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

Cargo
FC Spare Sdn Cargo Air
Management FCB (SPV) Ltd FC Air Ltd
Bhd Services Sdn Bhd
Sdn Bhd
 As at 2005
FCB secured agreements with well
established companies
 Top Management Team
Top Management Team

Chief Executive Officer Executive Director Chief Financial Officer

Mr. Lim Loon Sim Mr. Ali Bin Ahmad Mr. Kim Boon Chok
Founder of FCB Chairman of the company
Member since 1997 audit committee
Member of its employee share
option scheme committee
Board since 1999
The List of FCB's Board of Director
Chairman / Independent Dato' Ibrahim Samad
Non-Executive Director

Independent Non Non Independent Non Independent Non

Executive Director Executive Director Executive Director

Sulaiman bin Ahmad Kamil Lim Loon Sim Miri Kim Chen

Chong Kee Kit Ali Bin Ahmad Tan Sri Rahim Bin Fahmi

Lee Guan Choi Datuk Abu Bakar Bin Sharif

Excerpts

The auditors were unable to verify the aircrafts claimed to have been
1 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

2 addressees had changed their mailing addresses.

A large sum of sales transactions was found with no supporting

3 documents. Most of these transactions involved small clients.

A loan received from a Hong Kong based company was found to be

4 incorrectly recorded in the debtors' account.

Several abnormal transactions involving the purchase of aircrafts by FCB

5 and offsetting the debtors' accounts were found in FCB's books.
 Transaction Analysis
Methodology

5
QUESTIONS

2. What 4. Does the 5. Does my

3. How are
1. What's accounts balance analysis
they
going on? are sheet make
affected?
affected? balance? sense?
 Transaction Analysis
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.

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
 Transaction Analysis (Cont.)
3. Does the balance sheet balance?

Date Dr. Fixed Assets xx

Cr. Cash xx

xx
Date Dr. Inventory xx
Cr. Creditors
 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.)
Excerpts 2
Several debtors' confirmation letters were returned because the addressees
had changed their mailing addresses.

1. What's going on?

No confirmation on the service/sales taken place

2. What accounts are affected and how are they affected?

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Account Sales
Receivable
 Transaction Analysis (Cont.)
3. Does the balance sheet balance?

Date Dr. Account Receivable xx

Cr. Sales xx

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

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Account Bad
Receivable Debts
 Transaction Analysis (Cont.)
Excerpts 3
A large sum of sales transactions was found with no supporting documents.
Most of these transactions involved small clients.

1. What's going on?

Revenue recognized without proper documentation

2. What accounts are affected and how are they affected?

BALANCE SHEET INCOME STATEMENT
Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Cash Sales

Account Sales
Receivable
 Transaction Analysis (Cont.)
3. Does the balance sheet balance?
Date Dr. Cash xx
Cr. Sales xx

xx
Date Dr. Account Receivable xx
Cr. Sales

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
 Transaction Analysis (Cont.)
Excerpts 4
A loan received from a Hong Kong based company was found to be
incorrectly recorded in the debtors' account.

1. What's going on?

Overstating the Debtors Account

2. What accounts are affected and how are they affected?

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?

Date Dr. Accounts Receivable xx

Cr. Long Term Debt xx

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

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Owners Equity Net Income = Revenue Expenses
Cash Long terms
debt
 Transaction Analysis (Cont.)
Excerpts 5
Several abnormal transactions involving the purchase of aircrafts by FCB
and offsetting the debtors accounts were found in FCBs books.

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.
 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
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.

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
 Solution (Cont.)
Excerpts 2
Several debtors' confirmation letters were returned because the
addressees had changed their mailing addresses.

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
 Solution (Cont.)
Excerpts 3
A large sum of sales transactions was found with no supporting
documents. Most of these transactions involved small clients.

Short Term
Ask the engineering department to provide document using courier service
Countercheck with custom department
Should be able to verify turnover figure
 Solution (Cont.)
Excerpts 4
A loan received from a Hong Kong based company was found to be
incorrectly recorded in the debtors' account.

Short Term
Countercheck and verify with loan agreement
Correcting the double entry according to MASB
 Solution (Cont.)
Excerpts 5
Several abnormal transactions involving the purchase of aircrafts by
FCB and offsetting the debtors accounts were found in FCBs books.

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
 Conclusion
Deligate and segregate duties
ISO / Countercheck
Transparency