FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance

Department of Internal Auditing
SY 2019-2020

Audit of Accounting and Crewing Department from ADFIL Shipmanning

and Management Corporation

In Partial Fulfillment of the requirement of Internal Auditing

Submitted to:
Mark Anthony Ramos, CPA, CIA, MBA

Submitted By:
TEAM JAS
Rosaroso, Richella (CAE)
Alpe, Cathreene Gayle E.
Cabidoy, Judel Ariel U.
Martorillas, Jahanna Lhee D.
Mendoza, Jason Pasquinel D.
Nuyad, Sharmaine Ann Z.
Vera, Shayna May M.

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

Table of Contents

I. Executive Summary………………………………………………………………....
II. Background/Introduction…………………………………………………………....
III. Audit Methodology/ Audit Procedures……………………………………………..
IV. Objectives…………………………………………………………………………….
V. Scope………………………………………………………………………………....
VI. Risk and Control Assessment……………………………………………………...
VII. Result/ Observation………………………………………………………………….
A. Criteria…………………………………………………………………………
B. Condition………………………………………………………………………
C. Cause…………………………………………………………………………..
D. Effect…………………………………………………………………………...
VIII. Conclusions…………………………………………………………………………..
IX. Recommendations…………………………………………………………………..
X. Annex…………………………………………………………………………………
A. Planning………………………………………………………………………..
- Preliminary Assessment……………………………………………...
- Resource Allocation……………………………………………………
- Audit Program………………………………………………………….
B. Working Paper/ Gathering of Evidence…………………………………....
a. Sufficiency………………………………………………………………
b. Reliability………………………………………………………………..
c. Usefulness……………………………………………………………...
d. Relevance……………………………………………………………....

I. EXECUTIVE SUMMARY

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

This audit report aims to evaluate the internal processes of the crewing and accounting
departments, the effectivity and efficiency of the company’s internal controls, reasonably
identify risks and evaluate its severity, provide the appropriate audit opinions and cost-
efficient recommendations in line with the findings on the company’s risks and controls.

The audit team, thereby conducted a risk and control assessment through on-site
inspection, observation, and interview with the associated officers that helped ascertain
high-risk areas and inadequate controls that are insufficient to minimize the risks, and
discern if additional controls were needed. The gained information and provided
recommendations of the audit team will help the company make the necessary actions to
mitigate the risks and strengthen its controls.

II. INTRODUCTION

The ADFIL engagement was conducted as a strategy to provide assessment and improvement
to enhance the current internal procedures of the organization leading to effective and efficient
operations.
Adfil Shipmanning and Management Corporation (ADFIL) is an entity organized under the laws
of the Republic of the Philippines. It was granted its license to operate by the Securities and
Exchange Commission, a government organization having competent supervisory authority over the
company, on August 25, 2003. Its office is located near the place called the "Luneta", a rendezvous of
seafarers and recruiters.
 Its primary purpose is to own and operate ocean-going vessels and to provide complete marine
services to ship owners or principals.
  The company started operating with only two vessels owned by its principal, Kyowa Sansho Co.,
Ltd. Since the start of operation, the chain of close relationship and mutual understanding has
continued to bind Kyowa Sansho and Adfil. For this reason and coupled with trust and confidence, the
principal entrusted the company additional vessels for manning & management.

III. AUDIT METHODOLOGY/ AUDIT PROCEDURES

Interview: Interview of the people responsible for the oversight of the operation is key in gaining a
deeper understanding on how the established procedures related to the nature of the business. The

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

interview was also extended to employees in the performance of their duty to confirm if employees
understood their job description
Observation and Inspection: The engagement team went to the area of business to obtain first-
hand knowledge of the Company’s actual operation and conducted a physical examination of the
company’s assets and of the existing controls to safeguard those assets
Analytical Procedures: To gain on the plausible relationship of the existing procedures of the
company compared across the same industry with different entities.

IV. AUDIT OBJECTIVE

The overall purpose of the engagement is to evaluate current internal controls and processes,
determine how the company manages its potential risks, ascertain whether the business meets
policies and regulations and to provide recommendations to enhance the company’s efficiency.

V. AUDIT SCOPE

Our Review covers the process of Accounting and Crewing department of ADFIL ship manning
and management operations.

VI. RISK AND CONTROL ASSESSMENT

Risks Identified:
R1: The risk of fraudulent appropriation of funds due to the Liaison’s(Daughter) and the Vice
President’s(Father) signatures appear at one check at the same time.
R2: The risk of having only one person to prepare and audit the financial statements (This person
serves as the company’s accountant and auditor at the same time).
R3: The risk of having only one person to issue checks and vouch for the whole company.
R4: Risk of signing blank checks by the authorized personnel may lead to employee theft.
R5: The risk of having one principal, who finances and supports the crew ship might lead to closing of
the company.
R6: Inadequate amount of security personnel in the office may result to jeopardizing the safety of the
employees.
R7: Risk of Internal Connection; Some applicants who already know someone inside may lead to
biased hiring decision

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

R8: No human resource personnel may result to negligence of standard and making the needs of the
company.
R9: The probability of the applicants to fabricate the requirements may result to bad reputation of the
company when it comes to validation of applicant’s documents.
R10: Reputational risk might lead to losing crews and potential principals.

SEVERE R1 R5 R4
I
M MAJOR R3, R8, R9 R2
P MODERATE R6 R7
A
MINOR
C
INSIGNIFICANT
T
REMOTE UNLIKELY POSSIBLE LIKELY ALMOST CERTAIN

LIKELIHOOD

CRITICAL HIGH MEDIUM LOW VERY LOW

Prioritizing the High and Critical Risk:

R2: The risk of having only one person to prepare the financial statements and at the same
time the person audits it. (This person serves as the company’s accountant and auditor at the
same time)
C4: Management Review and Approval
Based from the interview, the control designed in order to address the risk of having only one
person to prepare the financial statements and at the same time the person audits it, they have
been outsourcing a third person to do this. The management then reviews and approves the
output.
Recommendation: Hire a different auditor to audit the financial statements and a bookkeeper to
prepare the financial statements.
R3: The risk of having only one person to issue checks and vouch for the whole company.
(High Risk)

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

C2: Partnered bank, (which is the metro bank) could keep track of the sequence number and
check number.
C4: Management Review and Approval
Based from the interview, the control designed in order to address the risk of having only one
person to issue checks and vouch for the whole company,is that after making the checks and
voucher it is then passed to the finance head for review and approval. The company’s
partnered bank also have a system installed on the company’s laptop that records and
monitors the issuance of checks using the sequence number aside from the checks’ number.
Recommendation: Segregation of duties. The accounting clerk can continue in issuing checks but the
vouching process will be done by the bookkeeper.

R5: The risk of having one principal, who finances and supports the crew ship might lead to
closing of the company. ( High Risk)
C5: Meeting with potential clients
Based from the interview, the control designed in order to address the risk of having one
principal, who finances and support the crew ship, is that the company has their own social media
website which encourages potential principals to partner with them.
Recommendation: The company should maximize the use of their website and the owner should be
more dedicated on finding other principals like joining in events like exhibits that promotes manning
agencies.

R8: No human resource personnel may result to negligence of standard and making the needs
of the company.

C8: Outsourcing human resource personnel

Based from the interview, the control designed in order to address the risk of not having
human resource personnel, it that they have been outsourcing human resource personnel to
do the company’s hr activity.

Recommendation: Have their existing outsourced HR personnel do HR activities on a quarterly basis.

R9: The probability of the applicants to fabricate the requirements may result to bad
reputation of the company when it comes to validation of applicant’s documents. (High Risk)
C6: Crew Evaluation System Exam
C7: Crew training and Orientation
C4: Management Review and Approval

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

Based from the interview, the control designed in order to address the probability of the
applicants to fabricate the requirements may result to bad reputation of the company when it
comes to validation of applicant’s documents is that the documentary officer will verify it with
the associated agencies like MARINA which is the governing body of the seafarers.
Recommendation: The documentary office can ask for a soft copy of the seafarers’ certification
and documentation for further confirmation of the legality of the documents.
R10: Reputational risk might lead to losing crews and potential principals.
C6: Crew Evaluation System Exam
C7: Crew training and Orientation
Based from the interview, the control designed in order to address reputational risk
might lead to losing crews and potential principals, it is the main reason why they maintained
to attract qualified seafarers and build trust with their potential principals.
Recommendation: The management should strengthen and strictly implement their policies
and procedures, especially their internal control.

Existing Control of the Company:

C2: Partnered bank, (which is the metro bank) could keep track of the sequence
number and check number.
C4: Management Review and Approval
C5: Meeting with potential clients
C6: Crew Evaluation System Exam
C7: Crew training and Orientation
C8: Outsourcing human resource personnel

RISK AND CONTROL MATRIX:

RISK IMPACT LIKE ASSESSMENT CONTROL NATURE ASSESSMENT TEST AUDIT

-LIHOOD PROCEDURES

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

VII. RESULTS/ OBSERVATION

OBSERVATION CRITERIA CONDITION CAUSE EFFECT

Partnered bank, (which is Sequence Attachments of The actual and Prevention of
the metro bank) could keep numbers deposit slip of expected are the financial fraud
Check numbers sequence and same
track of the sequence
check number with
number and check number. authorization
signature of
finance head.

Safety and Security Biometrics The security is The actual and Prevention of
through using biometrics Security Guards for the whole expected are the theft
and with Security Guards. CCTV building. same
Fire and
Emergency exits .
smoke detector
Fire extinguisher

Management Review and Authorized Segregation of Only one person Prevention of

Approval signatories duties. approves and theft
issue a check
3 authorized
personnel

Advertisement Social Media Sites

Crew Evaluation System video on demand The crew The actual and Prevention of
Exam should passed expected are the unqualified
the CESE same applicants

Crew training and Training and The crew The actual and Prevention of
Orientation seminars should have expected are the reputational risk
certificate of same
Briefing of qualified
applicants Proficiency

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

VIII. CONCLUSIONS
The report presents the responsibility for the expression of opinion as to the effectiveness
and efficiency of the existing internal control and procedures. The internal audit function
tries to identify the risk so that the effective recommendations to address the findings can
be provided.

In our opinions having one capitalist/investor is a major issue to the company because
there is a possibility that the capitalist/investor would not renew the contract. It will lead to
company bankruptcy

IX. RECOMMENDATIONS

Below are the recommendations with risks and controls:

X. ANNEX
A. Planning
Narrative
Accounting department:

The accounting departments’ process will start after the crewing department passes the list of
the onboard and off-signer crews for that month. The one who will receive the list and will do the
computation is the accounting clerk and will be rechecked by the bookkeeper for some adjustments
and deductions. After this, it will proceed for another rechecking and final approval by the finance
head and it will be noted by the president of the company. Usually it is prepared every 16 th of the
month and will be submitted to the principal via a courier and through online. The principal will then
verify and approve the said statement and will remit the remittances that will take weeks to process
and is usually received by the company every 28 th of the month.

After receiving the remittances the company’s bookkeeper will first compute the salaries with
deductions for their SSS, Pag-ibig, PhilHealth and their tardiness of the employee working in ADFIL
before computing the home allotments of the crew, which is the crews’ salaries. The crews’ home
allotment is computed by the accounting clerk and bookkeeper and is composed of their basic wage,
their allowances depending on their rank, salary adjustments, leave pay and other benefits. It also
includes the deductions for union fees, pay on board and if they have any cash advances before they
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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

went onboard. For its final computation, it is divided on how the crew allocates his salaries to his
allottees for example one crew can have three allottee that can be his mother, wife and his own
account. This allocation is based upon on the list that was submitted by the crew to the accounting
department before they went on board. They will be the one deciding the amount of each account, all
they have to do is submit the list of the names of their allottees and the account number since it will
be done through banks. It will be reviewed and rechecked by the finance head. Home allotments are
also signed by the bookkeeper, the finance head and two directors. Usually it is remitted every 5 th of
the following month.

Crewing Department:
The process of the crewing department will start at the application of the seafarer which is
either done through walk-ins with referrals or by recruitment. Referral means that the seafarer might
know someone inside the office like the land-based employee or an onboard seafarer and they
referred him to the company. Being recruited is based upon the needs of the company for a specific
position that is not available in their list of crews off the board, But is needed for deployment which is
caused by a finished contract of an onboard officer and he does not want to extend his contract any
longer.
After the application, the seafarer will proceed to the assistant crewing manager for screening
and the documentary officer for his documentation like checking for passports, seaman's book,
certificates of training, etc. It is then followed by a Crew Evaluation System exam that the applicant
needs to pass to proceed to the crewing manager for an interview and approval that includes
character and personality checking. If the position that the applicant is applying for is vacant, he will
proceed to the accounting department. But if the position is not available, he will be asked if he can
wait until someone with the same position signs off until then he will be listed as a reserve for that
current position.
While in the accounting department, the first step will start with the bookkeeper and the
accounting clerk for the applicants' financial documentation like SSS, PhilHealth, Pag-ibig numbers
and the allocation of his salary. If the applicant has any further questions regarding other financial
matters, he will then request to see the finance head. After these procedures, the applicant proceeds
to Kwoya Philippines for an interview, Video-On-Demand Exam (VOD) that he also needs to pass
and for another approval. Kyowa Philippines is a branch of the principal. The applicant will go back to
ADFIL upon the approval of Kyowa Philippines so that the crewing manager will email that principal in
Japan for the final approval. The approval procedure can be done on the same day. After receiving
the final approval, the applicant will now proceed to the liaison officer for the signing of contracts.
B. Resource Allocation

GROUPMEMBER ALLOCATION & ASSESSMENT DURATION

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

Rosaroso, Richella Interview

Risk Assessment
Test of Controls

Alpe, Cathreene Test of Controls

Cabidoy, Judel Risk Assessment

Test of Control

Martorilla,Jahanna Risk Assessment

Test of Control

Mendoza,Jason Risk Assessment

Test of Control

Nuyad, Sharmaine Test of Control

Vera, Shayna Test of Control

C. Gathering of Evidence
Interview with the Crewing Department
1. Was there ever an instance where your seafarers’ lives were put in danger while on board? If yes,
what were the necessary steps that Adfil made? What was its effect on the company?
2. What are the processes that your seafarers have to undergo before going on board or securing a
position on the next boarding?
3. Was there ever an instance where your seafarers were denied, in the immigration, to leave the
country? If yes, what are the steps that Adfil took to make it up to the seafarers?
4. Did you ever lose any seafarers due to lack of available position needed in your principal’s ship?
What were Adfil’s actions to solve this problem?
5. Have you ever encountered complaints from the seafarers that someone else was taking their
position due to internal connections when they clearly are next in the line-up?
6. As an officer in the crewing department, what do you think are Adfil’s weakest points or areas for
improvement? Why

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 FAR EASTERN UNIVERSITY
Institute of Accounts, Business and Finance
Department of Internal Auditing
SY 2019-2020

Interview with the Accounting Department

1. What are the company’s policies and procedures when handling the crew’s payrolls or SOA?
2. What are the other duties, aside from accounting, do you do?
3. What are the policies and procedures that you, as an accountant, has to follow?
4. How do you handle any mishaps in the company regarding your department?
5. Was there an instance where you were skeptic about some transactions are suspicious?
6. What do you think are Adfil’s weakest points or areas for improvement?
7. If any, what are your suggestions that Adfil should do or implement that will benefit the security and
will help in the accuracy rate of each transactions of your department?

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