CASE STUDY: BLUE MARINE HOLDINGS BHD (BMHB)

Background Information
Blue Marine Holdings Bhd (BMHB) is a well-known corporation and was publicly listed in
Bursa Malaysia since 1986. The corporation is involved in business conglomerate activities,
which mainly focused on marine operation, port-berthing operation, transportation, logistics,
private security, and fumigation services. A corporation with a long history since its
incorporation and acknowledged as one of the Malaysian companies that owned the biggest
port operating facilities in Malaysia. Its group turnover comprised of the following subsidiaries
(including components turnover percentage):
No
.
1
2
3
4
5
6

List of Subsidiaries
Blue Port (Malaysia) Bhd (BPMB)
Blue Mega Lift Sdn Bhd (BMLSB)
BM Transport Sdn Bhd (BMTSB)
Blue Global Logistics Bhd (BGLB)
Blue Core Security Sdn Bhd (BCSSB)
Marine Fumigation Service Sdn Bhd (MFSSB)
TOTAL GROUP PERCENTAGE TURNOVER

Components
Percentage
45%
15%
10%
20%
5%
5%
100%

During the financial year of 2015, there were several audit findings that would require the
auditors (both internal and external) special attention. Those findings shall be narrated in the
following paragraphs from the perspectives of internal and external audit functions.
Internal Audit Findings
Mr Aryan is the newly appointed Head of Group Internal Audit Department of BMHB since
2014. He has instructed his subordinates to conduct both compliance and operational audit
upon BMHBs subsidiaries. Surprisingly, he has encountered several infernal affairs issues
which have raised his eyebrows. Some of them are as follows:
First, there was an issue of power misuse made by a manager in the Contract Review
Committee of BGLB. The manager offered several projects to one of his old classmates from
Malay College Kuala Kubu (MCKK) and it was clearly against the corporations policies and
procedures. Plus, there were also a few other contracts that had been offered without going
through the committees review processes. Mr Aryan has confronted the committee members
(including the manager) for further explanation. However, those who were involved
commented that such issue is minor, as the offered contracts were so far did not face any
problems. Plus, the manager is closely associated with the Executive Director of the logistics
company and he promised to reward some commission if Mr Aryan kept quiet about it.
Second, in early 2015, one of his audit teams conducted an audit on one of BMHBs
subsidiaries BMTSB, a logistics transport operator. The audit conducted was on the
companys Operating Assets (OAs) such as the prime movers, trailers, bonded trucks, low
loaders, open bed trucks, side curtain carriers, and haulage carriers. Surprisingly, there were
several OAs that did not seem to match with the list provided by the companys Operating
Asset Register System (OARS). For instance, there were some OAs that had been fully
depreciated in OARS but still operating normally and no rectification done or declared on that
matter. Then, there were a few other OAs that had been missing but still normally appear in
the system. The issue was highlighted with the management and requested for corrective
resolution. However, the team has yet to provide Mr Aryan with a follow-up report on such

issue. Some of the missing OAs were believed stolen by a syndicate and ushered by an
insider.
Third, one of the internal auditors found out that there were some missing inventories
incurred in BPMB and BGLB in their warehouses. The team who was involved found out that
the figures for inventories recorded in the books were inconsistent as compared with the
findings obtained during stock-take. Among of the reasons for such inconsistencies
happened were due to physical damage encountered on the stored inventories, low
compliance on inventories and cargoes handling procedures, outdated and non-functional
warehouse facilities, and finally, theft. Apparently, these issues have been known by BMHB
since December 2014 and instructed both subsidiaries to setup a task force in solving those
issues as soon as possible.
External Audit Findings
Mr Dean is the audit partner of Rodl, Muller and Becker (RMB). The audit firm was recently
appointed as the principal auditor for BMHB. Thus, Mr Dean has assigned one of the audit
seniors of the firm to review the audits of group financial statements including the work of
component auditors which is based on ISA600 for the financial year of 2015.
Specifically, Mr Dean has instructed his subordinate to examine the factors that would
support the audit conducted upon BMHB is a group audit. In addition, further instructions
given in examining the following matters:
1)
2)
3)
4)

to identify the components within the group entity in order to justify the scope of work.
to identify which is financially significant components.
to determine components that are significant because of risk.
to determine the type of work to perform on the identified significant components.

The following table is the group financial summary for BMHB for the financial year of 2015:
RM 000
FINANCIAL RESULTS
Profit before tax
Profit after tax
Non-controlling interests
Profit Attributable to Owners of the Company

1,681,783
650,143
(145,279)
504,864

FINANCIAL POSITION
Non-current assets
Current assets
Total Assets

3,291,000
738,555
4,029,555

Share capital
Reserves
Shareholders Equity
Non-controlling interests
Total Equity

341,000
1,557,121
1,898,121
145,279
2,043,400

Borrowings
Other liabilities
Total Liabilities

1,150,000
836,155
2,132,000
2

Total Equity and Liabilities

4,029,555

BMHBs physical structures consist of corporate offices (both headquarters and subsidiaries)
and fifteen operation facilities that are strategically located in both peninsular and west
Malaysia. Additionally, each subsidiary maintained its own records, accounting and operating
system, as they possessed their own unique business structure and nature respectively.
Each subsidiary was audited by different firms and has been contacted by the principal
auditor. As requested, the auditors of the respective subsidiaries have provided their report
and sufficient working papers for the principal auditors review. Besides, the internal audit
system of BMHB is deemed to be well staffed and managed. Each internal audit staff of the
holding company possessed credible qualifications and experiences. The group internal audit
department made their visits at each relevant area at least once for every two years. Plus,
the reports were fully documented especially on procedures performed and findings are
available for review.
Mr Deans audit team has identified several issues raised by the other auditors of BMHBs
subsidiaries in their reports that are explained as the following:
First, both BPMB and BGLB experienced reductions in their sales volume during the financial
year. Both companies experienced sales decline due to weak economic condition and the
loss of major clients. Besides, such decline was also supported by the reduced percentage of
the companies operation volumes such as containers throughput, conventional cargo
handling and RORO volume. The key performance indicators (KPIs) upon the companies
operation volumes are shown as follows:
OPERATION
VOLUMES
Containers Throughput
Conventional Cargo Throughput
RORO Volume

KPIs
Twenty-foot equivalent unit (TEU)
Metric tonne
Thousand units

This is the first time for BPMB in experiencing decline in its operation volumes, thus, led to a
reduction in its turnover. However, BPMBs management has assured that the situation was
only temporary, as the company is expecting to pick up again its sales force once the
companys economic condition is restored and several counter-measures have been
implemented by the management in order to restore its performance in the financial year of
2016.
On the other hand, different stories occurred in BGLB, as the company has been
experiencing its economic performance adversity for several years already. Prior to coming
into such decline state, the company was a pioneer in the logistics industry since 1990s and
there were only a few competitors existed back then. The economic condition of BGLB
became worsened starting from the year of 2005. One of the major reasons is due to the
existence of many new competitors in the industry that have started to appear since the
licence to operate in the industry was liberalised by the government in 2001. The existences
of these new competitors have thus shrinks the companys market share significantly in the
industry. Other early pioneers such as Trans Line and Shapadu had ceased to operate due to
failure in maintaining their standings in the market. However, BGLB is still operating as the
company has received a special attention from the government and BPMB (as a government
linked company) has received the responsibility to assist and restore its economic
performance again.

Second, for a few years since 2010, BGLB failed to achieve its targeted KPIs although
several measures have been taken by the management. To make it worse, the largest
contributor for the companys operation volume i.e. conventional cargo handling has reduced
significantly due to strong competition as well as the weak volatility in the oil and gas
business sector. The management has informed the auditor that for all this while, the oil and
gas business sector has been the largest contributor in the companys revenue. The extract
of actual and targeted KPIs (from 2013 until 2015) by the company was shown as follows:
2013
Containers
Throughput
Conventional
Cargo
Throughput

5,000,000
TEUs
3,500,000
metric
tonnes

TARGET KPIs
2014
4,000,000
TEUs
2,900,000
metric
tonnes

2015

2013

ACTUAL KPIs
2014

3,000,000
TEUs
2,500,000
metric
tonnes

4,155,000
TEUs
3,100,000
metric
tonnes

2,9100,300
TEUs
2,600,000
metric
tonnes

2015
1,950,500
TEUs
1,800,000
metric
tonnes

Third, a significant number of BGLBs clients left the company and led to significant loss of
revenue. Some of them were identified as major clients such as Hong Bay Shipping, Mazars
Line Ltd, Emerald Shipping Ltd, Ming Line Ltd, Southern Port Bhd, North Island Port Bhd, Brit
Petroleum Ltd, Shell Corp, Petro China Inc, Sinopec Corp, Aramco Inc, TNB Bhd, Sime
Darby Bhd, Ministry of Defence (Malaysia), to name a few. One of the explanations for such
incident is due to competition imposed by new competitors as well as the companys former
clients that have also provided logistics services. Additionally, a number of expert and
credible logistics coordinators and managers who left BGLB were also among the many
reasons for the companys loss of revenue. To make it worse, the clients who were under the
said former employees portfolios have also followed them (i.e. to join new competitors as
new clients) as well.
Fourth, due to the worsening performance condition, BGLB failed to sustain its positive
cashflow reserve. Additionally, its constant negative earnings has caused the cashflow
growth sustainability to worsen, subsequently exhausting its reserve. Besides the
administration costs, the managements failure to plan and control the companys operating
costs have also been considered as the main factor. This is due to the failure of the
management to control and anticipate its operation coordinators movements in handling the
operation. Upon further investigations made by the auditor, the operation managers did admit
that the nature of the business requires a lot of cash basis transactions in enabling their
operations to proceed appropriately. Furthermore, these statements were supported by the
companys Chief Operating Officer (COO) and he agreed that a substantial amount of cash
was needed in order to support the companys daily operations.
Finally, in relation with the case of missing inventories (as mentioned in the internal audit
findings), the group auditor has enquired both internal audit department and the
managements (BPMB and BGLB). Both companies were enquired whether they have
resolved the issue or not, or how would they tackle on that matter. Apparently, BPMBs
management have conducted an official Domestic Inquiry (DI) and found out that several
employees were involved and proven guilty. The company made an official police report and
has taken the initiative in instructing BPMBs auxiliary police department to work closely with
the Royal Malaysian Police (Polis DiRaja Malaysia a.k.a. PDRM). As for BGLB, an official
investigation has also been made and the people who were involved proven guilty and
further actions have been taken upon them. However, the companys internal auditor has
raised some concern regarding BGLBs current security affairs. It was found out that the
security personnel were privately hired from a private security agency and its personnels
qualification and credibility seemed to be questionable. In addition, a company such as
BGLB in its industry should have established its own auxiliary police department. As for the
4

rectification matter on both companies warehouses and facilities, they will be rectified
accordingly.

Required:
1.

State TWO (2) inherent risks found in the above case.

(2 marks)

2.

As per stated in the above case, what factors that would support the conclusion that
this is a group audit? Review the definitions in Paragraph 9 of ISA 600 to assist you in
identifying the factors that you believe would be the indicators of when a group audit
exists.
(4 marks)

3.

In accordance with ISA 600 and in relating the above case, what might be a relevant
benchmark(s) and threshold(s) for identifying the financially significant components
for BMHBs group audit (please include ISA 320 Materiality in Planning and
Performing an Audit in deciding the significance of the components if necessary).
(9 marks)

4.

In relation with the above case, identify the red flags incurred in BMHB and its
subsidiaries that might affect the going concern assumption and propose on how to
overcome them by referring on ISA 570.
(6 marks)

5.

Define Analytical Procedures in accordance with ISA 520 and evaluate on BMHBs
position by referring on the said standard.
(6 marks)

6.

Explain on the differences between internal and external auditing.

(3 marks)
Total: 30 marks