ABCD

Client Honda Philippines, Inc. Prepared by KPEsguerra Date March 19, 2010

Walkthrough Memo REVENUE RECOGNITION Spare Parts

Period-end March 31, 2010 W/P reference

AUDIT OBJECTIVE Confirm initial understanding of the noted revenue recognition process established by the Company including identified key controls that ensures management assertions (e.g. completeness, existence, and accuracy) in revenue transactions.

AUDIT

PROCEDURES Obtained one sample of sales invoice and its supports issued to a customer. Obtained one sample of official receipt as issued to a customer for collections made. Checked completeness and accuracy through appropriate review of the required documentation and controls as stated in the Companys policies and procedures. DETAILS

WALKTHROUGH

Date: March 18, 2010 KPMG Participant: Karoll Anne P. Esguerra, Associate Auditor Honda Philippines, Inc. Participants: Magan Misajon, Order Taking Staff, Spare Parts Department Jerone Yabut, Spare Parts Warehouse Supervisor

BACKGROUND INFORMATION The Companys products are grouped into the following: Motorcycle (MC) Power products (PP) Spare parts (SP)

The Companys customers are composed of dealers who carry, market, sell, and distribute the Companys motorcycle products and spare parts. The Companys dealers are selected and evaluated thru the following process: 1. Interested corporations or sole proprietors submit a Letter of Intent indicating their interest to a dealership contract with the Company. Upon receiving the Letter of Intent, the Company evaluates the applicant by performing background reviews, credit investigations, and interviews to assess the credibility and credit standing of the firm.

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2.

If the applicant has good company profile, the Company will present a Dealership Program. Once this program is accepted and approved by the prospective dealer, the latter will be required to submit the legal requirements, which includes the following: BOI registration Municipal or City License BIR VAT registration CTC Php 2,000,000 Standby or Letter of Credit (as collateral security)

(Note: For the first six months, all transactions entered by a new dealer is on cash basis (cash before delivery). After the said period, the dealer will only be allowed to have credit transactions upon issuance of a collateral security worth Php 2,000,000, as stated above.) Upon submission of the above mentioned requirements, a Contract of Dealership will be signed and executed between the two parties. Such must be duly approved by the Companys management (President, Vice-President, Legal, Sales and Marketing, and Market Dealer Development Group). The contract offered is valid for a term or period of five (5) years (renewable). Dealers are further categorized into three (3) namely: 1. 3S Dealers owned and operated by a business entity duly registered to sell and display ALL Honda Philippines, Inc. products only. 2. Accredited Parts Dealers owned and operated by a business entity duly registered to sell and display not only HPI products but also other products such as aooliances, etc. 3. Power Product Dealers owned and operated by a business entity registered to sell and display the Companys power products such as generators and water pumps. Spare Parts division offers motorcycle accessories, apparel, and parts.

Order Taking The Company accepts orders through either of the following means below: Fax E-mail

Dealers are not allowed to order thru phone. All orders must be supported by a Purchase Order (PO) sent thru e-mail or fax. If the PO submitted does not contain the part number (item code) of the spare parts being ordered, then this PO will not be processed by the staff. The staff will request the dealer to indicate the part number (item code) so that the order may be encoded into the system. POs sent thru fax: For POs sent thru fax, the order processor will have to input the order details into the system (PC PACK). The processor must first identify whether the order is STOCK (regular) or URGENT. Then the order details must be encoded into the system such as

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the Dealer Code, PO No. (reference document from the dealer), the Part Number of the Spare Parts, and the Quantity being ordered. The prices of the Companys products are stored and updated thru the system. Upon encoding the Part Number and Quantity ordered, the system will automatically display the unit price and total amount of the items ordered.

POs sent thru e-mail For POs sent thru e-mail, the details of the order must be transferred by the order processor to a document template HTW Order Sheet. The template requires details such as the Dealer Code, Dealer Order No., whether the order is URGENT or STOCK, Order Date, Parts Number, and Quantity. This will be saved as a CSV file and uploaded to the system PC PACK. After the file has been imported, the system is automatically updated and the data is captured by the system.

Once the PO is encoded into the system by either of the two methods discussed above, the system will ask for the confirmation of the order. Once the order is confirmed by the staff, then an Order Confirmation Document will be generated. If the order is URGENT, an automatic allocation of the item ordered is done by the system. If the order is STOCK (regular order), then manual allocation is done by the Inventory Supervisor. The Order Confirmation Document shows whether the Company has available stocks to meet the dealers order. This document is sent (thru e-mail or fax) to the Companys dealers for them to know the status of their orders and to double check whether the items per order confirmation matches with their PO, According to Ms. Magan Misajan, order confirmations are not subject to the approval of their department head nor Finance. She noted that unlike in the PP and MC Divisions, spare parts products are not high-value items. Thus POs are processed immediately as good orders without the need of any approval. Invoice Processing and Delivery of Units

Delivery of Goods Upon order confirmation, the system in the Spare Parts Warehouse (WH) will be notified that there are orders waiting for Picking. The WH staff will then Print the related Picking Note and Packing Note of the order. Picking Note is then forwarded to the WH picker who will get the items ordered from the designated areas of the Warehouse. The items in the Picking Note will be checked individually by verifying the quantity, part number, and item description. The Picker will need to sign the Picking Note. The Picking Note and Packing Note will be forwarded to the WH releaser.

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The warehouse releaser will verify the correctness and accuracy of the items picked by the picker. He will also assign the carton number on where the particular stocks will be placed. The releaser will sign the Packing Note. The Packing Note and Picking Note will be forwarded back to the WH staff. The WH staff will encode the order to the system. A delivery entry will be made in the system and a Packing List will be generated. Three copies of Packing List is printed, one copy for the dealer, one copy for the forwarder, and one copy for filing of the WH staff. Copies of packing list will be attached to the items for delivery. The WH security guard and Forwarder will need to check that the items in the Packing List matches with the actual items for delivery. Both the forwarder and security guard will need to sign the Packing List. One copy of the Packing list will be returned to the WH for filing. According to Mr. Jerone Yabut, WH Supervisor, spare parts, the Packing List need not be signed by the customer. Their control of the items delivered is only up to the point where the forwarded acknowledges the accuracy of the Packing List. If there are discrepancies between the items in the Packing List and the items delivered to the dealer, the Company is no longer liable. The signature of the Forwarder indicated in the Packing list is proof that the items per Packing List is received by the forwarder in good condition and in the indicated quantities.

Invoice Processing After the delivery entry is made by the WH Staff, the Order Processor will be notified thru the system PC Pack that there are orders waiting for Invoicing. Five (5) copies of invoice are prepared by the Spare Parts Department. Original Copy-dealer, Accounting Copy, Customers Copy, Spare Parts Department Copy, and one copy for filing. The Invoice must be signed by the preparer, SP staff, Checked by the Order Processor, and Approved by the Warehouse Supervisor. Every month, Sales Report is generated and sent to the accounting department. Collection is done by the three depots of the Company, Manila, Cebu and Davao. Please refer to Walkthrough MC for the detailed discussion of the collection Process implemented by the Company.

For a visual representation of the Companys Spare Parts Process Flow, please refer to WP ______

Walkthrough ORDER DOCUMENT INSPECTED Purchase Order Dealers Name: Purchase Order No.: Purchase Order Date: Product Description: Quantity Ordered Product Description:

POWERCYCLE, INC. 10-SP-10144 March 11, 2010 31110-KTL-761 Flywheel Comp 1 11395-GBJ-730 Gasket Crankcase Cover

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Quantity Ordered Total Cost of Items Ordered:

1 Php 1,285.92

Remarks In order

Particulars Purhase Order No. 10-SP-10144 was received thru fax by HPI from Powercycle Inc. on March 11, 2010.

SALES DOCUMENT INSPECTED Sales Invoice/Delivery Acceptance Sales Invoice No: Date of SI: Ref No.: Dealer No.: Amount: Packing List: Date of Packing List: Delivery No.: Total Quantity: Amount:

SP90155030 March 12, 2010 PA151770 303027 Php 1,285.92 PA151770 March 12, 2010 D0213344 2 Php 1,285.92

Remarks In order

Particulars Sales Invoice was processed ob March 12, 2010. SP90155030 was prepared by Mr. Djogie Mercado; Checked by Ms. Magan Masajon; and Approved by Mr. Jerone Yabut, WH Supervisor. Shipment of the goods is supported by the Packing List dated March 12, 2010 for the delivery of the ordered units. This was signed as received by the trucker on March 12, 2010.

In order

CONCLUSION Based on our walkthrough review, we confirm our understanding of the revenue recognition procedures. We observed that the key controls identified were appropriately designed and are in compliance with the Companys policies and procedures. Based on our initial understanding and initial assessment of the key controls identified we also conclude that further testing (test of operating effectiveness) of identified controls are appropriate and warranted to enhance the nature, extent and timing of remaining audit procedures.

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