unrecorded additional works. It exceeded the project appropriation budget of 12 million by more than Php 4,074,085.15 or 33.95% The remaining work / activity is the repair of the Boiler and the commissioning / testing of the Cleaning Line this coming December 2011 Production run as discussed by the Plant Manager. For your information. Getre Y. Pechayco

Audit Head

DETAILED REPORT
22 October 2011 IAD Report 2011-10-001 For: Mr. ABETO A. UY Chairman

From: Internal Audit Re: Cc: Audit of SCP CGL Cleaning Line AVE, BMY, NLO, ECC

The results of our review conducted from October 12-15, 2011 are as follows; 1. The Project Appropriation Request (PAR) for the installation of the CGL Cleaning Line dated May 20, 2010 with fund requirement of 12 million pesos and work duration of 5 months. However a revised estimate was made on June 28, 2010 with computed detailed cost of 11.63 million and still within the budget. See Annex A for PAR 2. The recorded Construction-in-Progress recorded at SCP Plant Accounting as of September 30, 2011 is Php14, 714,409.97. with the following breakdown: Particulars Amount a. Services Php 10,624,124.68 b. Materials 2,198,604.25 c. In house Labor 656,784.95 d. In house - Materials 1,032,097.92 c. Other Expenses 202,798.17 Total Php 14,714,409.97 See Schedule 1 for breakdown of expenses and supplier. 3. However, we found additional works documentation already completed by the contractor without any Purchase Order or Amendment to Purchase Order as follows:
No . 1 2 3 4 5 6 7 8 9 10 Supplier F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. F17 Const. Corp. BS Tech. Corp. Work Repair of Boiler Electrical Works Grouting Steering guide assembly Hot air dryer assembly Steering guide assembly Servicing fume exhaust Installation of steam line Installation of pass line Cleaning line tank Amount 153,294.1 2 648,191.6 0 328,596.45 143,549.00 86,044.00 65,565.4 3 140,408.7 1 107,701.2 2 174,600.5 5 260,405.40 PR Yes Yes Yes Yes Yes Non e Non e Non e Non e Non e PO Non e Non e Non e Non e Non e Non e Non e Non e Non e Non e CIP No No No No No Yes Yes Yes Yes Yes Remarks PR not approved AU PR not approved AU PR approved AU PR not approved AU PR not approved AU Listing approved by AAU Listing approved by AAU Listing approved by AAU Listing approved by AAU With MRR and COA Anne x B C D E F H&I H&J H&K H&L G

Total

1,847,951.08

Particulars Additional works with Purchase Requisition (PR) Additional works with approved PR Additional works with approved listing Additional works rendered by F17 Const. Corp.

Item Item 1 to 5 Item 3 Item 7 to10 Item 1 to 9

Amount 1,359,675.1 7 328,596. 45 488,275. 91 1,587,545.6 8

However, we were not able to determine if the additional works with Purchase Requisition (a, b, c, d and e) and those without PRs (g, h, i, j, and k) are for a different or the same work rendered by F17 Construction Corporation. 3.2 Review of additional works with Purchase Requisitions 40932. 40933, 40934, 40935 and 40936 discloses the following: P. R. Justification No / Date made / Date 40932 EFSoriano 10/27/10 4/19/11 40933 EFSoriano 10/27/10 4/19/11 40934 EFSoriano 10/27/10 4/19/11 40935 EFSoriano 10/27/10 4/19/11 40936 EFSoriano 10/27/10 4/19/11 Note: Req. by R De Omampo R De Omampo R De Omampo R De Omampo R De Omampo Verified by EFS EFS/IFH EFS/IFH EFS/IFH EFS/IFH Concurred by RAJ/NALO RAJ/NALO RAJ/NALO RAJ/NALO RAJ/NALO Approved by None None AAU None None Remarks AB AB C AB AB

A - Purchase Requisition is not approved B - Purchase Requisition copy is not received by Purchasing Department. C Purchase Requisition received by Purchasing and Abstract of Quotation prepared on June 27, 2011. AOQ not returned to Purchasing Dept.

See Annexes M, N, O, PK and Qto O for copies of Purchase Requisitions and justification made at the plant. 4. Validation of payments to suppliers reveals that all transactions with Purchase Order had been paid except for the following: P.O. No.umber 33242 40933 10/27/10 33831 Contractor / Supplier EFSorianoEstane ro and Associates 4/19/11 Eco IndustrialEFSoria no 4/19/11 Work DescriptionReq. by Structural Engineering ServicesR De Omampo Supply of pressure gauge, connector, etc.R De Omampo AmountVerif ied by 90,000.00EF S 4,485.00EF S/IFH Remarks

For paymentA B For paymentA B

40934 10/27/10 34556 40935 10/27/10 40936 10/27/10

Phil. Parkerizing Inc.EFSoriano 4/19/11 EFSoriano 4/19/11 EFSoriano 4/19/11

Supply of Fine CleanerR De Omampo TotalR De Omampo R De Omampo

18,000.00EF S/IFH 112,485.00E FS/IFH EFS/IFH

For paymentC AB AB

5. Purcahse Orders payments the followingHowever, we found additional works documentation already completed by the contractor without any Purchase Order or Amendment to Purchase Order as follows: 6. Other related facts was established as follows: a. The project managers of the CGL Cleaning Line are Mr. E.F. Soriano (EFS) and Mr. R. A. Jaurigue (RAJ). But due to the separation and retirement of both Managers, the lead Manager is now Mr. Ramil De Omampo. b. Based on paper and assessment and of RAJ and EFS, the project is completed. However, there was no actual testing of the Line to evaluate its efficiency. c. Additional works except PR 40934 was not approved by the Chairman and it was considered necessary and within budget by previous project Managers. d. The justifications attached to the unapproved PRs were made in lie of the Certificate of Acceptance. e. Cleaning Line testing and evaluation will be made this coming December production run as discussed by N.L. Ong (SCP Plant Manager). 7. Other Audit Findings: a. Plant Accounting failed to consider the amendment to P.O. no 33633 changing Php185,162.16 to Php354,475.75. Supplier: PhilMetal Products Inc. Plant Record 185,162.16 Payment (APV143709) 354,475.75 Difference 169,313.59

8. Audit Concerns and Recommendations a. Additional works must be evaluated if it is an amendment to Purchase Order or a new Purchase Order is required. Amending the previous Purchase Order for additional works and cost maybe disadvantageous to the company as there will be no bidding on the new scope of work. b. There must a Bidding Committee composed of representatives from Finance, Engineering, and Purchasing to evaluate bids on its impact on the financial aspect, technical requirements, and logistical arrangements for large projects.

c.

Require a Surety Bond for the contracted work and retention (10 %) of payment for at least 1year upon acceptance to cover for any breach of contract and work defects. d. Monthly progress report on the project must be monitored by the assigned Project Manager and Finance Head so as not to exceed budget and control cost. Furthermore, it will also ensure compliance to the planned timetable. e. Project estimate and resulting budget must also include labor and materials to be provided in-house by the company. For your information.

Denzel Edward V. Cariaga Internal Auditor

Rafael D. Salazar Senior Audit Supervisor

Noted by: Getre Y. Pechayco Audit Head