CASE 1

DELIMA ENTERPRISE SDN BHD

Mustapa Kamal Mohd Razali

Aini Aman
Azbir Abu bakar
Yasmiza Long

It was July, 2006 when Encik Zayed engaged the external Auditor Aziz & Co (Chartered Accountant)
introduced by his friend to perform the statutory audit for the period of 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 auditors appointment
and appoint a new friendly party auditor. Encik Zayed 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
owned family members as its employees and some did not have the necessary job experiences.
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 the company to analyse and provide the Auditors with the
necessary clarifications and documentations.

Case 1 A Delima 1
Company Background

Delima Enterprise was founded in 1981 by Encik Zayed. It had 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 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 RM1.0 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 Administration and Human Resource Manager. Both Puan Balqis and 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, the
company had employed Cik Amy, a young Accounting graduate as Finance Executive responsible for
maintenance of the accounting and financial matters, including the preparation of accounts. Prior to
Cik Amys appointment, Puan Hashimah was responsible for all finance related matters. Cik Amy
graduated from a local university since April 2006 and had no working experiences.

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 RM1 million. The
banks required the companys past two years Audited Financial Statements 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 (Chartered Accountant) was engaged to
perform the audit. The audit was targeted to be completed at the earliest possible to meet the banks
requirement.

Case 1 A Delima 2
Accounting Systems, Information and Records

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

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 full. Monthly Statement of Accounts 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 services 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.

Audit findings and recommendations

The Auditor had difficulties to complete the audit of the accounts 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 from Trade Debtors were long outstanding and several personal withdrawals and

Case 1 A Delima 3
expenses were charged to the company. On top of that, several unrecorded cash withdrawals and Cash
and Bank balances were not reconciled.

The Auditor had noted the following findings:

1. That there was no Standard Operating Procedure (SOP) in place and all decisions were made and
authorised by either Encik Zayed or Puan Hashimah. The Auditors recommended that a 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 and RM250,000 respectively. The Auditor recommended that the amount be
provided in the Profit & Loss Accounts.
3. That several over payments were made to 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 compared to 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 were understated by RM40,000 compared to
the Accounts Receivables General Ledger in total.
6. That no individual project budget and analysis were prepared.
7. That personal vehicle expenses for Encik Zayed and Puan Hashimah totaling RM50,150 were
charged to the company.
8. That several withdrawals from the company totaling RM12,500 were made from the company
without proper documentation.

Based on the analysis performed by Cik Amy, the following was noted:
1. That the RM150,000 recorded as Accounts Payables was actually Cash Advances made by Encik
Zayed to the companies.
2. That the sum RM250,000 from the Accounts Receivables Summary Report 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 report.
3. That the overpayment of Trade Creditors totaling RM50,000 was due to human error as a result of
lack of control.

Case 1 A Delima 4
4. That the receipts of RM70,000, which was recorded twice in the General Ledger and RM40,000,
were related to Trade Receivables Accounts and the RM30,000 was related to Cash Advanced
from Encik Zayed.
5. That EPF contribution for contract workers were not deducted and remitted to EPF.
6. That there were no comprehensive business plan and budget prepared.
7. That Encik Zayed was not willing to commit and invest on necessary training to enhance the
knowledge of the employees so that could be more effective and efficient in performing their job.

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 demonstrated 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?

Note:
This case presents the actual family-business dilemma and identities are changed to protect family privacy. The
authors opinions do not necessarily reflect the views of the Malaysian Institute of Accountant and this case was
written for academic purpose only and the author disclaim any legal responsibilities.

Case 1 A Delima 5
 Appendix A

Delima Enterprise Sdn Bhd Unaudited Trial Balance

as at 31 May 2004 to 31 May 2005

2005 2004
DESCRIPTION RM RM
DR CR DR CR
Fixed Assets 133,818 98,244
Trade receivables 817,192 520,632
Other debtors, deposits & prepayments 28,617 181,906
Cash & bank balances 358,825 267,147
Auditors fee 8,000 -
Secretarial fee 1,500 1,500
Depreciation 22,750 14,737
Directors emoluments 49,925 42,188
Salaries 67,025 45,000
Rental of office 35,925 21,833
Office expenses 15,000 10,000
Motor vehicle expenses 25,000 15,000
Bank charges 5,825 5,670
Trade payables 847,929 482,457
Cost of Sales 1,326,410 627,935
Sales 1,700,525 897,050
Other payables, Accruals & provisions 66,223 70,735
Provision for Depreciation (FA) 37,487 14,737
Share capital 500,000 500,000
Retained Profit/(Loss) 113,187 -
Current year Profit/(Loss) 143,165 113,187

Control Total 2,895,812 2,895,812 1,964,979 1,964,979

Case 1 A Delima 6
 Appendix B

Delima Enterprise Sdn Bhd Unaudited Balance Sheets

as at 31 May 2004 to 31 May 2005

2005 2004
ASSETS EMPLOYED
RM RM

FIXED ASSETS 96,331 83,507

CURRENT ASSETS
Trade receivables 817,192 520,632
Other debtors, deposits and prepayments 398,156 295,093
Cash and bank balances 358,825 267,147
1,574,173 969,685
LESS: CURRENT LIABILITIES
Trade payables 847,929 482,457
Other payables, accruals & provisions 66,223 70,735
914,152 553,192
NET CURRENT ASSETS/(NET CURRENT
660,021 416,493
LIABILITIES)
756,352 613,187
FINANCED BY

SHARE CAPITAL 500,000 500,000

ACCUMULATED PROFIT/(LOSS) CARRIED 256,352 113,187

FORWARD

756,352 613,187

Case 1 A Delima 7
 Appendix C

Delima Enterprise Sdn Bhd Unaudited Profit & Loss Statements

for the period from 31 May 2004 to 31 May 2005

2005 2004
RM RM
TURNOVER 1,700,525 897,050

PROFIT/ (LOSS) FOR THE YEAR 143,165 113,187

After charging/(crediting):

Auditors fee 8,000 -

Secretarial fee 1,500 1,500
Depreciation 22,750 14,737
Directors emoluments 46,925 42,188
Salaries 67,025 45,000
Office rental 35,925 21,833
Office expenses 15,000 10,000
Bank charges 5,825 5,670

ACCUMULATED PROFIT/(LOSSES) 256,352 113,187

Case 1 A Delima 8
 Appendix D

Delima Enterprise Sdn Bhd Unaudited Cash Flow Statements

for the period from 31 May 2004 to 31 May 2005

2005 2004
RM RM
SOURCE OF FUNDS
Profit for the year 143,165 113,187

Adjustment for items not involving the movement of funds:

Depreciation 22,750 14,737

OTHER SOURCE OF FUND

Proceeds from disposal of fixed assets - -
165,915 127,924
APPLICATION OF FUND
Purchase of fixed assets
(35,574) (98,244)
Increase in paid-up capital
- 500,000

130,341 529,680
REPRESENTED BY:
INCREASED/(DECREASED) IN WORKING CAPITAL
Receivables 399,623 815,725
Payables (360,960) (553,192)
38,663 262,533
Movement in net liquid funds:
Cash and bank balances 91,678 267,147

130,341 529,680

Case 1 A Delima 9
 Appendix E

Delima Enterprise Sdn Bhd Organisational Chart as in 31 May 2005

Encik Zayed
Chief Executive Officer

Puan Hashimah
Chief Operating Officer

Encik Salam Puan Balqis Cik Amy

HR & Admin Manager Operations Manager Finance Executive

Vacant Clerical
Project Supervisor Assistant

Project Team
(On contract basis base
on project requirements)

Case 1 A Delima 10