Draft Internal Audit Report for the quarter ended September 2010

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Executive Summary……………………………………………………………….………….. 3

Scope of work…..….………………………………………………………………….……….. 4

Methodology…………………………………………………………………………………….. 5

Observations……………………………………………………………………………………. 6

1. Operational and financial compliance of finance department……… 6

2. Inter company book balances…………………………………………………… 11

3. Bank reconciliation statements………………………………………………. 15

4. Physical inventory count at yard site………………………………………… 18

5. Physical items count at head office building store and kemari store 20

CONTENTS

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Muniff Ziauddin Junaidy & Co. Chartered Accountant (MZJ / The Firm) had been appointed as internal auditors of CIM Shipping Inc (CIM/Entity).

We have completed our internal audit activities for the quarter ended 30 September 2010. In this report we have reviewed areas as mentioned in the scope section of this report.

We have reviewed transactions related to core functions of CIM and noted some deficiencies with reference to existing system and procedures. In this connection we would like to draw management attention towards the following matters which have come to our notice during performance of internal audit activities for the said quarter

We noted that written policies and procedures (SOPs) for finance department are not properly documented and approved by the management of the entity. For instances please refer observations 1, 2, 3 and 4.

We noted that some long outstanding cheques appearing in bank reconciliations. For instances please refer observations 5 and 6.

We observed that inter-company reconciliations are not prepared. For instances please refer observations 7 and 8.

In physical count of containers inventory at site yard we noted that containers are not properly placed. For instances please refer observations 9.

In physical count of store inventory at site yard we noted that goods received are recorded in store register but goods issued record is not properly maintained in store register. By the same reason closing stock list was not provided to us that placed limitation on our scope. For detail please refer observations 9.

In physical count of store items at head office building store and kemari store we noted that the entity does not prepare any list relating to scrap items placed in the both the stores. For detail please refer observations 10.

Executive Summary

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The scope of our report is to review the operational effectiveness and efficiencies of the existing accounting and internal control system being operative in CIM in selected areas. We have performed test of controls at Head Office Karachi. During our review of selected areas, we have noted certain exceptions that come to our attention during the performance of internal audit activities and suggested recommendations against our respective observations. We have reviewed the following areas:

Review of operational and financial compliance of finance department. Identify where policies are required and missing and ensure that policies and procedures are followed properly by the department,

Review of bank reconciliations, obtain original bank statements, cross match with ledger entries,

Review of inter-company balances and timely recording of assets and liabilities.

Physical verification of containers and store inventory at yard site and of the items placed in the head office building store and kemari store.

Scope of Report

MethodologyMethodology

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In order to achieve the objective as per the scope as stated earlier, we collected, analyzed, inquired and reported our observation noted during internal audit activities.

We reviewed the existing policies and standard operating procedures (SOPs) related to the finance department and observed the functions being performed by finance department. We identify where policies are required and missing and review whether the existing policies and procedures are being complied with by the finance department.

We reviewed bank reconciliation statements of each entity and cross checked with bank statement and bank ledger to identify the unclear and unpresented cheque appearing in the reconciliation. We also compared the timing of cheque collection slip/receiving slip issued to customers and deposit into bank through bank deposit slips. We also compared bank deposit slip, bank ledger and bank statement to identify un-cleared/bounced cheques, if any.

We reviewed each entity’s inter-company transactions to identify whether the reconciliation statements are properly prepared and timely recording of assets and liabilities.

We have been asked by the management of the entity to conduct physical verification of containers at yard site and physical count of the items placed in the site yard head office building and kemari store.

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Observation Observation description01. Policies and Standard Operating Procedures (SOPs)

During our internal audit filed work we have requested the management of the entity to provide us with the approved policies and operating procedures (SOPs) in respect of finance department. We have received unapproved policies and SOPs in respect of payment procedure & procurement. We also noted that procurement policy was not properly prepared by management, only limits of purchases mentioned in the purchase policy there is no purchase cycle describe in the SOPs and also we noted that the purchase committee mentioned in the policy but the function (TOR) of the committee is not described in the given SOPs.

We have not been with the provided policies and SOPs for the other functions of the finance department, details of which is given below.

1. Fixed asset register2. Capitalization policy3. Investment policy4. Financing policy5. Record management system6. Management information system (MIS) and reports to be produce by the finance department through

MIS.7. Procurement policy8. Budget & planning9. Insurance policy (fixed assets, health & life)10. Revenue policy11. Authority matrix12. Tax planning & administration13. Cash management & handling policy14. Receivable management policy15. Inter company/ related party transaction and settlement policy

OPERATIONAL & FINANCIAL COMPLIANCES OF FINANCE DEPARTMENT

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Recommendation:

We recommend that the management of the entity should properly prepare written policies and SOPs for operation of the finance department and also obtain approval from directors of the entity, as it is very important for effective and efficient operations and communication among the finance department.

Management Comments:

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Observation Observation description02. Cash in hand

During our review of cash in hand policy we observe that the maximum limit of cash in hand for each entity as mentioned in the payment process manual was not observed. Cash in hand ledger balance as on 30th September 2010 was not according to given policy.

Cash payments are not recorded in ledger on daily basis for that reason cash in hand ledger relating to given entities till 30 September 2010 are not agreement with policy limit and also we noted that the same policy limit was not followed by management.

COMPANY POLICY LIMIT (Rs.) AMOUNT AS PER LEDGER (Rs.)

CIM 100,000 306,301

EMKAY 50,000 1,214,602

TASA MARINE 50,000 178,170

Recommendation:

We recommend that entity either change their maximum cash limit policy of cash in hand or the accountant assistant should retain cash according to defined policy and also should record cash transaction on daily basis so that associated risk of theft and fraud may be mitigated.

Management Comments:

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Observation Observation description03. Payment vouchers are not signed by directors & receivers

In review of payment process we noted many instances where the payment vouchers are not approved by the Director and the same does not contain any acknowledgement of receiving from the receiver. Following are some of the instances we noted in this connection:

DATE VOUCHER NO. DESCRIPTION AMOUNT

16-Aug-10 1510

Issued chq to BLU-RAY TECHNOLOGIES bill#197 for purchased laptop Sony vaio EB 11FX notebook core I3 4GB DDR3,320gb DVD rw 15-6 window7 for Mr.Imran Moten & dell inspiring 580mt Pc core I3 2.93 4GB

152,400

25-Sep-10 3156Issued chq to BLU Ray Technologies Bill# 351 for purchase of HP pro 313MT I 3 3.06.IGB DDR,320GB sata DVD RW keyboard & mouse & HP-LE2009-20”LCD

59,200

03-Sep-10 2286

Issued PO to BLU RAY TECHNOLOGES Inv#338,339 for purchased Lap Top Sony vaio EB12/B (Black Color) Intel core i3 2.1Ghz 330m ,4GB ram DDR3 ,500GB HDD DVD Rw wifi ,LAN ,webcam 15,5" display, world car

92,000

30-Sep-10 3366Cash paid through Shafiq for purchasing of 2 new battery GX 150 for office server

17,600

Recommendation:

We recommend that payment vouchers should be approved by the authorized personnel and the acknowledgement from receiver must be obtained so that in case of any dispute with receiver with respect to payment the evidence of payment can be available with the entity.

Management Comments:

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Observation Observation description04. Vouchers and supporting documents are missing from the file

During our review, we observe that for the below mentioned vouchers supporting documents were not available in the receipt voucher file.

DATE VOUCHER NO. DESCRIPTION AMOUNT

1-Sep-10 Not Available Adj-a/c ABDUL KARIM PARACH (C/A) with MOTOR VEHICLES- a/c due to received & deposited-chq # 6833722,(dt-31/08/2010)

100,000

24-Aug-10 Not Available As adj a/c ABDUL KARIM PARACHA (C/A) with MOTOR VEHICLES a/c due to received & deposited- 5-Pos #83322-295556-

57,#897010-11, (dt-23/08/2010)

7,200,000

Recommendations:

We recommend that vouchers and supporting documents should be properly filed in the receipt vouchers file so that in case where any reference is required, respective supports can be available with the entity.

Management Comments:

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Observation Observation description05. Duplication of accounts

During our review of inter company assets and liabilities balances we noted that unnecessary inter- company account heads has been open in all entities books. Many among the opened account are not in use and have no movement since long.

Details of the heads are as follows.

NAME OF ENTITES NAME OF ACCOUNTS IN ENTINTIES BOOKS

CIM Shipping EMKAY InternationalCIM Shipping TASA MARINE & LogisticsCIM Shipping TASA MARINE & Logistics (C/A)

EMKAY TASA InternationalEMKAY TASA MARINE & LogisticsEMKAY TASA MARINE & LogisticsEMKAY TASA MARINE & Logistics (C/A)

TASA Marine EMKAY Shipping Agencies

Recommendations:

We recommend that unnecessary inter-company accounts should be deleted to avoid the duplication of the transactions and unauthorized use of the same accounts.

Management Comments:

INTER COMPANY BOOK BALANCES

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Observation Observation description

06. Inter company reconciliation not prepared by the entity

During our review we noted that most of the inter company balances are not reconciling with each other and the entities’ management do not prepare any reconciliation statement for it. We initially preparing reconciliation as per our understanding but was not able to reconcile the difference.

In reconciliation statement of Emkay and CIM we noted that both entities account balances were not agreed with each other and also we noted that in the book of CIM three different accounts heads with similar name are being operated by the finance department.

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While reviewing inter-company reconciliation statement of Emkay and Tasa we noted that both entities were not agreed with each other and also we noted that in the book of Emkay and Tasa same named accounts opened with different account codes.

CODES DESCRIPTION

1-Jul-10 31-Jul-10 31-Aug-10 30-Sep-10Opening Balance Closing Balance Closing Balance Closing Balance

Rupees Rupees Rupees RupeesACCOUNTS IN THE BOOKS OF EMKAY

12211438 TASA International - - - - 1228019 TASA Marine & Logistics (COMP) 9,864,238 9,874,238 9,874,238 9,820,498

301114 TASA Marine & Logistics - - - - 12213614 TASA Marine & Logistics 15,050 77,400 21,500 25,800

302120 TASA Marine & Logistics - - - - 3030819 TASA Marine & Logistics (C/A) - - - -

RECEIVABLE FROM TASA 9,879,288 9,951,638 9,895,738 9,846,298

ACCOUNTS IN THE BOOKS OF TASA

31020042 Emkay Shipping Agencies. 15,050 (25,800) (21,500) (25,800) 1.202E+09 Emkay Shipping Agencies. - - - - 31030023 Emkay Shipping Agencies. (83,401) (83,401) (83,401) (83,401)

1203002 Emkay Shipping Agenciesi. (9,650,541) (9,660,541) (9,660,541) (9,660,541)

PAYABLE TO EMKAY (9,718,893) (9,769,743) (9,765,443) (9,769,743)

Difference 160,396 181,896 130,296 76,556

INTER COMPANY BALANCE FROM THE BOOKS OF EMKAY & TASA

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During review of inter-company reconciliation statement of Emkay and Tasa we noted that both entities were not agreed with each other and also we noted that in the book of Emkay and Tasa same named accounts opened with different account codes.

Recommendation:

We recommend that the management of the entity should devise the policy for preparation of inter company balance reconciliation statement to identify any unusual transaction and avoid any dispute between companies.

Management Comments:

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Observation Observation description07. Outstanding bank reconciliations

We did not receive the bank reconciliations of CIM shipping 30th September 2010. Non availability of required documents has placed limitation on our scope. Following bank reconciliations were not provided to us:

i. RBS Bank ii. Standard Chartered Bankiii. Bank Al Falah (Aug/Sep)iv. RBS Bank (9140603016)v. Network Bankvi. Habib Bank Limitedvii. Arif Habib Bank

Recommendation:

We recommend that the management should ensure the timely preparation the bank reconciliation statement of above banks. So that it can be ensured that all transactions are reconciled and agreed between companies.

Management Comments:

BANK RECONCILIATION (CIM)

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Observation08. Long un-presented & un-cleared cheques still outstanding

During our review, we observed that the reconciliation statement of the bank A/Cs Emkay, contains reconciling items are long outstanding. We also observed that deposit slips are wrongly dated; Following are the details of long unclear & unpresented cheques.

DATE CHQ # UNCLEARED CHEQUESUNPRESENTED

CHEQUES

13/04/2010 2477360 100,000

17/04/2010 5924387 40,000

18/05/2010 2496061 13,088

24/05/2010 2496213 17,400

24/05/2010 2496244 19,000

24/07/2010 2497422 19,000

29/07/2010 2497494 150,000

01/07/2010 2497016 2,040

03/05/2010 2492240 20,272

03/06/2010 2496490 3,420

06/07/2010 2497110 26,500

30/08/2010 2497728 95,000

30/08/2010 2497729 86,372

06/08/2010 2497562 1,600

07/06/2010 2496568 26,960

07/06/2010 2496576 27,000

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Following are the details of long unpresented cheques of Emkay bank reconciliation of Standard Chartered Bank.

DATE CHQ # UNPRESENT CHEQUES

09/04/2010 6150118 21,280

26/04/2010 6150323 7,136

20/07/2010 6151106 1,600

22/07/2010 6151139 33,800

26/07/2010 6151170 27,000

29/07/2010 6151157 35,500

31/07/2010 6151196 16,960

10/08/2010 6151234 55,980

21/08/2010 6151333 26,500

21/08/2010 6151335 147,200

23/08/2010 6151350 40,000

23/08/2010 6151358 64,320

Recommendation:

We recommend that the management of the entity should investigate the delay in the given unclear and un-presented cheques so that any unusual matter may be identified.

Management Comments:

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Observation Observation description09. Physical Count at yard

We have visited Site Yard from 22nd September to 24th September 2010 to perform inventory count and to review whether inventory at yard is in agreement with the record available at site. During verification process we requested system generated report to check whether physical inventory is in agreement with system generated report.

We were informed by the yard Manager that all containers are placed at the two location of the yards belongs to Entity.

During physical count of containers we observed that containers were not properly stacked and there was not enough space between lines of containers, due to improper staking we were unable to count properly and verify the container number mentioned on the containers.

We noted that all containers (damage, sound, dirty, oil dirty and oil stain) were not staked separately and there is no identification and marking on the containers about their condition and we were unable to check the condition of the containers.

We were unable to count 1,240 containers mentioned in the containers system generated list due to the wrong staking of the containers. We had physically counted 654 containers i.e 53% of the according to the container number, line and status mentioned on the containers list. The remaining 586 containers i.e 47% were counted with out checking the number of the containers, line and status mentioned on the containers list.

The reconciliation summary of the containers movement is given below.

Opening balance of container 1,240Add: Gate in containers 179Less: Gate out containers 72Closing balance of container 1,347

PHYSICAL INVENTORY COUNT

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Containers Status Containers Quantity PercentageDamage 558 45 %Sound 500 40 %Dirty 135 11 %

Oily Dirty 26 2 %Oil Stain 21 2 %

Total 1,240

Store Inventory

We noted that store inventory received are recorded in store register but goods issued is not recorded in store register and the closing stock list has not provided to us and we were unable to perform physical verification in this connection.

Recommendation:

We recommended that management should give instructions to yard manager to place inventory separately according to condition of the containers to enhance the efficiency and effectiveness including proper utilization of the space available in yard that would also facilitate the counting of the containers.

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Observation Observation description10. Physical Stock Count at Stores

During our review of store in head office building and warehouse at kemari we observe that no records are maintained for the store items which have been placed at the Kemari Warehouse and Building Store Room. Both stores mostly contain scrap items. Store room in the building is located next to the generator of the building which exposes the items to risk of fire in the store. Below is the instance of the items which we counted in both the warehouses.

S.NO ITEM WAREHOUSE QUANTITY

1. CPU Building 7

2. Printer Building 3

3. Keyboard Building 1

4. Cartons Building 8

5. Bag of seal Building 1

S.NO ITEM WAREHOUSE QUANTITY1. Racks Kemari 52. Office chairs Kemari 23. Office tables Kemari 74. Glass door Kemari 15. Cabinets Kemari 36. Stools Kemari 37. Shutter cover Kemari 18. Drawers Kemari 59. cartons filled with box files Kemari 300

Recommendation:

We recommend that either management should look after the warehouses properly or sell all the scrap material placed in the warehouse.

PHYSICAL STORE ITEMS COUNT