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Synopsis
This case is about an enterprise founded by family members and later was incorporated
as Sdn Bhd. The shareholders are mainly the directors of husband and wife who involved
in the management ofthe company. It was July, 2006 when Encik Zayed engaged the
external Auditor Aziz & Co (Chartered Accountant) introduced by his friend to perform
the statutory audit for the period of 2003 to 2006. That was the first audit experience for
Encik Zayed and Puan Hashimah and it was a difficult learning experience.
The Auditors expressed their intention to qualify the Financial Statements due to several
unresolved issues. However, Encik Zayed and Puan Hashimah tried to negotiate with the
Auditor to not qualify the Financial Statements, failing which Encik Zayed planned to
terminate the auditors appointment and appoint a new friendly party auditor. Encik
Zayed 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. The company had maintained a very lean organisation and had employed their
owned family members as its employees and some did not have the necessary job
experiences. Time was the essence and the Audited Financial Statements had to be
issued to the bank at least by September, 2006, as Encik Zayed had applied for banking
facilities to implement several contracts the company had managed to secure.
Encik Zayed had assigned the tasks to Cik Amy, the Finance Executive who was newly
appointed by the company to analyse and providethe Auditors with the necessary
clarifications and documentations.
Case analysis
STAGE 1
Issues
Explain the main issues underlying the case. Place extra attention on the what,
why and when.
The Auditors wish to express their intention to qualify the Financial Statements due
to several unresolved issues. However, Encik Zayed and Puan Hashimah tried to
negotiate with the Auditor to not qualify the Financial Statements, failing which Encik
Zayed planned to terminate the auditors appointment and appoint a new friendly
party auditor.
Encik Zayed 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 and as such they were not able to carry out such responsibilities
in managing the Company well. 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.
Encik Zayed had applied for banking facilities to implement several contracts the
company had managed to secure. However, the banks required the company's
Audited Financial Statements for the last two years. Thus, time was the essence
whether the audited Financial Statements can be completed soonest possible to
meet the banks requirement.
The accounting system was not properly maintained and control as all transactions
were not adequately supported with relevant supporting documents, duly authorised
and recorded either manually or via a computerised system and filed accordingly at
every month end closing.
Encik Zayed had assigned the tasks to Cik Amy, the Finance Executive to analyse
and provide the Auditors with the necessary clarifications and documentations
although she was new to the company and had no working experience.
Key players
Based on the issues identified above, determine the key players involved, their
position/roles and the main decision that they have to make.
Num
.
1.
Who?
Position/roles
Auditors
External auditors
2.
Encik Zayed
CEO/Managing Director
Main decision
3.
Puan
Hashimah
STAGE 2
PART I: Decisions
For each decision that need to be made by each key player, identify the criteria
that should be considered and the decision alternatives that are available
Key
player
N
o.
1.
Auditor
Main decision
Decision criteria
1. Companies
Act
1965
2. Duty of care to
shareholders
3. Compliance
to
GAAP/
Financial
Reporting
standards
4. Audit findings
Alternatives
Companies Act
The Companies Act (Sec 174 Power and Duties of Auditors as to report an account)
requires public accountants to express an opinion on whether financial statements are
true and the account are fairly presented with no materially misstatement with regards
to the financial condition and statement of the company. .
Duty of care to shareholders/stakeholders
Auditor has a duty to ensure that companies produce financial statements that provide
information about their financial position and performance because this information is
used by a wide range of stakeholders (e.g., investors) in making economic decisions. The
owners of these companies (as well as other stakeholders, such as banks,suppliers and
customers) take comfort from independent assurance that the financial statements fairly
present, in all material respects, the companys financial position and performance.
Compliance to GAAP/FRS
Audit Findings
The extent to which the audit findings have been resolved and various audit
recommendation being implemented.
Key
player
N
o.
1.
2.
Encik Zayed
Main decision
Negotiate
with
auditor to not qualify
the
financial
statement.
Responsible
and
accountable for all
DESB operations.
Decision criteria
1. Companies Act.
2. Process of removal
& appointment of a
new auditor.
3. Timeline to
complete the audit
report
4. Audit Findings
1. Audit issues
2. Directors duty &
responsibilities
3. Internal control
4. Training
Alternatives
1.Retain the auditors
appointment
2. Terminate the auditors
& appoint a friendly
party auditor
1. To establish a proper
accounting system
(SOP)
2. Remain with existing
accounting system
Companies Act
An auditors report is considered an essential tool when reporting financial information to
users, particularly in business. It is mandatory for all companies established under the
Companies Act 1967 to perform the statutory audit. In this case DESB was required to
comply with the Companies Act 1965 to prepare the Audited Financial Statement.
Process of removal and appointment of new auditor
An auditor may only be removed by shareholders at the general meeting where notice of
the intention to move the resolution to remove the auditor must be given to the
company not less than 28 days before the meeting at which the resolution is to be
moved. Auditor must be given a copy of the notice and may make representations to the
company dealing with his removal.
The Bursa Malaysia Securities Berhad Listing Requirements 19 requires that in the case
of the removal of an external auditor the listed issuer must forward to the Exchange a
copy of any written representations made by the external auditors at the same time as
copies of such representations are sent to members of the listed issuer under section
172(5)(b) of the Companies Act 1965, unless an order is made by the Registrar of
Companies under section 172(6) of the Companies Act 1965.
If the company did not appoint an auditor in place of the auditor so removed, the
Registrar of companies will appoint an auditor but the auditor must consent to the
appointment.
The concern of Audited Financial Statements had to be issued to the bank at least by
September 2006. As time was the essence, the company has to ensure that whether the
completion of audit report can be submitted to meet the banks requirement to process
the facilities application.
Audit findings issues
The audit could be completed soon without any qualification if Encik Zayed and Puan
Hashimah could attend to the outstanding matters objectively. They should discussed
objectivelywith the Auditors and be guided by the Auditor for the appropriate solutions.
Key
player
N
o.
1.
Puan Hashimah
Main decision
Responsible
and
accountable for the
financial operations
and management of
DESB.
Decision criteria
Alternatives
1. Audit issues
2. Directors duty &
responsibilities
3. Internal control
4. Training
1. To establish a proper
accounting system
(SOP)
2. Remain with existing
accounting system
Audit issues
Attend to all outstanding matters objectively. They should discussed objectively with the
Auditors and be guided by the Auditor for the appropriate solutions. Several transactions
with significant amount were wrongly recorded and due reconciliation was necessary to
identify and making the appropriate adjustment to the accounts.
Directors duty & responsibilities
Although both Encik Zayed and Puan Hashimahwere not professionally trained and had
started as entrepreneurs, it was the duty of Encik Zayed and Puan Hashimah to
understand the business requirements when DESB was upgraded from Enterprise to a
Sdn Bhd and Encik Zayed and Puan Hashimah had assumed the role of Directorsof the
company.
Internal control
The Auditor had difficulties to complete the audit due to incomplete information and
records and in addition, a standard operating procedure was not in place. The suggested
Standard Operating Procedures must be designed to be the most appropriate and
applicable or DESB as the initial step to operate effectively by incorporating all the
internal control aspect in the SOP.
Training
Both directors were responsible to supervise the performance of the personnel and to
ensure the employee was adequately trained to performed the job effectively.
Auditor
To express a true and fair view opinion of the Companys financial
statement and its condition
Decision criteria
Companies
Act
Duty of
care to
share/
stakeholde
rs
Complianc
e to GAAP/
MFRS
Unqualified report
High
High
High
Resolved
Qualified report
High
High
High
Not
resolved
N
o.
Alternative
1
2
Audit
Findings
Key
player
Main
decision
Encik Zayed
Negotiate with auditor to not qualify the financial statement.
Decision criteria
N
o.
1
Alternative
Retained the
auditors
Terminate and
appoint new
friendly party
auditor
Companies
Act
Process
Timeline to
complete
audit
Audit
Findings
High
No process
High
Resolved
High
Longer
process
Low
Not
resolved
Key
player
Main
decision
Decision criteria
N
o.
Alternative
To establish a
proper accounting
system SOP
Resolved &
implement
auditors
recommenda
tion
Remain with
existing accounting
system
Not resolved
Audit issues
Directors
duty &
responsibil
ity
Internal
control
Training
High
Incorporati
ng internal
control
Organised
for all staf
Low
Lack of
internal
control
Not
organised
Wha
t
How
Explain how the decision shall be implemented (action plan). The action
plan should be in chronological order, detailed and clearly explained.
All the audit findings must be resolved, guided by the auditor appropriate
solutions and making the appropriate adjustments to the accounts
The records were not organized and filed accordingly for easy reference.
Several assets purchased by the company were not recorded and there were
several over-payments made to Trade Creditors. They also found out that
several collections from Trade Debtors were long outstanding and several
personal withdrawals and expenses were charged to the company. On top of
that, several unrecorded cash withdrawals and Cash and Bank balances were
not reconciled.
1. That there was no Standard Operating Procedure (SOP) in place and all
decisions were made and authorised by either Encik Zayed or Puan
Hashimah.
Auditors recommended that an SOP be prepared and implemented.
2. That no reconciliation was performed for Accounts Payables, Accounts
Receivables, Cash Book and Bank balances. Non-reconciled payments and
collections noted for the period under review totalled RM150,000 for year
2004 andRM250,000 for year 2005 respectively.
Auditor recommended that the amount be provided in the Profit & Loss
Accounts.
3. That several over payments were made during the year 20041o the Trade
Creditors totaling RM50,000.
Auditor recommended that the Company advise the respective Trade
Creditors and request for Credit Notes.
4. That the Cash and Bank balances in Cash Book were overstated by
RM70,000 (RM40,000 for year 2004 and RM30,000 for year 2005)
compared to the Bank Statements.
Auditor recommended that the amount be reconciled or written-off to
Profit & Loss Accounts.
How
Explain how the decision shall be implemented (action plan). The action
plan should be in chronological order, detailed and clearly explained.
5. That the balances of the detail Accounts Receivables for year 2004 were
understated by RM40,000 compared to the Accounts Receivables General
Ledger in total.
6. That no individual project budget and analysis were prepared.
7. That personal vehicle expenses for Encik Zayed and Puan Hashimah
totaling RM50,150 were charged to the company during the year 2005.
8. That several withdrawals from the company totaling RMl2,500 were made
from the company without proper documentation.
Who
Wha
t
How
Explain how the decision shall be implemented (action plan). The action
plan should be in chronological order, detailed and clearly explained.
All the auditors finding be resolved, guided by the auditor appropriate solutions
and making the appropriate adjustments to the accounts
DESB is required to comply with the Companies Act 1965 to prepare the
Audited Financial Statement and in addition to meet the banker
requirement to process the facilities application.
The audit could be completed soon without any qualification and Encik
Zayed and Puan Hashimah must attend to the outstanding matters and
discussed objectively with the Auditors and be guided for appropriate
solutions and making appropriate adjustment to the accounts.
Who
Wha
t
How
Explain how the decision shall be implemented (action plan). The action
plan should be in chronological order, detailed and clearly explained.
Both Encik Zayed and Puan Hashimah are responsible to supervise the
performance of the personnel and ensure the employee was adequately
trained to perform the job effectively.
In this case, the Company Secretary must play a major role and
responsibility in advising Encik Zayed and Puan Hashimah to conduct the
operations of DESB in compliance with the provisions of the Companies
Act 1967.
Missing information:
Assumptions:
Breach of the fiduciary duty could result in grave consequences for both the
offending board member and the community, which he or she represents.
Fiduciary duty is related to the degree of competence or zeal with which board
members perform their management responsibilities. In fact, the fiduciary
responsibility has nothing to do with board members' skill or fervor. Basically, a
breach of the fiduciary duty to shareholders and unit owners occurs whenever a
board member's abuse of such power results in harm to one or more of his
constituents.
Trust and confidence has been reposed on one side and there is a resulting
superiority and influence on the other side. Thus, board members are fiduciaries
to the shareholders and unit owners who have elected them to their position of
power.
In this case, both husband and wife have fiduciary duty to the shareholders and
staffs. They have to perform audit and meet necessary requirement for the
benefit of shareholders and staffs. Manipulating situation or pursuing action that
are not in line with the requirement and standards are considered as breach of
fiduciary.
Since the fiduciary obligation is an elastic concept, which contemplates any abuse
of power, it is impossible to chronicle every act, which could conceivably
constitute a breach. However, it is instructive to review the specific kinds of
conduct, which courts have already condemned as a breach of fiduciary duty.
Another form of self dealing occurs when both of them, without the knowledge
or consent of their shareholders and staffs, seizes for their own personal
benefit a financial opportunity which should rightfully be an asset of the
Association.
Encik Zayed and Puan Hashimah being the Directors and key personnel of the
company were responsible and accountable to the operations of DESB. All
decisions were made either by Encik Zayed severally and/or jointly with Puan
Hashimah. All business decisions and appointments of company key personnel
were decided by En Zayed and/or Puan Hashimah. Both Encik Zayed and Puan
Hashimah were directly responsible to supervise the performance of the
personnel and it was their responsibility to ensure the employee was adequately
trained to perform the job effectively.
The argument was whether Encik Zayed and Puan Hashimah had the leadership
and management skill to lead and manage DESB. Although both Encik Zayed and
Puan Hashimah were not professionally trained and had started as entrepreneurs,
it was the duty of Encik Zayed and Puan Hashimah to understand the business
requirements when DESB was upgraded from Enterprise to a Sdn Bhd and Encik
Zayed and Puan Hashimah had assumed the role of Directors of the company.
It was a norm within the industry that the training requirements of small and
medium enterprises were always neglected in the absent of competent HR &
Admin functions. Thus, it was very subjective to put the blame on the employee
for non and underperformance although morally it was the responsibility of the
employee to deliver their responsibilities meeting the expectations. In this case,
most appointments were family members and without the right qualification and
work experiences would certainly contributed to DESB problems.
The Company Secretary also played a major role and responsibility to advise
Encik Zayed and Puan Hashimah to conduct the operations of DESB in compliance
with the provisions of the Companies Act 1967. In this case the Company
Secretary had failed to advise Encik Zayed and Puan Hashimah and thus was held
responsible and accountable for the failure of DESB to prepare the Audited
Financial Statements and the filing of the documents to the Companies
Commission.
3. Could the Audit be completed soon without any qualification? From the
financial perspective, discuss and recommend objectively the most
appropriate solution for DESB financial management and operations.
established under the Companies Act 1967 to perform the statutory audit. In this
case DESB was required to comply with the Companies Act 1965 to prepare the
Audited Financial Statement and in addition to meet the banker requirement to
process the facilities application.
The audit could be completed soon without any qualification if Encik Zayed and
Puan Hashimah could attend to the outstanding matters objectively. They should
discussed objectively with the Auditors and be guided by the Auditor for the
appropriate solutions. It was noted from the audit findings that several
transactions with significant amount were wrongly recorded and due reconciliation
was necessary to identify and making the appropriate adjustment to the
accounts.
Puan Hashimah could have participated in the process jointly attended by Cik
Amy because she was the principal officer directly involved in the financial
operations and management of DESB. Cik Amy being an inexperienced could
assist in the reconciliation process and reconstruct the preparation of the
Financial Statements with full participation by Puan Hashimah.
The roots to the problems was the failure of Puan Hashimah to ensure that all
transactions were adequately supported with relevant supporting documents, duly
authorised and recorded either manually or via a computerised system and filed
accordingly at every month end closing. It was not the right decision by Encik
Zayed to depend entirely on Cik Amy to resolve the matter with the Auditor
because she was new with the company.
It is recommended that all the above personnel to attend several basic functional
training as follows.
1. Encik Zayed and Puan Hashimah to attend the company directors training and basic
management courses.
2. Cik Amy - to attend functional financial reporting and FRS courses.
Suggested Standard Operating Procedures (SOP)
1. Authorisation
Puan Hasimah (an owner who did not work with the accounting records) should have
made a listing of incoming cheques (a cash prelist) when she opened the mail. This
cash prelist could later be compared with the deposit ticket to be sure all cheques
received were deposited.
2. Segregation of Functions
a. Asset custody should be separate from asset recordkeeping. This is the key to the
case. The person who has access to the cash should not handle the accounting
records.
b. Recordkeeping functions should be carefully divided. It would have been nice to
separate recordkeeping functions so that the person in charge of recording sales
was not also in charge of recording payments received. Given the small number
of employees working for the company, and the fact that the accounts receivable
programme being used handled both sales transactions and payments, this would
have been difficult, if not impossible, to do.
c. Segregation of functions is more difficult when records are maintained on a
microcomputer. One individual was often responsible for entering all transactions
daily. Microcomputer systems provide inadequate control over access to the data
files. This was a particular problem with the type of computer programme being
used. Also, it would have been more difficult to alter manual records than it was
for her to change the computer records. In addition, having the records on a
microcomputer allowed one to completely trash the accounts receivable files.
3. Accounting Records
Sales invoices should have been pre-numbered. This would have let the owners
know when an invoice was not recorded.
An extra copy of the sales invoice should have been supplied to the customer. The
customer should have been asked to return the extra copy of the invoice with the
payment. The returned invoice would provide an audit trail linking payments with
specific sales.
4. Access Controls
Puan Hashimah should not have had access to incoming cheques, the accounting
records, and other documents such as deposit tickets, stationery, etc. Having access
to the accounting records and to the cheques allowed her to steal.
5. Independent Verification
A system should have been set up that provided independent verification of the
accuracy of the accounting records. The company did prepare a weekly sales report,
which should have been a check on sales as recorded in the accounting records.