Mustapa Kamal Mohd Razali

Encik Salarn
self-made bu.
and Encik S

AiniAman
AzbirAbu Bakar

gtaduate as Fi
matters, incluti

A Delima

Yasmiza Long

was responsihb
since

2006 when Encik Zayed engaged the external Auditor Aziz & Co (Chartered.
Accountant), introduced by his friend to perform the statutory audit for the period 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 auditor's appointment and appoint a new "friendly party"
auditor. EncikZayed,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 own family
members as employees and some did not have the necessary job experiences.

It was July,

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 Jhe company to analyse and
provide the Auditors with the necessary clarification and documentation.

Company Background
Delima Enterprise was founded in 1981 by Encik Zayed.It conducted trading and supplying
related products including manpower supplies to the oil and gas industries. Subsequently
in 2004, due to encouraging business growth, the enterprise was incorporated as Delima
Enterprise Sdn Bhd. The two principal shareholders and controlling directors were Encik
Zayed and Puan Hashimah (husband and wife). The company activities had expanded into
provision of engineering services as part of their business diversification and expansion plans.
The company's corporate mission was to become a leading service contractor and provide
quality products and excellent services. Since 2006, the company had been awarded with
several engineering projects and its cumulative revenue for 2004 and 2005 were nearly RMl.0
million and RM1.7 million respectively. Appendix A to D presents Delima Enterprise Sdn
Bhd Unaudited Financial Statements as at 31 May 2004 to 31 May 2005.

The company had maintained a very lean organisation (refer to Appendix E) with basic
functional positions, with Encik Zayed as the Managing Director and his wife Puan Hashimah
as the Chief Operating Officer. The other personnel were Puan Balqis, the Operations Manager
and Encik Salam. the Human Resource and Administration Manager. Both Puan Balqis and
tr4air\'sian l!ls1ihrle

oiArcounlsilts

April l[r-6

ln May

2Cr{'t6.

a duration u.f

Malavan
The banl-i

flis

11-g5

$:tr

A friend haa
-A.ccountar:

earliest

-\ccountiry

-\li

accr-

!'l

>eVe:3.

1-1Pr
,-rf

=it

5?.-_3r

-ts

:E

Encik Salam were family members of the Directors. Encik Zayed and Puan Hashimah were
self-made business owners with only secondary school background and likewise, Puan Balqis
and Encik Salam. In May 2006,lhe company had employed Cik Amy, a young Accounting
graduate as Finance Executive responsible for maintenance of the accountirig and financial
matters, including the preparation of accounts. Prior to CikAmy's appointment, Puan Hashimah
was responsible for all finance related matters. Cik Amy graduated from a local university
since April 2006 and had no working experience.
In May 2006, the company had secured a contract worth RM750,000 to be implemented over
a duration of six months. Due to shortage of funds, the company had submitted applications to
Malayan Banking Berhad and CIMB Bank Berhad for banking facilities totaling RMI million.
The banks required the company's Audited Financial Statements for the last two years, and
this was when Encik Zayed realised that the company had not performed the statutory audit.
A friend had introduced to Encik Zayed an audit firm and shortly after, Aziz & Co (Charlered
Accountant) was engaged to perform the audit. The audit was targeted to be completed at the
earliest possible to meet the bank's requirement.

Accounting Systems, Information and Records

accounting records were maintained using the standard financial software "MYOB". The
programme was not integrated fthe data was not processed and generated automatically between
several modules namely Procurement, HR, Accounts Payables (AP), Accounts Receivables
(AR) and Cash Book (CB)1. At every end of the accounting period, information summary
generated by all purchases, accounts receivables and payroll transactions were updated and
entered into the general ledger (GL) system.

All

u)
lsJ

The Sales' invoices were manually produced when orders were received and the job was
completed, while the manual sales invoices were not pre-numbered. 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.

Collections from the customers were received via cheques and cash and not all payments from
customers were received in fuIl. Monthly Statement ofAccounts was not sent to customers on
a monthly basis. Instead, it was done as and when the payment had been long outstanding.
Likewise, the purchase orders (PO) were also manually prepared and not pre-numbered. The
original PO was issued to the suppliers or senrice providers and a copy was retained for record
and GL system update.
The employees prepared their timesheets when they arrived at work and recorded the time
they leave the office, manually. At the end of every week, the employee timesheets were sent
to Puan Hashimah for approval and payment of salaries. The company also paid their general
workers in cash on a weekly basis and it was therefore, not unusual to withdraw large sums of
cash from the local banks when needed.
Nlalavsirn ilrstitutr' of ,AicoLrlGnts

m
i"*

Audit Findings and Recommendations

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 records were not organised
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 f,rom 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.

The Auditor noted the following findings:

1. 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. The 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. The 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. The 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. The Auditor recommended that the amount be reconciled or written-off to
Profit & Loss Accounts.
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.
T.Thatpersonal 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.
Based on the analysis by Cik Amy. the following were noted:
1. That the RM150,000 recorded as Accounts Payables was actually Cash Advances made

by Encik Zayed to the companies during theyear 2004.

2. That the sum RM250,000 from the Accounts Receivables Summary Report for year
2005 was wrongly entered into the General Ledger and no one had reviewed the record.
Several pages of the Accounts Receivables listing went missing and thus, the listing of
the individual accounts receivable balances was not a continuous list, distorted at several
points and the individual Account Receivables balances did not add up to the total of the
l\4alrysiM lnilillxc oiAccouulillls

report.

3. That the overpayment of Trade Creditors totaling RM50,000 in year 2004 was due to
human error as a result of lack of control.
4. That the receipts of RM70,000, which was recorded twice in the General Ledger and
RM40,000, were related to Trade Receivables Accounts for year 2005 and the RM30,000
was related to Cash Advance from Encik Zayed in year 2004.
5. That the EPF contribution for contract workers were not deducted and remitted to EPF.
6. That there were no comprehensive business plan and budget prepared.
7. 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.

Cik Amy was very concerned with the situation and had tried her best to facilitate the audit
completion. She admired the leadership and the struggle demonskated by Encik Zayed and
Puan Hashimah, but she thought that was not enough. 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;:ii

&
F"
,'f:

Discluimer:
This case presents the actual family-business dilemma and identities have been changed to protect
family privacy. The author b opinions do not necessarily reflect the views of the Malaysian Institute of
Accountants and this case wqs written
responsibilities.

for

academic purpose only and the author disclaims any legal

N:lalayilan lrstitute of,AccorBllants

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, deposits
prepa\,ments
Cash

& bank balances

DR

133,818

98.244

8r7,192

520.632

28.617

181,906

58,825

267.147

Auditors'fees

8.000

Secretarial fees

t,500

1,500

Deoreciation

22Jso

14,7 37

Directors' emoluments

42,188

Rental ofoffice

49,925
67,025
35,925

4s.ooo
21,833

Office expenses
Motor vehicle exDenses

15,000

10.000

25.000

15,000

5 R?5

Bank charses
Trade payables

t,326,410

Sales

Other payables, accruals

provisions

Share caoitals

Retained Pro fitl(Lo ss)

Current year Profit/(Loss)

i\4ainvsiar

h5titr(c ol Acsluntants

482.457
627.93s

1,700.525

897.050

66.223

70 715

31,481

l4,l3l

500,000

500.000

&

Provision for Depreeiation (FA)

Control total

CR

5,670

847,929

Cost of Sales

i.ll

RM
CR

&

Salarieg

afl

2005

RM

t 13,187

t43.t65

?.895.812

2,895,812

13,1 87

1.964.979

t,964,919

Appendix

.4
:.H

:E

;et

Delima Enterprise Sdn Bhd Unaudited Balance Sheets

as at 31 May 2004 to 31May 2005
2004:'

:'2005

.,fttr![,,..

'RM.

'

83,507

96,331

FIXED ASSETS
CURRENT ASSETS
Trade receivables

817,192

520,632

Other debtors, deposits and prepayments

Cash and bank balances

398,1 56

t,574,r73

295,093
267.147
969,685

847,929

482,457

358.825

LESS: CT]RRENT LIABILITIES

Trade payables
Other payables, accruals & provisions

66"223

70^735

914.152

553,192

NET CURRENT ASSETS/(NET CURRENT

LIABILITIES)

660.021

416.493

iT56;35?

dl3'18?

s00,000

500,000

FINANCED BY
SHARE CAPITAL

ACCUMULATED PROFIT(LOSS)
CARRIED FORWARD

\6

75',)

13,187

td
F-

'7561352

613.187

h{alx},sia!1 Irstiture of Accounlant$

Appendix C
Delima Enterprise Sdn Bhd Unaudited Profit & Loss Statements
for the period 31 May 2004 to 31 May 2005
.i2&05

,X{X}4,1

.,,&FJ
TURNOVER
PROFIT(LOSS) FOR THE YEAR
Aft er charging/(crediting)

:RM.

t,700,s2s

897,050

143,165

t13,187

Auditors'fees
Secretarial fees

8,000
1,500

1,500

Depreciation
Directors' emoluments

22,750
46,92s

14,737

42,188

Salaries

6'.7,025

45,000

Rental ofoffice

15 q?5

27,833

Office expenses

15,000

10,000

Bank charges

ACCUMULATED PROFIT(LOSSES)

ki

!*

cfi

\lr.a].ian rnsr.rur ., Aj\nunt r''r.

s,825
256,352

5,670
I 13,187

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

22,750

13,1 87

74,737

OTHER SOURCES OF FUNDS

Proceeds from disposal of fixed assets
165.915

127.924

(35,574)

(98,244)

APPLICATION OF FUND
Purchased

of fixed

assets

Increased in paid-up capital

R.EPRESENTED BY:

s00,000
-r130;341

'. 5tr9'68t'

399,623
(360,960)

(553;192)

38.663

262.533

91,6',78

26'7,t47

TNCREASED(DECREASED) IN WORKING

CAPITAL

Receivables
Payables

815,725

iEl

*,J
F*

Movement in net liquid funds:

Cash and bank balances

u)

.-130341:.

529;68Or.

N{aiaysian

Inslil$e

of

Acciunlants

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