Annual sales rose 17 percent to 58 million US dollars,according to interim results filed with the stock exchange
The company, a unit of the Hayleys group, had made a net profit of 3.2 million dollars the year before.
The statement said a special audit verification on trade receivables and inventories revealed discrepancies between the value of physical balance of inventories and that in the financial records.
"Net realizable value of certain categories of inventories were lower than that of the stated weighted average cost," it said.
"Trade receivables were overstated as some credit notes due had not been recorded.
This had required an additional provision of 1,187,889 US dollars for trade receivables and 2,090,463 dollars for inventories and provided for in the financial statements for the period ended 31st December 2010.
"A forensic audit was completed, and the findings warranted a criminal investigation which is being carried out," Hayleys MGT Knitting Mills said.