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 auditor’s 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.
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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 RM1.7 million respectively. Appendix A to D presents Delima Enterprise Sdn Bhd Unaudited Financial Statements 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 Human Resource Manager. 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 Amy’s 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 company’s 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 earliest possible to meet the the bank’s requirement.
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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 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
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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.
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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 author’s 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.
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Appendix A Delima Enterprise Sdn Bhd Unaudited Trial Balance as at 31 May 2004 to 31 May 2005 2005 RM
DESCRIPTION DR
2004 RM CR
DR
CR
Fixed Assets
133,818
98,244
Trade receivables
817,192
520,632
28,617
181,906
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
5,825
5,670
Other debtors, deposits & prepayments Cash & bank balances
Bank charges Trade payables Cost of Sales
847,929 1,326,410
Sales
482,457 627,935
1,700,525
897,050
Other payables, Accruals & provisions
66,223
70,735
Provision for Depreciation (FA)
37,487
14,737
500,000
500,000
Share capital Retained Profit/(Loss)
113,187
-
Current year Profit/(Loss)
143,165
113,187
Control Total
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2,895,812
2,895,812
1,964,979
1,964,979
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Appendix B Delima Enterprise Sdn Bhd Unaudited Balance Sheets as at 31 May 2004 to 31 May 2005 ASSETS EMPLOYED
2005 RM
2004 RM
96,331
83,507
817,192 398,156 358,825
520,632 295,093 267,147
1,574,173
969,685
847,929 66,223
482,457 70,735
914,152
553,192
660,021
416,493
756,352
613,187
SHARE CAPITAL
500,000
500,000
ACCUMULATED PROFIT/(LOSS) CARRIED FORWARD
256,352
113,187
756,352
613,187
FIXED ASSETS CURRENT ASSETS Trade receivables Other debtors, deposits and prepayments Cash and bank balances LESS: CURRENT LIABILITIES Trade payables Other payables, accruals & provisions NET CURRENT ASSETS/(NET CURRENT LIABILITIES) FINANCED BY
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Appendix C Delima Enterprise Sdn Bhd Unaudited Profit & Loss Statements for the period from 31 May 2004 to t o 31 May 2005
TURNOVER PROFIT/ (LOSS) FOR THE YEAR
2005 RM 1,700,525
2004 RM 897,050
143,165
113,187
8,000 1,500 22,750 46,925 67,025 35,925 15,000 5,825
1,500 14,737 42,188 45,000 21,833 10,000 5,670
256,352
113,187
After charging/(crediting): Auditors’ fee Secretarial fee Depreciation Directors’ emoluments Salaries Office rental Office expenses Bank charges
ACCUMULATED PROFIT/(LOSSES)
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Appendix D Delima Enterprise Sdn Bhd Unaudited Cash Flow Statements for the period from 31 May 2004 to t o 31 May 2005 2005 RM SOURCE OF FUNDS Profit for the year Adjustment for items not involving the movement of funds: Depreciation OTHER SOURCE OF FUND Proceeds from disposal of fixed assets APPLICATION OF FUND Purchase of fixed assets Increase in paid-up capital
REPRESENTED BY: INCREASED/(DECREASED) IN WORKING CAPITAL Receivables Payables Movement in net liquid funds: Cash and bank balances
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2004 RM
143,165
113,187
22,750
14,737
-
-
165,915
127,924
(35,574) -
(98,244) 500,000
130,341
529,680
399,623 (360,960)
815,725 (553,192)
38,663
262,533
91,678
267,147
130,341
529,680
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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 HR & Admin Manager
Puan Balqis Operations Manager
Cik Amy Finance Executive
Vacant Project Supervisor
Clerical Assistant
Project Team (On contract basis base on project requirements)
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