General & IT Audit: ULTICON BUILDERS, INC. (UBI)- Davao City January 17, 2011

General & IT Audit:ULTICON BUILDERS, INC. (UBI)- Davao CityJanuary 17, 2011

Agenda Overview of the Engagement Ulticon Builders Inc. Financial Statement Closing Process Discuss Comments and Recommendations Applications Review IT General Controls Review Handover IT Reports and Deliverables Applications Review Report Process Flowcharts IT Comments and Recommendations Supporting Exhibits Discuss FS Reconstruction Accounting Issues and Concerns Pro-forma FS Reconstruction vs. Audited Balances

Overview of the Engagement Phase 1. Financial Statement Reconstruction Objectives: Assist the Company in compiling and testing the basis of accounting information, determining the necessary journal entries, generating trial balance after posting of journal entries, and preparing financial statements; and Advise on accounting treatment and consequences, & presentation of complex transactions in the financial statements. Phase 2. IT General and Application Controls, & Business Process Review Objectives: Review of Company’s applications system used to generate financial statements; Review of IT environment and general controls; Review of existing significant business processes.

Input Master File Entries, Chart of Accounts, Accounting Period, & Transactions • Manual Input: • Depreciation; & • Other Adjustments • UBIAIS- Inventory System • System Administration • Inventory • Human Resources • Fleet Management • UBIAIS- Accounting System • System Administration • Accounting • Treasury & Audit Overview of FS Close Process • Financial Statements: • Balance Sheet; • Income Statement; & • Cash Flow Statement • Generate Accounting Reports: • Trial Balance; • Balance Sheet; & • Income Statement Extract and Convert Accounting Reports (PDF) to Spreadsheet File Manual Input of Adjustments and Prepare Financial Statements -see more detailed FS close process flowchart

APPLICATIONS REVIEW REPORT

APPLICATIONS REVIEW on UBI Accounting Information System (UBIAIS) General Statement of Findings “Our review revealed that to date, the existing system cannot generate reliable and timely financial statement reports for the whole Company and for its various projects. This also applies to desired management reports for decision-making.” - see Application Review Report

1 Applications ReviewThe following are the reasons why to date, the Company cannot generate reliable financial statements and real-time reports for Management’s decision-making out of its existing applications system (UBIAIS).

RECOMMENDATIONS OPTION 1. Consider changing into a new system; or OPTION 2. Improve the existing system.

RECOMMENDATIONS OPTION 1. Consider changing into a new system: Change into a new system that will cater to Management’s need of accounting financial transactions. IT Solutions Providers Lane Systems, Inc. X”pres Tire N Lube Wheels Bldg., Drive Compound, JP Laurel Avenue, Davao City +6382 221 3344 Hubport Interactive, Inc. (through Syntactics, Cagayan De Oro) ConpincoBldg., Bajada, Davao City +6382 300 9178

RECOMMENDATIONS OPTION 2. Improve the existing system: The company may just consider improving the existing system. This will require the following measures: Conduct comprehensive training on all modules; Complete detailed user’s manual for each module; Require delivery of requested programs changes provided these program changes are formally requested, authorized and documented; Link the accounting and inventory system and allow automatic posting of transactions; Rationalize the standard chart of accounts of the Company; Develop new or improve existing modules that will address significant functions (e.g., computation of percentage of completion to ensure automatic posting of billing to clients, computation of depreciation, financial statements for every project); Allow the users to customize the reports to enable the creation of reports needed by the Management; Establish policies and procedures to formalize authorization of those transactions that are manually inputted into the system; and Upload transactions needed to update the system (e.i., transactions from 2009-10). Hire in-house qualified people for systems development

IT GENERAL CONTROLS REVIEW

IT GENERAL CONTROLS REVIEW General Statement of Findings “Our review revealed that the Company needs to improve its IT General Controls including Program Change Management, Logical Access Controls, & IT Environment and Physical Controls.” - see Summary of Comments & Recommendations

1 IT General Controls Review

FINANCIAL STATEMENTS RECONSTRUCTION Accounting Issues and Concerns

Accounting Issues and Concerns Findings Risk Implications/Recommendations The use of cash basis of accounting has the following risks/implications: Revenue are recognized upon collection Receivable based on billings are not recorded Expenses may not be recorded in the proper accounting period Liabilities relating to accrued expenses may not be recognized The Company should use accrual basis of accounting. General Use of cash basis of accounting The Company currently uses the cash basis of accounting. Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements requires that the financial statements should be prepared using the accrual basis of accounting.

Accounting Issues and Concerns Findings Risk Implications/Recommendations The Company should adopt the PFRS in preparing the financial statements, with January 1, 2009 as the date of transition. Incorrect Accounting Standard Used to Prepare on the Financial Statements In 2005, the Philippine Auditing Standards (PAS)/Philippine Financial Reporting Standards (PFRSs) were issued and became effective. The threshold in adopting PFRS defined as total assets of at least P250 million or liabilities of at least P150 million. With the threshold set in adopting PFRS and the Company’s current financial status, the Company no longer qualifies to use the non-publicly accountable entity (NPAE) under Philippine Accounting Standard (PAS) 101, Financial Reporting Standards for Non-Publicly Accountable Entities .

Accounting Issues and Concerns Findings Risk Implications/Recommendations Since the accounting department has no sufficient documents to support the balance, the balance should be recorded as part of the “Due from Head Office”. The Head Office must liquidate the balances to record transactions (mostly disbursement) that were not entered in the Company’s books. Unreconciled Cash Balance be Recorded as Part of Due from Head Office Based on our examination of the cash balance of the Company, we have reconciled all the bank accounts of the company except for the three bank accounts that we have not examined. The following are the bank accounts: As per inquiry with the Accountant, the bank records are maintained by their Manila Office.

Accounting Issues and Concerns Findings Risk Implications/Recommendations Per paragraph 30 of the PAS 11 on “Construction Contracts” states that “The stage of completion of a contract may be determined in a variety of ways. The entity uses the method that measures reliably the work performed. The Company should consider adopting the PAS 11 and follow the method in estimating the percentage of completion of the projects. Advance payments made by the Government will be recorded as “Unearned Income”. Incorrect Accounting for Long-term Construction Contracts Based on the examination of the billings submitted by the Company to the DPWH, we have noted that the Company’s current method of estimating the percentage of completion is based on the total progress billings over the total contract price. However, the progress billings are usually bloated by accelerating the percentage of completion of the project. With this current practice, there is a mismatch of revenue recognized and cost incurred for a certain period.

Accounting Issues and Concerns Findings Risk Implications/Recommendations Per paragraph 13 and 15 of the PAS 31 on "Investment in Joint Venture", Jointly controlled operations involve the use of assets and other resources of the venturers rather than the establishment of a separate entity. Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own finance. Based on the agreement, the total cash collected from the revenue of the project amounting to P732.5 million should be recorded as payable to the Joint venture and not as revenue of the Company. Also, the actual cost incurred amounting to P248.8 million should be recorded as “Investment in Joint Venture”. The Company should also record half of its share on the income of their investment in joint venture amounting to P11.4 million. Incorrect Accounting for Investment in Joint Venture (JV) Based on the records of the on-going Government projects, we have noted two projects under joint venture agreement with other construction companies. The joint ventures are as follows: Based on our review of the JV agreement, we have noted that the companies agreed to contribute 50% each of their resources for the project. The parties also agreed to equally share any profit of the JV on a fifty-fifty basis. However, per examination of the Company’s books, we noted that the Company records all of the construction income received from the JV project.

Accounting Issues and Concerns Findings Risk Implications/Recommendations The physical count at yearend will only address the existence assertion of the inventory. Pilferages and/or inefficiencies cannot be monitored. The receipts and issuances of the inventory items should also be monitored and accounted by the Company in order to decrease risks of theft or fraud. Incorrect Recording of Inventories We noted the following exceptions: • Charging of purchased inventory directly to expense. • The Company conducts physical inventory count at year-end for monitoring purposes only. • The Company’s inventory module is not fully utilized (please see application review report).

Accounting Issues and Concerns Findings Risk Implications/Recommendations The acquisition cost of the Property and Equipment should only include cost that are directly attributable to the equipment. The Company should review the estimated life of the property & equipment and establish standard estimated life for each class of property and equipment. The lapsing schedule should be automated to avoid incorrect computation of depreciation expense. The Company should reconcile the property and equipment included in the audited FS and per books. Incorrect Recording of Property & Equipment We noted the following exceptions: • Property and equipment acquired thru installment includes the interest expense in the acquisition cost of the property. • The estimated life of some of the property and equipment is overstated and unreasonable. • Certain property and equipment were included in the audited FS but not recorded in the Company’s records.

Accounting Issues and Concerns Findings Risk Implications/Recommendations The Company should ensure proper recording of long-term debt to reflect the existing and correct balance. Since the Company has no support of the long-term debt, the amount will temporary be recorded as a current liability. Difference in the Amount of Long-term Debt Per FS vs. Per Books Based on our examination, we have noted that the Company has loans payable amounting to P100.0 million. However, the audited FS recorded long-term debt amounting to P180.0 million. There were no supporting documents available to support both of the balances.

Accounting Issues and Concerns Findings Risk Implications/Recommendations PAS 19, Employee Benefits, requires the Company to recognize a liability when an employee has provided service in exchange for employee benefits to be paid in the future and an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits. A liability for a long-term employee benefits is the net total of the present value of defined benefit obligations and the fair value of any plan assets. Obtain Actuarial Valuation Report for Proper Determination of Pension Expense and Pension Liability As of December 2010, the Company has 438 regular and probationary employees. The Company has not yet recognized pension expense and pension liability in its books.

Other Accounting Issues and Concerns • Delayed Preparation of Bank Reconciliation Statement • Unsupported Cash Equivalents • Unrecorded Creditable Withholding Income Tax (CITW) • Improper Classification of Intercompany Transactions • Unreasonable Capitalization and Depreciation Policy for Property, Plant and Equipment • Disorganized Presentation of Data in Lapsing Schedule • Discrepancies between Subsidiary Ledger (SL) and General Ledger (GL) of Accounts Payable • Improper Recording of Value Added Tax (VAT) Transactions • Incorrect Taxation on Government Projects • Incorrect Classification of Expenses (Direct costs vs. General & Administrative expenses) • Possible Disallowance of Representation Expense • Disorganized Chart of Accounts • Facilitate Closing of Books • Create Policies and Procedures Manual

Summary of Significant Adjustments Exhibit 1 – Summary of Significant Adjustments Per Account Exhibit 2 – Adjustments on Retained Earnings

Exhibit 2 Adjustments on Retained Earnings

FINANCIAL STATEMENTS RECONSTRUCTION Comparison of Reconstructed, Audited and Book Balances

Balance Sheet

Balance Sheet (cont’d)

Income Statement

Thank you…!

General & IT Audit: ULTICON BUILDERS, INC. (UBI)- Davao City January 17, 2011