Statement on Internal Control

Introduction

Pursuant to paragraph 15.27(b) of the Bursa Malaysia Securities Berhad ("Bursa Securities") Listing Requirements, the Board of Directors of Yeo Hiap Seng (Malaysia) Berhad is pleased to provide the following statement on the state of internal control of the Group for the financial year ended 31 December 2004, which has been prepared in accordance with the "Statement on Internal Control - Guidance for Directors of Public Listed Companies" issued by the Institute of Internal Auditors Malaysia and adopted by the Bursa Securities.

Internal Control

The Board acknowledges its responsibilities in maintaining a sound system of internal control, and for reviewing its adequacy and integrity in supporting the achievement of YHS Group's strategic goals and business objectives, whilst safeguarding its assets and the public's capital. The nature of risks means that events may occur which would give rise to unanticipated or unavoidable losses and because of the limitation that are inherent in any system of internal control, the Board recognises that such systems of internal control are designed to manage and control risks rather than eliminate the risks of failure to achieve its business objective. Accordingly, it should be noted that the systems of internal control could therefore only provide reasonable and not absolute assurance of effectiveness against the risk of material errors, fraud or losses. The Group's systems of internal control comprises the following key elements:

	Board Committees
	Clear definitions of the functions and responsibilities of the various committees of the Board of Directors.
	Control Procedures
	Established policies, procedures and practices are in place to ensure clear accountabilities and control procedures for all business units. The policies and procedures are available and accessible by all employees via the Group's intranet.
	Organisational Structure and Accountability Levels
	The Group has a well defined organisational structure with clear lines of accountability. The delegation of authority is properly documented and sets out the decisions that need to be taken and the appropriate authority levels of Management, including matters that require Board approval.
	Reporting and Review
	The Group's management team carry out monthly monitoring and review of financial results and forecasts for all business units within the Group, including performance against the operating plans and annual budgets. The Group's management team meet regularly to monitor operational and financial performance as well as to formulate action plans to address any areas of concern.
	Internal Audit
	The internal audit function is currently outsourced to an audit firm. The internal audit function assesses the effectiveness, adequacy and integrity of the systems of internal control of the Group. The internal audit team advises executive and operational management on areas for improvement. The findings are submitted to the Audit Committee, which in turn will review the findings with the management at its quarterly meetings. The internal audit team will subsequently follow-up to determine the extent of their recommendations that have been implemented. As such, the internal audit function provides assurance to the Board on the Group's systems of internal control. The Audit Committee reports to the Board of Directors the activities of the internal audit function, significant findings and the necessary recommendations in relation to the adequacy and effectiveness of the system of internal controls and accounting control procedures of the Group.
	Risk Management
	The Group's operations involve management of a wide range of risks. The Executive Committee, which comprises the Chief Executive Officer and the Senior Management Officers, is responsible for identifying business risks and in ensuring the implementation of appropriate systems to manage these risks. The Executive Committee conducts fortnightly meetings to discuss, review and monitor strategic and operational matters.

Conclusion

The Board is of the view that there is a continuous process in evaluating and managing significant risks faced by the Group. There is no significant breakdown or weaknesses in the systems of internal controls of the Group that may result in material losses to the Group for the financial year ended 31 December 2004. Because of the changing circumstances and conditions, the effectiveness of an internal control system may vary over time. The Board continually evaluates and manages risks faced by the Group and regularly reviews the audit plan, to ascertain if risks are mitigated and well managed.