+-Republic of the PhilippinesCOMMISSION ON AUDIT

Commonwealth Avenue, Quezon City, Philippines

Corporate Government SectorCluster B

INDEPENDENT AUDITOR’S REPORT

The Board of DirectorsPhilippine Postal CorporationLiwasang Bonifacio, Manila

We have audited the accompanying financial statements of the Philippine Postal Corporation(PPC), which comprise the balance sheet as of December 31, 2008, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with generally accepted state accounting principles in the Philippines. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

Basis for Adverse Opinion

The estimated money value of earned leave credits of the Corporation’s 12,380 personnel amounting to P2.5 billion as of December 31, 2008 was not recognized as a benefit liability, contrary to the requirements of Philippine Accounting Standards No. 19, Employee Benefits, thereby understating liabilities, deficit and net loss.

Property and Equipment with a carrying value of P1.142 billion is of doubtful validity as physical inventory thereof in the PPC – Central Office and in several PPC-Regional Offices was either not undertaken, or undertaken but no inventory report thereon submitted or undertaken but inventory report thereon not reconciled with the accounting records. This casts doubt on the existence, whereabouts, condition of the assets and the fairness of the balance presented in the financial statements.

Cash as reported in the balance sheet differs by P184 million from the total balance of the cash in bank as confirmed by the depository banks and the undeposited collection as reported by the postmasters. No reconciliation was done of the variance.

Liability for unpaid domestic money order issued as reported in the balance sheet of P21 million was based on an estimate that is not supported by a record/listing of money order checks issued but not yet cleared with the bank.

As discussed in Note 18 to the financial statements, the balance sheet accounts are presented net of the balances of accounts kept by the then Bureau of Post which could not be substantiated with proper supporting documents. The inadequacy of records did not permit us to apply alternative procedures to establish the validity, accuracy and existence of the balances of these accounts.

Adverse Opinion

In our opinion, because of the effects on the financial statements of the matters discussed in the preceding paragraphs, the financial statements do not present fairly in conformity with the generally accepted state accounting principles in the Philippines, the financial position of the Philippine Postal Corporation as of December 31, 2008, and of its financial performance and cash flows for the year then ended.

COMMISSION ON AUDIT

DIVINIA M. ALAGON Director IV

August 20, 2009