Mini Case Study - A Delima

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It conducted trading and supplying related products including manpower supplies to the oil and gas industries. Accountant). and Encik S AiniAman AzbirAbu Bakar gtaduate as Fi matters. Both Puan Balqis and tr4air\'sian l!ls1ihrle oiArcounlsilts April l[r-6 ln May 2Cr{'t6. Encik Zayed and Puan Hashimah tried to negotiate with the Auditor to not qualify the Financial Statements. the Finance Executive who was newly appointed by Jhe company to analyse and provide the Auditors with the necessary clarification and documentation. as Encik Zayed had applied for banking facilities to implement several contracts the company had managed to secure. the enterprise was incorporated as Delima Enterprise Sdn Bhd.-rf =it 5?. Time was the essence and the Audited Financial Statements had to be issued to the bank at least by September 2006. The company had maintained a very lean organisation (refer to Appendix E) with basic functional positions. EncikZayed.7 million respectively. Encik Zayed had assigned the tasks to Cik Amy. Appendix A to D presents Delima Enterprise Sdn Bhd Unaudited Financial Statements as at 31 May 2004 to 31 May 2005. 1-1Pr . the Human Resource and Administration Manager.-_3r . Since 2006. due to encouraging business growth. The two principal shareholders and controlling directors were Encik Zayed and Puan Hashimah (husband and wife). incluti A Delima Yasmiza Long was responsihb since 2006 when Encik Zayed engaged the external Auditor Aziz & Co (Chartered. The other personnel were Puan Balqis.ccountar: t earliest -\ccountiry -\li accr- !'l >eVe:3. introduced by his friend to perform the statutory audit for the period 2003 to 2006. Company Background Delima Enterprise was founded in 1981 by Encik Zayed. Subsequently in 2004. However. That was the first audit experience for Encik Zayed and Puan Hashimah and it was a difficult learning experience. the Operations Manager and Encik Salam.0 million and RM1. a duration u. The company activities had expanded into provision of engineering services as part of their business diversification and expansion plans. The Auditors expressed their intention to qualify the Financial Statements due to several unresolved issues.Mustapa Kamal Mohd Razali Encik Salarn self-made bu. the company had been awarded with several engineering projects and its cumulative revenue for 2004 and 2005 were nearly RMl. failing which Encik Zayed planned to terminate the auditor's appointment and appoint a new "friendly party" auditor. The company's corporate mission was to become a leading service contractor and provide quality products and excellent services.f Malavan The banl-i flis 11-g5 : $:tr A friend haa -A. with Encik Zayed as the Managing Director and his wife Puan Hashimah as the Chief Operating Officer.and Puan Hashimah were not familiar with Accounting Standards and the provisions of the Companies Act 1965. including their roles and duties as Company Directors. It was July. The company had maintained a very lean organisation and had employed their own family members as employees and some did not have the necessary job experiences.

it was done as and when the payment had been long outstanding. HR. Encik Zayed and Puan Hashimah were self-made business owners with only secondary school background and likewise. At the end of every week. Nlalavsirn ilrstitutr' of . Aziz & Co (Charlered Accountant) was engaged to perform the audit.AicoLrlGnts m i"* . The company also paid their general workers in cash on a weekly basis and it was therefore. The employees prepared their timesheets when they arrived at work and recorded the time they leave the office. Monthly Statement ofAccounts was not sent to customers on a monthly basis. the purchase orders (PO) were also manually prepared and not pre-numbered.lhe company had employed Cik Amy.-ts :E Encik Salam were family members of the Directors. manually. Information and Records accounting records were maintained using the standard financial software "MYOB". The banks required the company's Audited Financial Statements for the last two years. Due to shortage of funds. One copy of the sales invoices was attached to the delivery order for the customer and the other copy was used to update the sales records. a young Accounting graduate as Finance Executive responsible for maintenance of the accountirig and financial matters. In May 2006. A friend had introduced to Encik Zayed an audit firm and shortly after. accounts receivables and payroll transactions were updated and entered into the general ledger (GL) system. The programme was not integrated fthe data was not processed and generated automatically between several modules namely Procurement. including the preparation of accounts. At every end of the accounting period. Instead. Puan Hashimah was responsible for all finance related matters. Prior to CikAmy's appointment.000 to be implemented over a duration of six months. Likewise. information summary generated by all purchases. The original PO was issued to the suppliers or senrice providers and a copy was retained for record and GL system update. Cik Amy graduated from a local university since April 2006 and had no working experience. Collections from the customers were received via cheques and cash and not all payments from customers were received in fuIl. Accounting Systems. Accounts Receivables (AR) and Cash Book (CB)1. not unusual to withdraw large sums of cash from the local banks when needed. Puan Balqis and Encik Salam. the employee timesheets were sent to Puan Hashimah for approval and payment of salaries. while the manual sales invoices were not pre-numbered. the company had submitted applications to Malayan Banking Berhad and CIMB Bank Berhad for banking facilities totaling RMI million. In May 2006. the company had secured a contract worth RM750. The audit was targeted to be completed at the earliest possible to meet the bank's requirement. and this was when Encik Zayed realised that the company had not performed the statutory audit. All u) lsJ The Sales' invoices were manually produced when orders were received and the job was completed. Accounts Payables (AP).

150 were charged to the company during the year 2005. Based on the analysis by Cik Amy. Several pages of the Accounts Receivables listing went missing and thus.000 (RM40. They also found out that several collections f. several unrecorded cash withdrawals and Cash and Bank balances were not reconciled.Audit Findings and Recommendations The Auditor had difficulties to complete the audit due to incomplete information and records and in addition. 3.000. That several withdrawals from the company totaling RMl2. That several over payments were made during the year 20041o the Trade Creditors totaling RM50.000 for year 2005 respectively. On top of that.000 for year 2004 andRM250. The Auditor recommended that the Company advise the respective Trade Creditors and request for Credit Notes. Cash Book and Bank balances. That the RM150. The Auditor recommended that the amount be reconciled or written-off to Profit & Loss Accounts. 4. That there was no Standard Operating Procedure (SOP) in place and all deci'sions were made and authorised by either Encik Zayed or Puan Hashimah.rom Trade Debtors were long outstanding and several personal withdrawals and expenses were charged to the company. Non-reconciled payments and collections noted for the period under review totalled RM150. 5. The Auditor recommended that the amount be provided in the Profit & Loss Accounts.000 recorded as Accounts Payables was actually Cash Advances made by Encik Zayed to the companies during theyear 2004. That the balances of the detail Accounts Receivables for year 2004 were understated by RM40. The Auditor noted the following findings: 1. Several assets purchased by the company were not recorded and there were several over-payments made to Trade Creditors. That the sum RM250. a standard operating procedure was not in place. That no reconciliation was performed for Accounts Payables. 2.500 were made from the company without proper documentation.Thatpersonal vehicle expenses for Encik Zayed and Puan Hashimah totaling RM50. the following were noted: 1.000 from the Accounts Receivables Summary Report for year 2005 was wrongly entered into the General Ledger and no one had reviewed the record. That the Cash and Bank balances in Cash Book were overstated by RM70. 2. the listing of the individual accounts receivable balances was not a continuous list. The records were not organised and filed accordingly for easy reference. Accounts Receivables. The Auditors recommended that an SOP be prepared and implemented. distorted at several points and the individual Account Receivables balances did not add up to the total of the l\4alrysiM lnilillxc oiAccouulillls . That no individual project budget and analysis were prepared. 6. 8.000 compared to the Accounts Receivables General Ledger in total. T.000 for year 2004 and RM30.000 for year 2005) compared to the Bank Statements.

6. which was recorded twice in the General Ledger and RM40.report.000.'f: Discluimer: This case presents the actual family-business dilemma and identities have been changed to protect family privacy. Were there any abuses of power by the management and breach of fiduciary on the part of the directors? Who should be held responsible and accountable? Could the Audit be completed soon without any qualification? What should be done to improve the leadership and management of Delima Enterprise Sdn Bhd? fJ l. but she thought that was not enough. 7.AccorBllants . That the EPF contribution for contract workers were not deducted and remitted to EPF.000 was related to Cash Advance from Encik Zayed in year 2004. That the overpayment of Trade Creditors totaling RM50. were related to Trade Receivables Accounts for year 2005 and the RM30. ThatEncik Zayedwas not willing to commit and invest on necessary training to enhance the knowledge of the employees so that they could be more effective and efficient in performing their jobs.000 in year 2004 was due to human error as a result of lack of control. for academic purpose only and the author disclaims any legal N:lalayilan lrstitute of. Cik Amy was very concerned with the situation and had tried her best to facilitate the audit completion. That there were no comprehensive business plan and budget prepared. She admired the leadership and the struggle demonskated by Encik Zayed and Puan Hashimah. 4.000.:ii & F" . 3. That the receipts of RM70. The author b opinions do not necessarily reflect the views of the Malaysian Institute of Accountants and this case wqs written responsibilities. 5.

050 66.188 Rental ofoffice 49.147 Auditors'fees 8.964.895.000 & Provision for Depreeiation (FA) Control total CR 5.ll RM CR & Salarieg afl 2005 RM t 13.410 Sales Other payables.925 4s.244 8r7.979 t.192 520.000 15.906 58.000 Secretarial fees t. accruals provisions Share caoitals Retained Pro fitl(Lo ss) Current year Profit/(Loss) i\4ainvsiar h5titr(c ol Acsluntants 482.825 267.925 67. deposits prepa\.929 Cost of Sales i.223 70 715 31.000 5 R?5 Bank charses Trade payables t.700.AppendixA De\\ma Bnterprise Sdn Bhil \Jnaudited'lria\ Ba\ance as at 31 May 2004 to 31 May 2005 20$4 DASCRIPTION DR Fixed Assets Trade receivables Other debtors.833 Office expenses Motor vehicle exDenses 15.ooo 21.025 35.812 1 2.ments Cash & bank balances DR 133.812 13.919 .t65 ?.000 500.525 897.l3l 500.481 l4.818 98.000 25.617 181.500 1.93s 1.457 627.1 87 1.7 37 Directors' emoluments 42.670 847.000 10.895.964.632 3 28.187 t43.500 Deoreciation 22Jso 14.326.

deposits and prepayments Cash and bank balances 398.825 LESS: CT]RRENT LIABILITIES Trade payables Other payables..192 NET CURRENT ASSETS/(NET CURRENT LIABILITIES) 660.187 h{alx}.093 267.147 969.929 482.457 358.187 td F- '7561352 613.35? dl3'18? s00.4 :.331 FIXED ASSETS CURRENT ASSETS Trade receivables 817.H :E .507 96.et Delima Enterprise Sdn Bhd Unaudited Balance Sheets as at 31 May 2004 to 31May 2005 2004:' :'2005 l .493 iT56.192 520.1 56 t.000 500... accruals & provisions 66"223 70^735 914.. ' 83.000 FINANCED BY SHARE CAPITAL d ACCUMULATED PROFIT(LOSS) CARRIED FORWARD ) \6 75'.685 847.574.Appendix B .021 416.r73 295.) 1 13.632 Other debtors.fttr![. 'RM.152 553.sia!1 Irstiture of Accounlant$ .

1 .188 Salaries 6'.825 256.670 I 13.a].ian rnsr. s.187 .000 Rental ofoffice 15 q?5 27.s2s 897.750 46.&FJ TURNOVER PROFIT(LOSS) FOR THE YEAR Aft er charging/(crediting) .187 : Auditors'fees Secretarial fees 8.833 Office expenses 15.i2&05 .000 10. :RM.050 143.92s 14.000 1.500 1.352 5..700. t.X{X}4..025 45.500 Depreciation Directors' emoluments 22. Aj\nunt r''r.7.165 t13.000 Bank charges ACCUMULATED PROFIT(LOSSES) @ ki !* cfi \lr.737 42.rur ..Appendix C Delima Enterprise Sdn Bhd Unaudited Profit & Loss Statements for the period 31 May 2004 to 31 May 2005 .

725 iEl *.6'.68Or. 529.960) (553.924 (35.-130341:.78 26'7. 5tr9'68t' 399.574) (98. N{aiaysian Inslil$e of Acciunlants .915 127.244) APPLICATION OF FUND Purchased of fixed assets Increased in paid-up capital R.t47 TNCREASED(DECREASED) IN WORKING CAPITAL Receivables Payables 815.1 87 74.192) 38.623 (360.750 13.J F* Movement in net liquid funds: Cash and bank balances u) .341 '.533 91.Appendix D Delima Bnterprise Sdn Bhd Unaudited Cash Flow Statements for the period 31 May 2004 to 31 May 2005 SOT]RCES OF FUNDS Profit for the year Adjustment for items not involving the movement of funds: Depreciation t43.t65 1 22.000 -r130.737 OTHER SOURCES OF FUNDS Proceeds from disposal of fixed assets 165.663 262.EPRESENTED BY: s00.

AppendixE Delima Enterprise Sdn Bhd Organisational Chart as of 3L May 2005 Encik Zayed Chief Executive Officer Puan Hashimah Chief Operating Officer Encik Salam Human Resource Puan Balqis & Operations Manager Administration Manager a{ id Vacant i"" Project Supervisor Project Team (On contract basis based on project requirements) ffi "*'or''on 'nstii!te 0i Accouttans Cik Amy Finance Executive .