INTEGRATED CASE STUDY
SEMESTER I (2014/2015)
REPORT OF CASE FLAT CARGO BERHAD: AN AUDITOR’S CONUNDRUM
PROF. DATO’ DR. MUHAMAD MUDA
(28 OCTOBER 2014)
NOR NURUL IZZA BINTI AINUDDIN
Kencana & Associates served as Flat Kargo Berhad’s auditor, which is one of the largest air freight companies in Malaysia, servicing several government linked companies. In 2006, the auditors identified several suspicious findings that resulted in a delay in finalising the auditor’s report. It is involving the possibility of fraud in a financial audit engagement. On February 5 of 2006, Kencana & Associates had just been informed by his subordinates that there had been inconsistencies in the accounts of Flat Cargo Berhad (FCB), and they cannot deal with another client scandal. The team has to report to the audit committee of FCB in two weeks. Thus in order to do so, Mr Chuah has to work through the company’s information to assess the possibility of fraud to help him explain the situation to Mr.Keong which is the managing partner of Kencana & Associate.
This case is about some issues in auditing, especially when there was time which has been revealed in the audit working papers for 2006,that the auditors were unable to verify the aircrafts claimed to have been purchased by FCB in 2005 and the findings of obsolete aircraft worth 231 million. In this concern, it shows that there is no proper authorization done by this company. The authorization is one of the step addresses whether FCB’s management and staff follow proper internal control procedures when approving the purchase or disposal of aircraft. In this situation, FCB did not follow the proper internal control as there is an ability to do asset verification. 2002 (RM ‘000) 2003 (RM ‘000) 2004 (RM ‘000) 2005 (RM ‘000) Land & buildings, plant & equipment
445,519 475,443 595,072 1,565,807
Percentage of change 32%
7% 25% 163%
From the table above, the fixed assets of FCB increase significantly in 2005. Although FCB claimed that they have purchased aircrafts, but the auditors were unable to verify it. In this case, auditors must carefully consider the risk related to long-lived assets. There are possibility for management to manage fixed-asset accounts by several ways, which include change estimated useful lives and residual values, capitalizing costs that should be expensed or improper accounting for asset. In addition, obsolescence of assets is another risk area related to fixed asset. In this case, auditors found a non-functional rundown aircraft with value RM231 million. There is a risk of fraud occur because of the failure in asset valuation test and failure in account transaction validation. Next issue is when the company unable to obtain the debtors confirmation. Several debtors’ confirmation letters were returned because the addresses had changed their mailing addresses. The ability to obtain the debtors confirmation is important to know that the debtors really exist in the company. Non-current and current assets may be overvalued to show the company is in a better position as a going concern. This could lead to the assumption that the company is practicing creative accounting. The sending of the confirmation letter to debtors is one way to detect that amount of debtors in financial statement is same with the debtors account. When there is no returned back confirmation letter, this raises the issue of fraudulence in the debtors account. Other issue is about the lack of supporting document of the company, for sales transaction. It has been revealed that a large sum of sales transactions was found with no supporting documents, which most of these transactions involved small clients. Internal control deficiencies lead to problem in identifying whether the sales are really existing and it is properly documented or not. Absence of adequate...
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