Report of Internal Control performed by Bruno, Trapp, & Z, LLP.

We have audited Alchemy Inc.’s processes of internal control and have concluded that Alchemy Inc. did not maintain effective internal control over financial reporting. This conclusion was made after identifying and examining the potential areas for mistake and/or fraud. Alchemy Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified.

There are numerous control issues that are present at Alchemy Inc. To begin, there are some important issues involving management. Ben Eaze is the supervisor of the Receiving Dept., the Operations Dept, and the Shipping Dept. Having one single person overseeing this entire process gives that person ample opportunity for intentional wrongdoing and also being negligent in his or her duties. Ben Eaze collects the logs that are kept by the workers once a week. However, a daily collection would provide more control in the sense that each day’s activities can be checked at the end of each day. Also the CEO seems to be committed to preventing fraud. However, the employees do not reflect that same feeling. The CEO praised the company’s Code of Ethics, and ethics hotline, however most employees did not use them or are unaware of their presence.

Moving on, a few control problems were present in the Receiving Department. The Receiving Clerk manually counts the amount of spheres received in a delivery, without any assistance. These spheres are counted as a whole, and are not differentiated between colors, or compared to purchase orders. The Receiving Clerk also accepts delivery of orange spheres which are of no value, and are discarded. Because Alchemy only uses green and gold spheres, it is unclear why they receive any orange ones. The Receiving Clerk keeps a weekly log of his count, which is not compared to any other list, and is then submitted to Ben Eaze. The Receiving Clerk also delivers spheres to the machine operators when they are needed. Each morning he delivers six bags to every operator, and then delivers additional bags as they are needed. There is no count of which operators require the most bags, or how many spheres are used by each operator. The operators also do not sign for the new bags that are delivered to them.

Control issues were also discovered in the everyday tasks of the Machine Operator. One task of the operator is to separate gold spheres from green ones and orange ones. The problem is that she is color blind. Although she claims to be able to tell shades of colors real well, this presents a very possible material problem. During the day, the machine operator never reconciles the physical count to that of the machines laser counter which is recalibrated daily for accuracy. The manual clicker has been broken for some time and she is forced to count with her head. When she receives the spheres from receiving she is not required to sign off on raw materials received at any point during the day. As well, there is a trap door present on her machine which she claims to have no knowledge of its use. This is something could present a problem if it were used in a fraudulent manner.

At the end of the day, when her shift is over, she leaves unfinished bags of spheres unguarded and not stored, which invites theft. As mentioned earlier, she is unfamiliar with the code of conduct. She also has no email which the CEO uses to get feedback from the employees. Not having email leaves her out of the open-table discussion. Also any orange spheres she identifies are discarded. No record of this is made. Lastly, her salary is based on the amount of spheres she helixinates. This is a problem because she can put the orange spheres through the helixination process and then discard them and still get paid for it.

The next area of internal control weakness is present in the Shipping Dept. The Shipping clerk does not reconcile the number of spheres received from receiving to the number shipped. So if one thousand were received and only nine-hundred get shipped out, Alchemy has no way of discovering this fault. The shipping clerk also has no knowledge of the code of ethics and is also without email. This leaves her out of the open-table discussion as well. Lastly, at shipping, there is no check to see if the correct colored spheres are in the correct bins.

Also, the security on the shipping floor seems a little lax. All that is needed is a swipe card. There are no biometric devices used to allow entry to the floor. Spheres are never stored and the canisters are left open until they are shipped out. The shipping clerk is unaware of any confirmation with management and only assumes it is present. The last internal control weakness with shipping is the fact that partial bags are sometimes shipped out. These bags can be only half full and can be recorded as full. This would inflate their sales numbers.

In our opinion, Alchemy Inc. did not maintain effective internal control over financial reporting in their most recent fiscal year. Also in our opinion, because of the effect of the material weaknesses described above on the company’s ability to achieve the objectives of the control criteria, Alchemy Inc. did not maintain in all material respects, effective internal control over financial reporting during their most recent fiscal year.

Frank J. Bruno
Kevin Trapp
David M. Zawitkowski

Philadelphia, Pennsylvania

March 16, 2005