Table of Content

Introduction ............................................................................................ 1

Issues ..................................................................................................... 2

Recommendation .................................................................................. 4

Negotiation with the auditors ............................................................... 6

Could the Audit be completed soon without any qualification? ....... 8

Conclusion ............................................................................................. 9
Introduction

Delima Enterprise was established in 1981 by Encik Zayed whereby the

company had conducted trading and supplying products and manpower
supplies to the oil and gas industries. Due to the business growth, the enterprise
was incorporated as Delima Enterprise Sdn Bhd in 2004. The company was
managed by a married couple, Encik Zayed as the Managing Director and his
wife Puan Hashimah as the Chief Operating Officer.

The other personnel were Puan Balqis as the Operations Manager and
Encik Salam as the Administration and Human Resource Manager where both
of them were family members of the Director. They also hired Cik Amy as
Finance Executive which was a fresh accounting graduate. She was
responsible for maintenance of the accounting and financial matters. Based on
the education background, only Cik Amy had studied until university’s level
while the others were only graduated from secondary school.

Due to the shortage of funds, the company had submitted application to

Malayan Banking Berhad and CIMB Bank Berhad for banking facilities which
amounting to RM1 million. However, the banks had required the company’s
past two years Audited Financial Statements in order to meet the bank’s
requirement.

For the first time of audit experience, Encik Zayed had engaged the external
Auditor Aziz & co (Chartered Accountant) which was recommended by his
friend to perform the statutory audit for the company from year 2003 to 2006.
Unfortunately, there were several unresolved issues where the auditors
expressed their intention to qualify the Financial Statement. Both Encik Zayed
and his wife try to negotiate with the auditors in order to not qualify the Financial
Statements and they had planned to terminate the auditor’s appointment and
engaged a new “friendly party” auditor. The time was essence and the Audited
Financial Statements had to be issued to bank by September 2006 in order for

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the company to receive the banking facilities to implement several contracts
that the company had manage to secure.

Issues

Based on the Delima Enterprise Sdn Bhd case, there are few issues that
we could found in this case. It can be divided into two problems which is
financial problem and operation problem.

For the financial problem, we can see that there is no reconciliation of

accounts. The auditor found that the company had not performed reconciliation
for accounts payable, accounts receivable, cash book and bank balances.
Whereby, the totaled amount of non-reconciled payments and collections noted
for the period under review are RM150,000 and RM250,000 respectively.

Besides, there is personal expenses that had been charged to the

company. The personal vehicle expenses for both Encik Zayed and his wife
are totaling RM50,150. It is consider as a breach of fiduciary duty, where it is
for the interest of themselves and not act at the best interest of the company.

Next, we can found that there is no budget planning in the company. We

can conclude this because there is shortage of funds even though that the
company had successfully secured a contract worth RM750,000 to be
implemented over a duration of six months.

Lastly for the financial problem is that the company’s payroll. Based on this
case, we can see that the employees prepared their time sheets when they
arrived at work and recorded the time they leave the office manually. Whereby,
the employees can easily manipulated the time sheets by increasing the
number of hours that they work in order to get overtime paid. The company also
paid their general workers in cash on a weekly basis not monthly basis.

For the operation problem, we can notice that the company have no
Standard Operating Procedure (SOP) in place and all decisions were made

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and authorized by either Encik Zayed or Puan Hashimah. Without Standard
Operating Procedure, it is hard to achieve efficiency, quality output and
uniformity of performance in the company.

Besides, there is lack of familiarity with Accounting Standards and

Companies Act 1965 for the directors. In this case both Encik Zayed and Puan
Hashimah were not familiar with the Accounting Standards and the provisions
of the Companies Act 1965 which including their roles and duties as Company
Directors.

Next, there is no segregation of duty in the company. The company had

hire Cik Amy as Finance Executive to maintained the company’s accounting
and financial matters which also including the preparation of accounts. Cik Amy
is a fresh graduate with no working experience before, therefore it could be lack
of efficiency due to the heavy workloads that had been assigned for her.

Lastly, the operation problem that the company has face is that the
employees are lack of training. The company may face several unresolved
issues are due to the lack of experiences and training of the employee to handle
and prepare a proper financial statement for the company.

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Recommendation

One of the problems faced by the company is having no account

reconciliation. So, performing the accounts reconciliation is a must for the
company. The company should at least do an accounts reconciliation on a
monthly basis. This also able to avoid fraud such as unauthorized withdrawal
of money from happening. Other than that, the company also able to ensure an
accurate balance sheet amount regularly.

Personnel expenses for Encik Zayed and Puan Hashimah should

not be recorded under company expenses. Instead, the expenses should be
recorded under director accounts. This would allow the company to be able to
see more clearly about the director expenses and the company expenses.
There also less chances for Encik Zayed and Puan Hashimah to misused the
company money as personnel gain since all the personnel expenses are
transparent and not shrouded in company expenses transaction.

The company also should do budgeting planning for every project.

Budgeting planning can help the company to control the finances of the
business. Budgeting planning also allow the management to plan the cost that
may incur and enable the business to meet it objectives and make good and
confident financial decisions.

Salary normally be done on a monthly basis instead of weekly basis.

Beside that, EPF should be deducted from the salary and remitted to EPF
accounts. This is all according to the EPF Act 1951 and the company are
required to follow it. Aside from that, the company should enforce a punch card
system so that the work forces from the employees are fully utilized and
recorded.

The company also should set up a Standard Operating Procedures

(SOP) so that all employees have a clear guideline on how to do their duties.
Beside that SOP also will have the company achieved a consistent and good
result from the employees since all the employees follow a same guideline.

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 Other than that, since both Encik Zayed and Puan Hashimah did not
have any audit experience, both of them should attend some lesson or
seminars to improve their knowledge and familiarized themselves with
Accounting Standards and their roles and duties as Company Directors. This
lesson also able to help them both in managing company.

Cik Amy who is just recently been employed should not be responsible
for all of the finances matter. Furthermore, Cik Amy have just recently
graduated and clearly did not have many experiences yet. So, the company
should hire one or more employees to help lessen Cik Amy duties. Beside that,
segregation of duties also important to avoid further fraud activities and any
misstatement may be detected easier.

The company also should provide training, so all the employees are
knowledgeable and know how to conducts their duties. Besides that, the
training may help the employees to avoid or detect any future mistake or error.

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Negotiation with the auditors

Based on the case study that I have study on Delima Enterprise Sdn. Bhd.,
as the partner of Aziz & Co, I would not comply with Encik Zayed request to
make an unqualified report. This is because that the company has already
many unresolved issues that may bring difficulties to an auditor. For example
that I can take is that the company does not have complete information of the
transaction accounts in their financial software “MYOB”.

Several assets that are purchased by the company were not recorded and
several over payments credited to trade creditors. I can conclude that the
management of financial in Delima Enterprise does not follow accounting
standards. In addition, the company also does not have a proper standard
operating procedure the records are not organized and filed accordingly for
easy reference.

An unqualified report can be presented as all the important facts are stated
in the report which means the information are not hidden and also are complies
with the accounting standards. But Encik Zayed requests for unqualified report
to be submitted to Malayan Banking Berhad and CIMB Bank Berhad for
applying the banking facilities totaling RM1 million. Therefore an unqualified
report does not offer a view on whether a business of the company is in good
economic health. It may occur conflict of interest on the auditor that are in
charge on the audit report.

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 In conclusion, the auditor should not comply with Encik Zayed request as it
is against the statutory duty and responsibility of an auditor since it is
considered as attempting to commit fraud. Accordance to the relevant sections
in Company Act 1965, an auditor should comply and is to carry out duties and
responsibilities as follow:

 Sec 174 (2), auditor is required to; express opinion in report (duty
to report defects, irregularities in account)

 Sec 174 (3), the report particulars of deficiency, failure and

shortcoming.

So an auditor can reject Encik Zayed request on making an unqualified

report which may bring harm on the company itself and Delima Enterprise Sdn.
Bhd.

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Could the Audit be completed soon without any qualification?

Delima Enterprise Sdn Bhd are require to comply with the Companies Act
1965 to prepared the Audited Financial Statement.

Yes, the audit can be completed soon without any qualification if the
financial statement are accordance with the Generally Accepted Accounting
Principle (GAAP), however they needed everyone to give a full cooperation and
work together with auditor especially Encik Zayed and Puan Hashimah, by
having they attend it they could further help with any financial information
required.

For their management and admin their responsibility is to provide a

complete details require by the auditor to further help with the investigation. For
Puan Hashimah cases, as a Chief of Operating Officer are responsible for the
account matter need to cooperate with Cik Amy to identify human error, identify
any unrecorded information and organized all files recorded. By having each
departments to corporate it will help to reduce time taken by auditor and the
report able to complete on time without qualification. By having they fully
corporate with the auditor they could enhance financial management and
operation of the company.

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Conclusion

Encik Zayed and Puan Hashimah should equip themselves with more
knowledge especially in accounting and comply to the MFRS and Companies
Act 1965 to avoid lot of issues arise. Besides that they could also avoid issue
that arises from the case to be happen such as abuse of power by the
management and breach of fiduciary on the part of the director.

The statement it can be audit and can be complete without any qualification
as long as it comply with the Companies Act 1965 to prepared the Audited
Financial Statement. But Encik Zayed and Puan Hashimah tried to negotiate
with the auditor Aziz & co to not qualify the financial statement. More over, they
even planned to terminate their appointment and hire a “friendly Auditor” since
they more willing to qualify the statement sue to unsolved issue. This is clearly
not a good and professional decision. This decision also does not solved
anything in a long run since none of the issues are being solved by running
away and hire a “friendly Auditor”.

Instead of hiring a “friendly Auditor”, they should improved their company

by perform accounts payable, accounts receivable, cash book and bank
balances reconciliation. They also should not any of their personal expenses
recorded under company expenses which they should also at the same time
set up a Standard Operating Procedure (SOP). The company also should do
budgeting planning for every project. When the company management a
improved, fraud activities also may be reduced.