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Encik Selamat, a Certified Public Accountant (CPA), had been the General Manager of Excel Poultry & Meat Sdn Bhd (EPM) since 2005. EPM was established in 1998 to carry on chicken farming and supplying of whole chicken to various outlets in Malaysia. Now, EPM had more than 200 employees within the organization and started positioning itself amongstthe top 5 chicken suppliers, in the mid-tier producers in country. The company was able to maintain its operations and started to make profits in the poultry and meat industry since the demand for chicken buoyant.
However, the company had facing problem in 2008. The issues arose includes the management of trade receivables, in dealing with superiors, subordinates and customers as well as in handling credit control. The case became worse with a situation faced by general manager of the company who took opportunities and capitalized on his past connections while assuming office. The issues also highlighted the leadership style, lack of adequate internal control system on sales and collection processes, flaws in internal reporting channel as well as issues on professional ethics and conduct of an accountant. Besides, it was also related to situation when accountants would be required to act when information might not readily be available.
What were the problems/issues facing the company?
Since 2008, the company has been facing g the problem of increased chicken feed cost which has risen to RM88 from RM54.50 (an increase in almost 61.5%). The increase in feeding cost has ultimately increased the company¶s production cost to about 56.5%. The increase of feeding cost has affected the whole industry. Thus, FLFAM has called for higher chicken prices in order to protect producers earnings in the face of feed cost hike. However, members of the FLFAM had seen a drop in demand of the chicken. Since the event of the feed cost hike, the company discovered that they have systematically low operating cash. In that event, the company resorted to borrowing short -term loans from the bank in order to meet operating obligations. This in turn increased its financial obligations in terms of interest payments. The aging analysis of the customers of the company had turned out that one of the major customers¶ Cold Gold Sdn. Bhd. has gone over the company¶s credit limit, yet marketing department continued to supply products to the company.
.Another problem faced by the company is that the company¶s General Manager. In turn. Bhd. 2. in this case. . At this point of time. Siva¶s account had outstanding balance. The decrease of net profit is mainly because of the feeding cost hike and also undiscovered irregularities in the accounts.. Siva. This proves that the company¶s accounts are not in proper order and there is possibility of misstatements in their accounts. Mr. This includes EPM as one of the top five chicken suppliers in Malaysia. Choy). The figures in the balance of the accounts of the company do not tie up to the confirmations given to their debtors and creditors. where he claimed to have paid all outstanding balance and the cash payments had been made to Encik Munir (one of the former personnel in finance department). This relationship has enabled Cold G old to extend its credit limit withauthorization from EncikSelamat and not the Credit Controller (Ms. price and time of delivery of the poultry. The stakes of the bank in the company is to be assured that the company has consistent cash flow to pay for their monthly commitment of bank loan installment to the bank.EncikAzman. The deal wasif EncikSelamat extended the credit limit of Cold Gold Sdn. They need reliable supply of poultry in terms on quality. The company also faced a decrease in net profit within 3 years of its operation in year 2006± 2008. The major creditor in this case is the bank. EncikSelamat has close relationship with one of the executive directors of Cold Gold Sdn. Malaysian government is promoting the integrated chicken production in the East Coast Economic Region (ECER). acompany cannot sustain its operations. EncikSelamat also has personal interest in the deal with Cold Gold Sdn. the government relies on the poultry industry to succeed in this project. Another problem discovered during the aging analysis is that in EPM¶s books. That is the importance of customers to the company. Therefore. This was in contrast with the books of Mr. Bhd. he will personally benefit from the deal. poultry supply for their daily sales and consumptions. a retailer. Who are the stakeholders and what their stakes are? Customers are one of the important people that help a company grow. customers also have stakes in the company. Government is also one of the stakeholders of the company. Without them. EncikSelamat did not disclose this matter to the Board. Customers rely on the supply of products. The company has been facing low operating cash which resulted in the company to resort in borrowing short -term loan from the bank. Bhd.
Then. Siva. Mr.e. they need to be assured that the company is doing well so that they do not have to find another job that has higher job security. Puan Azura. the Accounts Executive and Ms. She managed to inform the matter to Encik Selamat and he went for a meeting with one of the executive directors of Cold Gold Sdn Bhd to settle it. accounting department will send timely reminders to customers with outstanding balances in respect of their account s. Choy has discovered from the aging analysis of customers that the credit limit of its major customer.6%. Then the department will produce aging analysis of customers and the credit controller will . How were the affairs of the company managed? There are several affairs faced EPM. they are concerned about not losing their jobs (i. demand for chicken decreased. The company¶s Credit Controller. She found out that Encik Munir. However. EPM faced another problem relating to the development of the company in late 2008 as the note of a report indicates that the operating cash was systematically running low. They need to be assured that their time and energy spent on the company are worth it. How would you describe the system that existed within the company? In account receivable system of Excel Poultry &Meat Sdn Bhd. Choy also send reminders to all customers with outstanding balances in respect of their accounts. The account receivable division in the accounting department will set credit limit for every customer to make sure there is cash inflow to the company. the company faced operational crises when the cost of production rises in 2008 by about 56. First. Federation of Livestock Farmers Associations of Malaysia (FLFAM) increases the price of chicken to protect producer¶s income. had not disclosed the receipt of payments from customers. a former staff who received the cash payment from Mr. job security). 3. 4. Then she reported the matter to one of EPM directors. Ms. As employees. Choy about the incorrect figures on the statement of accounts sent to him. Cold Gold Sdn Bhd had reach its level but still the marketing department continued to supply chicken to the company. a few weeks later. Then.Another stakeholder of the company is the employees. one of the retail customers with a small account came by the office to complain to Ms. Siva. marketing department send acopy of sales invoice of each sales transaction to the accounting department. Fortunately. The company managed to resort to significant increase in short-term borrowing in order to meet its operating obligation. Therefore. However.
What would you suggest as appropriate course of actions? There are several problems faced by EPM. After that. there areincreasing in trade receivables as well as trade creditors. The consumer accepts such increase negatively. however they was left with no choice. 5. Therefore. the company still cannot gain higher operating profit. the financial health of Excel Poultry & Meat Sdn Bhd (EPM) is getting worse year by year. The situation described was the initial part of the problem which later on gets much worst. The increasing in trade creditor caused of low operating cash.reportcustomers who have reach their credit limit to Encik Selamat. As a result of recession. finance department will send copy of the payment receipt to the accounting department to update the customers¶ accounts. The first problem of EPM is which indicated that the operating cash of the company was systematically running low. The company had to incurred higher feeding cost because the increasing in purchase price of a bag of feed.Even the company had growing in revenue in which cause by the demand in the poultry and meat industry. The customer¶s haddifficulty in paying the debt which leads to long outstanding debts. the demand of whole chicken drop. The problem emergedduring the financial year 2008 ± the economic turmoil. the company had to resort to significant increase in theshort-term borrowings in order to meet its financial operating obligation 6. The increasing effect on thecompany¶s cost of sales. EPM later. It was mainly pertaining to significant increase in cost of sales. EPM indicated thatthe operating cash was systematically running low. with highinflation in the market. have to increase the price of chicken to maintain their sustainability. With the drop of demand of the chicken. hence the increase of cost of production. The financial position becomes worse as the company continued supply products to their customers even though their customer credit limit had already exceeded. It was getting worse because the net profit of EPM is decreasing since year 2006. EPM without hesitation. the price of a bag of feed increase. Every day the business of EPM went from bad to worst. So. At the end of the day. How would you assess and rate the financial health of the company? Generally. Customers will then pay the amount payable by them to the finance department. . planning to increase theshort-term borrowing in order to meet its operating obligation. Having to service the high interest rate currently in the market makes absolutely a bad idea.
If this was the case. Ms. is to have interference of Board of directors seemappropriate before the situation gets much worst. a company whichdoes not tolerate with any such behavior. upon each credit terms of each of the client come due. the subordinates of En Selamat willview of the action (transferring En Selamat to other subsidiary) to be a serious measureshow by the Board of Directors to not tolerate with greediness and putting self-interestbeyond the interest of the company. EPM need to have a proper guideline or policies and procedures so to speak in handling conflict of interest. This is a good first step in moving EPM in a better direction. the auditor must satisfy eight accounts receivable balance -related audit objectives which are as follows: . we discover that there is conflict of interest involved. My next suggestion in handling this problem inmuch quicker and more serious. A good screeningof customer such as credit check will definitely benefit the company in the long run. EncikSelamat was curiously caught single-handedly by EPM¶s Credit Controller. looking at the bigger picture. In a bigger picture. Implementing a policy to ensure themembers of EPM to disclose any conflict of interest in any of their client is to be madecompulsory. 7.The management team tried everything to bring the business on track. this conflict of interest somehow can be one of the factor of the financial fiasco faced by EPM. describe an appropriate audit program on the Trade Receivables of the company? In designing the tests of details of balances in trade receivables of the company. one of their major customers had gone into its level and yet the marketing department continues to supply products to the company. If you are appointed as the auditor to handle the audit work of this company. The successor however needs to be an experienced person inpoultry industry to turn EPM around. The guideline need to clearly reveal the requirement needed in accepting customers. As the problem of EPM being analyzed deeper. the financial stability of the customer so to speak. In the process.. At least to have En Selamat beingtransferred to other subsidiary. again. This exacerbated the existing operating loss faced by the company. In handling this problem. they discovered that. I am here suggesting that the appropriate course of action is to have a proper guideline in selecting customer. EncikSelamat said to have an ideal between him and one of the director in ColdGold SdnBhd (highly likely to be En Azman). Choy. well from the aging analysis of customers that the credit limit of Cold Gold SdnBhd.
second and third requests of confirmation are sent. subsequent test are necessary. (Accuracy) 5.MIA By-Law has distinguished the responsibilities between professional member in thepublic practice and professional members in business. Positive confirmation is a confirmation requesting the debtor to confirm directly the amount stated in the confirmation is correct or incorrect. Cutoff for accounts receivable is correct (Cutoff) 7. How should a professional member conduct himself/herself in commerce and industry? A professional member in commerce and industry should always comply with theCompanies Act 1965. subsequent cash receipts duplicate sales invoices. (Detail tie -in) 2. Even with these confirmations. Accounts receivable is stated at realizable value. Negative confirmation is a confirmation addressed to the debtor but requests only to responds if debtor disagrees with the stated amount. both parts require a professional member to always act with integrity. Accounts receivable are properly classified (Classification) 6. external confirmations are given to the accounts receivable. (Realizable value) 8. and shipping documents. For example. debtors still does not respond to the confirmation. However. there are basically two types of confirmations: positive and negative. accuracy and cutoff objectives. 8. When there are non-responses in the first confirmation sent. Accounts receivable in the aged trial balance agree with related master file amounts. The primary purpose of accounts receivable confirmation is to satisfy the existence. The client has rights to accounts receivable (Rights) After all of these eight objectives have been achieved. and the total is correctly added and agrees with the general ledger. objectivity or the good reputation . Accountants Act 1867. Existing accounts receivable are included (Completeness) 4. and other regulatory bodies constituting itsresponsibilities. Accounts receivable are accurate. (Existence) 3. When sending in confirmations.1. Recorded accounts receivable exist.
This is the threat that due to a long or closerelationship with a client or employer. The first threat is self -interest threat. A professional accountant should alsobe objectivity. or by another individual within the professional accountant¶s firm or employing organization.unless there is legal or professional right or duty to disclose. on which theaccountant will rely when forming a judgment as part of providing a current service. one should always avoid threats to the compliance of the fundamental principles. A professional accountant should be straightforward andhonest in all professional and business relationships. . nor use the information for thepersonal advantage of the professional accountant or third parties.not discloses any such information to third parties without proper and specific authority. He must respect the confidentiality of theinformation acquired as a result of professional and business relationships and. The firstfundamental principle is integrity. A professional accountant must becompetence and due care to maintain professional knowledge and skill at the level requiredto ensure that a client or employer receives competent professional services based oncurrent developments in practice. A professional accountantis also required to act with confidentiality. Thisis the threat that a professional accountant will not appropriately evaluate the result of aprevious judgment made or service performed by the professional accountant. legislation and techniques and act diligently and inaccordance with applicable technical and professional standards. The thirdthreat is advocacy threat.of theprofession and as a result would be incompatible with the fundamental principles. The final threat is intimidation threat ± the threatthat a professional accountant will be deterred from acting objectively because of actual or perceived. A professional accountant must act with professional behavior that complies with relevant laws and regulation and should avoid any action that discredits the profession.A professional accountant shall comply with the five main fundamental principles. The fourth threat is familiarity. therefore. The second threat is self-review threat. a professional accountant will be too sympathetic totheir interests or too accepting of their work. This threat is the threat that a financial or other interest will inappropriately influence the professional accountant judgment or behavior. He is not allowed to be bias. This threat is the threat that a professional accountant will promote a client¶s or employer¶s position to the point that the professional accountant¶s objectivity iscompromised. have conflict of interest or undue influence of others to override professional or business judgments. As a professional member of public practice and commerce.
It also stated that all professional members of the public and business must eliminate or reduce threats to an acceptable level. And thirdly. or may be misleading. a professional accountants shall take reasonable steps to maintain information for the professional accountant in business is responsible in a manner that firstly describe clearly the true nature of business transactions. Bhd.EncikSelamat is a Chartered Professional Accountant. The significance of the threats will depend on factors such as the source of the pressure and the degree which the information is. If still Ms.8 of theMIA By-Law. . all the accountants of EPM are considered professional members in business. represents the facts accurately and completely in all material respects. assets or liabilities. What are the roles of professional accountants in relation to their compliance to the By-Laws of the Malaysian Institute of Accountants as in this case? In this case. Self -interest threat is a threat that a financial or other interest will inappropriately influence the professional accountant judgment orbehavior. According to Section 320 of MIA By-Law which regards to the preparation and reporting of information. According to section 100. It also stated that threats to compliance with the fundamental principles. EncikSelamat is supposedly to safeguard which is to eliminate or reduce thisthreat. they should disassociate themselves from the information that creates threat. for example in this case intimidation threats to objectivity or professional competence and due care. The first way is that they should obtain legal information to report the actions of En. the General Manager of EPM. Selamat for his personal interest with Cold Gold Sdn. It is the duty of Ms. Another way is to consider resigning. classifies and records information in a timely and proper manner. Choy and the other professional accountants cannot eliminate the threat of intimidation to the GM. he is facing the self-interest threat because he is accepting personal benefits when he extended the credit of Cold Gold Sdn. Choy is pressured to decide whether or not to raise the case of personal interest of the EncikSelamat. Ms. Professional members in business and public practice both must comply with thefundamental principles in Section 100 in the MIA By -Law.9. Choy and PuanAzura to reduce the significant threats to an acceptable level. Bhd. Secondly.
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