DBS Personnel

Jorge Gorda, the corporate controller of DBS$,$ has been with the company since receiving his MBA ten years ago.

Gorda is also a CPA and was a staff accountant with CDG & Co$.$ for five years just prior to joining DBS$.$ Other

DBS personnel include; Edgar Ferolino, vice president, production; Charlie Guanzon, vice president, marketing:

Marlyn Olegario, treasurer; Lana Sinco, director of human resources; John Pondo, chief accountant; Greg Cutillar.

director of internal auditing; and Martin Rustico, director of Computer Based Information Systems $($CBIS$).$ Pondo,

Cutillas, and Rustico report to Gorda. Emil Soriano, the director of purchasing, as well as the plant manager and the

factory supervisors, report to Ferolino. Three personnel officers report to the director of human resources. DBS has

three product managers: one for touring bikes, one for mountain bikes, and one for stationary bikes. The sales staff

reports to the product managers and the product managers report to Guanzon. Under Pondo, the chief accountant,

are Harriet Ybanez, transaction processing; Oliver Plata, cost accounting; and Janice Hofer, financial statements.

Board of Directors and Audit Committee

Bais is the chairman of the board of directors. Also on the board are two of Bais' siblings, neither of whom is engaged

in day$-$to$-$day management of DBS$.$ The rest of the board is comprised of DBS$\text{'}$ treasurer and vice presidents of

production and marketing, as well as a number of external members that were longtime business associates of Bais'

father. The external members of the board have considerable financial expertise in their respective industries

$($insurance$,$ road construction, banking, health care, and software$).$ The board meets quarterly $($March$,$ June,

September, and December$).$ At the December meeting, DBS$\text{'}$ top managers present the board with the budget for

the upcomingyear and analyses of budget variances for the current year through November. Board members receive

the budget and variance analyses approximately two weeks prior to the meeting. Given their limited financial

expertise in the bicycle industry, Board members question or challenge the upcoming budget on very few matters

and seldom have probing questions regarding budget variances. The audit committee $($one of three committees

including the compensation and nomination committees$)$ is made up exclusively of externat members. At the June

and December board meetings, the audit committee holds a joint meeting with the external audit partner, director

of internat audit, and controller to be briefed on audit findings and approve the scope of planned audit activities. In

addition, significant changes in internal control over financial reporting are presented and explained. The audit

committee, in joint consultation with the compensation committee, approves the recommendations of the

controller regarding the annual appointment of the external auditor, and the compensation and retention of the

director of internal audit.

Accounting and Information Systems

Transaction processing is divided into the following sections: General ledger, accounts receivable, accounts

payable, and payroll. The managers of these sections report to Ybanez. Three staff auditors report to the director of

internal auditing. Harold Carreon, information technology manager, and Nancy Kirit, management information

systems manager, report to the CBIS director. Carreon's department is divided into four sections: data entry, data

processing, control, and systems analysis$/$programming$.$ Kirit's department is divided into three sections: statistical

analysis, budget coordination, and report generation. Reporting to the treasurer are Lawrence Y $,$ credit manager;

Paula Pinili, portfolio manager; and Mark Santos, cashier. DBS closes its general ledger on a calendar$-$year basis.

Unaudited financial statements are prepared quarterly and are reviewed by CDG &: Co$.$ The accounting

information system, including the general ledger, inventories, receivables, payables, and plant assets, was initially

computerized more than $20$ years ago, and it was upgraded to a real$-$time system about three years ago. After

extensive "debugging," the real$-$time system seems to be functioning smoothly. The company has provided the

auditors with a year$-$end adjusted trial balance and a complete set of financial statements, together with supporting

schedules $($see Exhibits BB$\mathrm{.}2-$BB$\mathrm{.}6).$ DBS$\text{'}$ internal audit staff of three members plus the director is viewed by our

external audit firm as competent. The internal audit group conducts evaluations of important processes $($e$.$g$.,$ sales,

purchases, and payroll$)$ on a recurring basis, usually once every ten to fourteen months. In addition, the group works

on special projects as warranted. Any weaknesses in accounting and information systems are reported immediately

to Gorda and the responsible function manager. The director of internal audit reports directly to Gorda and also

makes