Case Study 2 :

Flat Cargo Berhad - An Auditor's Conundrum

Chapter 4 : The Bookkeeping Process
Group 1:
1. Fatimah Zahrah Zaid : PBS1331373
2. Faeeza Noor Mohd Jaafar : PBS1331339
3. Hajara AbdulKadi : PBS1331402
4. Pushpanathan : PBS 1331405
Flat Cargo Berhad
Largest air freight companies
Head office located in Selangor
1997 - Started operations with 2 air-crafts
15 Sept 2001 obtained listing in Bursa Malaysia
Operating primarily - Air Cargo Carrier
Principal activities of FCB subsidiaries
Air Freight services
Air-craft ground handling services
Auditor: Kencana & Associates
FCB Wholly Owned Subsidiaries
FLAT CARGO
GROUP BERHAD
FC Spare Sdn
Bhd
Cargo
Management
Sdn Bhd
FCB (SPV) Ltd
Cargo Air
Services Sdn Bhd
FC Air Ltd
As at 2005
FCB secured agreements with well
established companies
Top Management Team
Top Management Team
Chief Executive Officer Executive Director Chief Financial Officer
Founder of FCB
Member since 1997
Chairman of the company
audit committee
Member of its employee share
option scheme committee
Board since 1999
Mr. Lim Loon Sim Mr. Ali Bin Ahmad Mr. Kim Boon Chok
The List of FCB's Board of Director
Chairman / Independent
Non-Executive Director
Independent Non
Executive Director
Non Independent
Executive Director
Non Independent Non
Executive Director
Dato' Ibrahim Samad
Sulaiman bin Ahmad Kamil
Chong Kee Kit
Lim Loon Sim
Ali Bin Ahmad
Lee Guan Choi
Miri Kim Chen
Tan Sri Rahim Bin Fahmi
Datuk Abu Bakar Bin Sharif
Excerpts
1
2
3
4
5
The auditors were unable to verify the aircrafts claimed to have been
purchased by FCB in 2005. The audit team found a non-functional
rundown aircraft barely worth RM231 million in a hangar.
Several debtors' confirmation letters were returned because the
addressees had changed their mailing addresses.
A large sum of sales transactions was found with no supporting
documents. Most of these transactions involved small clients.
A loan received from a Hong Kong based company was found to be
incorrectly recorded in the debtors' account.
Several abnormal transactions involving the purchase of aircrafts by FCB
and offsetting the debtors' accounts were found in FCB's books.
Transaction Analysis
Methodology
5
QUESTIONS
1. What's
going on?
2. What
accounts
are
affected?
3. How are
they
affected?
4. Does the
balance
sheet
balance?
5. Does my
analysis
make
sense?
Transaction Analysis
1. What's going on?
Overstating the Assets
2. What accounts are affected and how are they affected?
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Cash
Fixed Assets
Inventory Creditors
Excerpts 1
The auditors were unable to verify the aircrafts claimed to have been
purchased by FCB in 2005. The audit team found a non-functional rundown
aircraft barely worth RM231 million in a hangar.
Transaction Analysis (Cont.)
3. Does the balance sheet balance?
Date Dr. Fixed Assets
Cr. Cash
Date Dr. Inventory
Cr. Creditors
xx
xx
xx
xx
Transaction Analysis (Cont.)
4. Does my analysis make sense?
Documents were not found to support the claims that the purchasing took place
Which implied that fraud might have took place
Transaction Analysis (Cont.)
1. What's going on?
No confirmation on the service/sales taken place
2. What accounts are affected and how are they affected?
Excerpts 2
Several debtors' confirmation letters were returned because the addressees
had changed their mailing addresses.
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Account
Receivable
Sales
Transaction Analysis (Cont.)
3. Does the balance sheet balance?
4. Does my analysis make sense?
Due to this issue it will have a major impact on accounts receivable.
However this will lead to further problem as follows
No exact debtor figure available for reference
Possibility of bad debt
Weak debt servicing ability by company
Date Dr. Account Receivable
Cr. Sales
xx
xx
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Account Bad
Receivable Debts
Transaction Analysis (Cont.)
1. What's going on?
Revenue recognized without proper documentation
2. What accounts are affected and how are they affected?
Excerpts 3
A large sum of sales transactions was found with no supporting documents.
Most of these transactions involved small clients.
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Cash
Account
Receivable
Sales
Sales
Transaction Analysis (Cont.)
3. Does the balance sheet balance?
4. Does my analysis make sense?
This problem will mostly affect the revenue. In addition, it could lead to:-
Poor book-keeping process
Manipulation on the revenue figure (RM 550 million)
Manipulation of the shareholders interest in terms of dividend declared
Complication on debt collection therefore the possibility of bad debt in future
Date Dr. Cash
Cr. Sales
Date Dr. Account Receivable
Cr. Sales
xx
xx
xx
xx
Transaction Analysis (Cont.)
1. What's going on?
Overstating the Debtors Account
2. What accounts are affected and how are they affected?
Excerpts 4
A loan received from a Hong Kong based company was found to be
incorrectly recorded in the debtors' account.
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Account Long terms
Receivable debt
Transaction Analysis (Cont.)
3. Does the balance sheet balance?
4. Does my analysis make sense?
The impact on liabilities of the FCB will be decreased whereas assets increase due to
the error on double entry process
Date Dr. Accounts Receivable
Cr. Long Term Debt
xx
xx
BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Cash Long terms
debt
Transaction Analysis (Cont.)
1. What's going on?
It violates principle of accounting system
principle of non-compensation
financial info should be shown without expecting any compensation of debt by an asset, revenue by
an expense, and same.
principles of sincerity
- the accounting unit should be a reflection of a companys financial status.
principles of consistency
- a business should enter all similar items to be followed in exactly the same way which has once
been fixed as a method.
Excerpts 5
Several abnormal transactions involving the purchase of aircrafts by FCB
and offsetting the debtors accounts were found in FCBs books.
Transaction Analysis (Cont.)
2. What accounts are affected and how are they affected?
Accounts Receivables - decrease
Fixed Assets - increase
3. Does my analysis make sense?
Abnormal transactions could lead to multiplier faults in the financial statement like
Overstated/Understated assets
Usage of cash or credit was not determined properly
Cutting down the overall debtor amount
Fail to determine bad debt
Fail to determine the true figure of Debtors
Solution
SOLUTIONS
SHORT TERM LONG TERM
AUDITOR FCB
Solution
Short Term
Check the purchase document
Internal or production document
Verify with the staff
Check with the lease company
Check the register or licencing company
Long Term
Update the bookkeeping regularly
Excerpts 1
The auditors were unable to verify the aircrafts claimed to have been
purchased by FCB in 2005. The audit team found a non-functional
rundown aircraft barely worth RM231 million in a hangar.
Solution (Cont.)
Long Term
Create efficient system
Verify claim of debtors
Create database or updated portfolio
Create a debt solely for debt servicing
Short Term
Investigate the identity of debtor with SSM
Supporting document of debt
Excerpts 2
Several debtors' confirmation letters were returned because the
addressees had changed their mailing addresses.
Solution (Cont.)
Short Term
Ask the engineering department to provide document using courier service
Countercheck with custom department
Should be able to verify turnover figure
Excerpts 3
A large sum of sales transactions was found with no supporting
documents. Most of these transactions involved small clients.
Solution (Cont.)
Short Term
Countercheck and verify with loan agreement
Correcting the double entry according to MASB
Excerpts 4
A loan received from a Hong Kong based company was found to be
incorrectly recorded in the debtors' account.
Solution (Cont.)
Short Term
Reconsilation of bookkeeping related to purchase of abnormal transaction
Cross checking proof
Ensure debtor/creditor confirmation letter
Long Term
Do not mix with creditors and debtors
Excerpts 5
Several abnormal transactions involving the purchase of aircrafts by
FCB and offsetting the debtors accounts were found in FCBs books.
Conclusion
Deligate and segregate duties
ISO / Countercheck
Transparency