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<PAGE> PAGE 2
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TITLE V.P. & SECRETARY
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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Report of Independent Auditors on Internal Control Structure
Board of Directors and Shareholders
Princor World Fund, Inc.
In planning and performing our audit of the financial statements of Princor
World Fund, Inc. for the year ended October 31, 1995, we considered its internal
control structure, including procedures for safeguarding securities, in order to
determine our auditing procedures for the purpose of expressing our opinion on
the financial statements and to comply with the requirements of Form N-SAR, not
to provide assurance on the internal control structure.
The management of Princor World Fund, Inc. is responsible for establishing and
maintaining an internal control structure. In fulfilling this responsibility,
estimates and judgments by management are required to assess the expected
benefits and related costs of internal control structure policies and
procedures. Two of the objectives of an internal control structure are to
provide management with reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or disposition and that
transactions are executed in accordance with management's authorization and
recorded properly to permit preparation of financial statements in conformity
with generally accepted accounting principles.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projection of any evaluation
of the structure to future periods is subject to the risk that it may become
inadequate because of changes in conditions or that the effectiveness of the
design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weaknesses under standards established by the American Institute of Certified
Public Accountants. A material weakness is a condition in which the design or
operation of the specific internal control structure elements does not reduce to
a relatively low level the risk that errors or irregularities in amounts that
would be material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions. However, we noted no matters
involving the internal control structure, including procedures for safeguarding
securities, that we consider to be material weaknesses as defined above as of
October 31, 1995.
This report is intended solely for the information and use of management and the
Securities and Exchange Commission.
Des Moines, Iowa
November 22, 1995
Independent Service Auditors' Report
The Board of Directors
Princor Management Corporation
We have examined the accompanying description of policies and procedures
applicable to the multiple distribution system for calculating the net asset
value, dividends and distributions of, and for allocating income and expenses
to, various classes of shares of each of the Princor Mutual Funds listed in
Exhibit 1 attached hereto (the "Funds"). Our examination included procedures to
obtain reasonable assurance about whether (1) the accompanying description
presents fairly, in all material respects, the aspects of Princor Management
Corporation's policies and procedures that may be relevant to the Funds'
internal control structure, (2) the control structure policies and procedures
included in the description were suitably designed to achieve the control
objectives specified in the description, if those policies and procedures were
complied with satisfactorily, and (3) such policies and procedures had been
placed in operation as of October 31, 1995. Princor Management Corporation uses
a computer processing service organization for a portion of its computer
processing. The accompanying description includes only those policies and
procedures and related control objectives of Princor Management Corporation, and
does not include the policies and procedures and related control objectives of
the computer processing organization. Our examination did not extend to the
computer processing service organization's policies and procedures. The control
objectives were specified by Princor Management Corporation. Our examination was
performed in accordance with standards established by the American Institute of
Certified Public Accountants and included those procedures we considered
necessary in the circumstances to obtain a reasonable basis for rendering our
opinion.
In our opinion, the accompanying description of the aforementioned portions of
the internal control structure presents fairly, in all material respects, the
relevant aspects of Princor Management Corporation's policies and procedures
that had been placed in operation as of October 31, 1995. Also, in our opinion,
the policies and procedures, as described, are suitably designed to provide
reasonable assurance that the specified control objectives would be achieved if
the described control structure policies and procedures were complied with
satisfactorily.
In addition to the procedures we considered necessary to render our opinion as
expressed in the previous paragraph, we applied tests to specific policies and
procedures, listed in Section III. The nature, timing, extent, and results of
the tests are listed in Section IV. This information has been provided to the
Funds and to their auditors to be taken into consideration, along with
information about the internal control structure at the Funds, when making
assessments of control risk for the Funds. In our opinion, the control structure
policies and procedures that were tested were operating with sufficient
effectiveness to provide reasonable, but not absolute, assurance that the
control objectives specified in Section II were achieved during the period from
December 9, 1994 (date dual class shares first offered to the public) to October
31, 1995.
The relative effectiveness and significance of specific policies and procedures
at Princor Management Corporation and their effect on assessments of control
risk at the Funds are dependent on their interaction with the policies,
procedures, and other factors present at the Funds and at the computer
processing service organization. We have performed no procedures to evaluate the
effectiveness of the policies and procedures placed in operation at the computer
processing service organization.
The description of the policies and procedures at Princor Management Corporation
is as of October 31, 1995, and the information about the tests of the operating
effectiveness of the specified control structure policies and procedures covers
the period from December 9, 1994 to October 31, 1995. Any projection of such
information to the future is subject to the risk that, because of changes, the
description may no longer portray the system in existence. The potential
effectiveness of specified policies and procedures at Princor Management
Corporation is subject to inherent limitations, and accordingly, errors or
irregularities may occur and not be detected. Furthermore, the projection of any
conclusions, based on our findings, to future periods is subject to the risk
that changes may alter the validity of such conclusions.
This report is intended for use by the management of Princor Management
Corporation, the Funds, and the Securities and Exchange Commission.
Des Moines, Iowa
November 22, 1995
<PAGE>
Section I
Description of the System
Princor Financial Services Corporation ("the Distributor"), Princor Management
Corporation ("Adviser") and each of the funds listed on Exhibit 1 (the "Fund or
Funds") have implemented plans which allow each of the Funds to issue two
separate classes of shares under a Dual Distribution System (the "System").
The System enables each Fund to offer investors the option of purchasing shares
subject to: (i) a conventional front-end sales charge ("Class A shares") or (ii)
a contingent deferred sales charge ("Class B shares"). The Fund will pay to the
distributor a distribution fee pursuant to the Fund's Rule 12b-1 distribution
plan at an annual rate of up to .25% of the average daily net asset value of the
Class A shares, and up to 1.00% of the average daily net asset value of the
Class B shares. The two classes each represent interests in the same portfolio
of investments of a Fund. For accounting purposes, the two classes of a Fund are
identical except that the net asset value and expenses of each class will
reflect the Distribution Plan expenses (if any) and any Class Expenses, as
defined below, attributable to the class. "Class Expenses" are limited to: (i)
transfer agency fees, as identified by the Funds' transfer agent as being
attributable to a specific class; (ii) blue sky registration fees incurred with
respect to a class of shares; (iii) Commission registration fees incurred with
respect to a class of shares; (iv) the expenses of administrative personnel and
services as required to provide services to the shareholders of a specific
class; (v) litigation or other legal expenses or audit or other accounting
expenses relating solely to one class of shares; (vi) Directors' fees incurred
as a result of issues relating to one class of shares; and (vii) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders of a given
class.
Any additional incremental expenses not specifically identified above that are
subsequently identified and determined to be properly allocated to one class of
shares will not be so allocated unless and until approved by the Commission
pursuant to an amended order. Certain expenses may be allocated differently if
their method of imposition changes; thus, if a Class Expense of a Fund can no
longer be attributed to a class it will be allocated to the Fund as a whole.
The net asset value of all outstanding shares of the two classes is determined
by dividing the ending total net assets applicable to a specific class by the
number of shares outstanding relating to that class. Expenses are attributable
to each class of shares depending on the nature of the expenditure and are
accrued on a daily basis. These fall into two categories: (1) fund level
expenses that are attributable to each class that are allocated based on net
assets at the beginning of the day (i.e., legal, audit, etc.) and (2) certain
class level expenses that may have a different cost for one class versus the
other (i.e., 12b-1 fees). Because of the additional expenses that will be borne
by the Class B shares, the net income attributable to and the dividends payable
on Class B shares will be lower than the net income attributable to and the
dividends payable on Class A shares.
<PAGE>
Section II
Specified Control Objectives
Following are the control objectives of the Fund's system of internal accounting
control relating to the allocation of income and expenses to the two classes of
shares within the Fund:
Income, expenses and realized and unrealized gains and losses are properly
allocated between the two classes of shares within the Fund.
Distribution expenses are properly calculated.
Dividends and distributions are recorded correctly as to account, amount,
period and class of shares of the Fund.
Net asset value per share ("NAV") of each class of shares of the Fund
includes the appropriate amount of income and expense, including those
expenses allocated between each class of shares.
Section III
Policies and Procedures to Achieve Specified Control Objectives
The following procedures are designed to account for the two classes of shares
in each Fund:
1. On a daily basis, the mutual fund accounting system calculates the
distribution fees to be charged to each class by applying the appropriate
class annual fee rate of up to .25% for Class A shares and up to 1.00%
for Class B shares, to the prior day's average net asset value of the
class of shares. These calculations are reviewed by the fund accountant.
2. The mutual fund accounting system then allocates the total daily income
and expenses among the Class A and Class B shares for daily distribution
Funds, based on their respective outstanding (i.e., "settled") shares.
Daily income and expenses are allocated for all other Funds based on
their respective adjusted net assets at the end of the prior day. The
number of shares outstanding in each class is provided to the accountant
by the Fund's transfer agent, who maintains each class of shares in a
separate account. The daily income and expense allocations are reviewed
by the fund accountant.
3. For daily distribution funds, upon completion of the income and expense
allocations, the fund accountant determines the required distribution by
class of shares by dividing daily net investment income allocated to each
class by the number of shares eligible to receive dividends for the
respective shares.
For funds in which net investment income is distributed other than daily,
the mutual fund accounting system accumulates net investment income by
class.
4. The NAV by class is determined by dividing the ending total net assets
applicable to a specific class by the number of shares outstanding
relating to that class.
<PAGE>
5. On a daily basis, the fund supervisor reviews the distribution fees,
income and expense allocations, the net asset value per share for Class A
and Class B shares and the dividends per share calculations, if
applicable. The reviewer initials the worksheets to evidence this review.
6. Before the NAVs, daily dividend rates and yields are released, the fund
supervisor reviews the reasonableness of the NAVs, daily dividend rates
and yields. Special attention is paid to the differences between the
NAVs, daily dividend rates and yields of the two classes of shares.
7. Once the fund supervisor is satisfied that all of the above steps have
been completed and that the NAVs, daily dividend rates and yields appear
reasonable, the NAVs, daily dividend rates and yields are made available
to the transfer agent for processing purposes.
8. If the fund supervisor notes any unusual fluctuations between NAVs, daily
dividend rates and yields of the two classes in the Fund, they will
research the matter and document the findings. The fund manager reviews
and initials this documentation evidencing final approval of the NAVs,
daily dividend rates and yields.
9. On a monthly basis, the fund manager reviews a monthly checklist
including the calculations of all income and expense items. In doing so,
they review a separate record of the average daily net assets of each
class of shares in the Fund. All fees calculated by the fund accountant
are then reconciled to the general ledger of the Fund. The fund manager
reviews and initials this reconciliation evidencing their approval.
Section IV
Tests of Effectiveness of Control Structure Policies and Procedures
Our tests of the effectiveness of control structure policies and procedures were
designed to determine whether:
1. The description of Princor Management Corporation's policies and
procedures included in Section I of this report presents fairly, in all
material respects, those aspects of Princor Management Corporation's
control structure that may be relevant to a user organization's internal
control structure.
2. The control structure policies and procedures described in Section III of
this report were suitably designed to achieve the control objectives
defined in Section II of this report, if those policies and procedures
were complied with satisfactorily.
3. The control structure policies and procedures described in Section III of
this report had been placed in operation as of the date specified.
4. The control structure policies and procedures were operating with
sufficient effectiveness to provide reasonable, but not absolute,
assurance that the control objectives in Section II were achieved during
the period from December 9, 1994 to October 31, 1995.
<PAGE>
Our tests of the effectiveness of control structure policies and procedures
included the following procedures, to the extent we considered necessary: (a) a
review of Princor Management Corporation's organizational structure, including
the segregation of functional responsibilities, policy statements, and personnel
policies, (b) discussions with management, accounting, administrative and other
personnel who are assigned responsibilities for developing, ensuring adherence
to and applying control structure policies and procedures, and (c) observations
of personnel in the performance of their assigned duties.
Our tests of the effectiveness of control structure policies and procedures
included such other tests as we considered necessary in the circumstances to
evaluate whether those policies and procedures, and the extent of compliance
with them, are sufficient to provide reasonable, but not absolute, assurance
that the specified control objectives were achieved during the period from
December 9, 1994 to October 31, 1995. Our tests of the operational effectiveness
of control structure policies and procedures were designed to cover the
calculation for the period from December 9, 1994 to October 31, 1995, for each
of the procedures listed in Section III which satisfy the control objectives
listed in Section II of this report. In selecting particular tests of the
operational effectiveness of control structure policies and procedures, we
considered the (a) nature of the items being tested, (b) the kinds and
competence of available evidential matter, (c) the nature of the audit
objectives to be achieved, (d) the assessed level of control risk, and (e) the
expected efficiency and effectiveness of the tests.
Tests of effectiveness of control structure policies and procedures included:
o Tests of source documentation to ensure validity of information.
o Tests of input and supervisory control procedures in place to ensure
accuracy, completeness, validity and integrity of processing.
o Tests of recalculation of output to verify accuracy.
o Tests of output control procedures and resultant documents and reports
relative to specific calculations to ensure accurate and timely updates
of accounting records were achieved.
Testing procedures were designed and performed to enable us to conclude that the
control objectives listed in Section II of this report were achieved during the
period from December 9, 1994 to October 31, 1995. <PAGE>
Exhibit 1
Princor Bond Fund, Inc.
Princor Cash Management Fund, Inc.
Princor Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc.
Princor Utilities Fund, Inc.
Princor Balanced Fund, Inc.
Princor Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc.
Princor Emerging Growth Fund, Inc.
Princor Growth Fund, Inc.
Princor World Fund, Inc.
