CASE STUDY

Topics: Audit, External auditor, Financial statements Pages: 6 (2983 words) Published: October 27, 2014
Three Executives of a well-known multi-national company decided to form a new company, named New Star Company Limited in 1974. These three executives were becoming close to their retirement age. Pifco-Zen Chen Company Limited, the company that they worked for had been in business for the last 80 years. It was their previous employers policy to retire the executives with a golden hand-shake worth approximately US120,000 each. The three executives occupied the following position with Pifco-Zen Chen Company Limited, (1) Finance Manager Mr. Zu Chang, (2) Sales Marketing Manager, Mr. Lim Lam, and (3) Risk Management Manager, Mr. Shu Ching. In their previous position with Pifco-Zen Chen Company Limited, they were regarded as the most respected executives because the company made significant progress in terms of organic growth and diversification. The Chairman of the Board of Directors, Dr. Wing Wan used to call them the three wise men. Pifco-Zen Chen Company Limited main business activities were the manufacturing of twisties and acted as wholesale distributor of a special drink called Wysalt. The drink is full of calcium and protein and it is very popular in the South East Asia. Each years Annual General Meeting of Pifco-Zen Chen Company Limiteds gross income and net profit before taxation increased by 10, while its main competitors performance was declining at an alarming rate. Chairman Wan always wanted to find out what is the main reason driving its companys operational success. In a nutshell, Chairman Wan always believed that the financial result was too good to be true because whenever he has a chance to play golf with one of the Chairman of his competitor company, he was told that life as the head of a corporate is becoming unbearable due to competition and increased in the cost of living. Still, Mr. Wan kept quiet while congratulating his three wise men for a fantastic job each year. Even the external Auditors could not believe the significant progress, which the company used to, when the three wise men were working for Pifco-Zen Chen Company Limited. The auditors knowing too well the performance of the company before the departure of Mr. Chang, Mr. Lam, and Mr. Ching cautioned the Chairman that it would be a great loss for the company to loose three key executives in one go. In view of the continued pressure and perplexities of the situation, one afternoon, Chairman of Pifco-Zen Chen Company Limited, Dr. Wan called a special Board of Directors meeting to address his concern regarding the retirement of Mr. Chang, Mr. Lam, and Mr. Ching. One of the vocal directors. who did not get along very well with these three managers, said it does not matter if all of the three men were to leave the company today because they are not indispensable people. He went on to argue further that we can replace them easily because there are other professionals looking for work. According to the employment contract of the three wise men, they were paid a basic salary plus they also benefited with a 2 commission on the net profit of the company each year after the accounts have been finalized by the external auditors. The Internal Auditor, Miss Wen always queried this employment terms that it favours mostly these three managers at the detriment of the other hard-working employees. One day in a management meeting, Miss Wen expressed her frustration of the favourable treatment of the three managers because she felt that they are working very close and perhaps, manipulating the figures so that they can benefit a hefty remuneration every year. Chairman Wan felt every uneasy during this meeting and closed the meeting earlier than expected. After the meeting, Miss Wen wrote a memo to the Chairman of the Board of Directors to complain that the external auditors come on the premises of the company for a very short time to perform the audit. They do not carry out an efficient audit and the Pifco-Zen Chen Company Limited runs the risk of facing a...
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