flat cargo

5/23/2018 flat cargo

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Case Study 2 :

Flat Cargo Berhad - An Auditor's ConundrumChapter 4 : The Bookkeeping Process

Group :1. Fatimah Zahrah Zaid : PBS1331373

2. Faeeza Noor Mohd Jaafar : PBS1331339

3. Hajara AbdulKadi : PBS13314024. Pushpanathan : PBS 1331405


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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 subsidiariesAir Freight services

Air-craft ground handling services

Auditor: Kencana & Associates


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FCB Wholly Owned Subsidiaries

FLAT CARGOGROUP BERHAD

FC Spare SdnBhd

CargoManagement

Sdn BhdFCB (SPV) Ltd

Cargo AirServices Sdn Bhd

FC Air Ltd


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As at 2005

FCB secured agreements with well

established companies


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Top Management Team

Top Management Team

Chief Executive Officer Executive Director Chief Financial Officer

Founder of FCB

Member since 1997

Chairman of the company

audit committee

Member of its employee share

option scheme committee

Board since 1999

Mr. Lim Loon Sim Mr. Ali Bin Ahmad Mr. Kim Boon Chok


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The List of FCB's Board of Director

Chairman / Independent

Non-Executive Director

Independent Non

Executive Director

Non Independent

Executive Director

Non Independent Non

Executive Director

Dato' Ibrahim Samad

Sulaiman bin Ahmad Kamil

Chong Kee Kit

Lim Loon Sim

Ali Bin Ahmad

Lee Guan Choi

Miri Kim Chen

Tan Sri Rahim Bin Fahmi

Datuk Abu Bakar Bin Sharif


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Excerpts

1

2

3

4

5

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.

Several debtors' confirmation letters were returned because theaddressees had changed their mailing addresses.

A large sum of sales transactions was found with no supporting

documents. Most of these transactions involved small clients.

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

incorrectly recorded in the debtors' account.

Several abnormal transactions involving the purchase of aircrafts by FCB

and offsetting the debtors' accounts were found in FCB's books.


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Transaction AnalysisMethodology

5

QUESTIONS

1. What's

going on?

2. Whataccounts

are

affected?

3. How are

they

affected?

4. Does thebalance

sheet

balance?

5. Does myanalysis

make

sense?


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Transaction Analysis

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

CashFixed Assets

Inventory Creditors

Excerpts 1

The auditors were unable to verify the aircrafts claimed to have beenpurchased by FCB in 2005. The audit team found a non-functional rundownaircraft barely worth RM231 million in a hangar.


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Transaction Analysis (Cont.)

3. Does the balance sheet balance?

Date Dr. Fixed Assets

Cr. Cash

Date Dr. InventoryCr. Creditors

xx

xx

xx

xx


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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


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1. What's going on?

No confirmation on the service/sales taken place


Excerpts 2

Several debtors' confirmation letters were returned because the addresseeshad changed their mailing addresses.



Account

Receivable

Sales


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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

Date Dr. Account Receivable

Cr. Sales

xx

xx



Account Bad

Receivable Debts


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1. What's going on?

Revenue recognized without proper documentation


Excerpts 3

A large sum of sales transactions was found with no supporting documents.Most of these transactions involved small clients.



Cash

Account

Receivable

Sales

Sales


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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

Date Dr. Cash

Cr. Sales

Date Dr. Account Receivable

Cr. Sales

xx

xx

xx

xx


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1. What's going on?

Overstating the Debtors Account


Excerpts 4

A loan received from a Hong Kong based company was found to beincorrectly recorded in the debtors' account.



Account Long terms

Receivable debt


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The impact on liabilities of the FCB will be decreased whereas assets increase due tothe error on double entry process

Date Dr. Accounts Receivable

Cr. Long Term Debt

xx

xx



Cash Long terms

debt


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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 byan 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 oncebeen fixed as a method.

Excerpts 5

Several abnormal transactions involving the purchase of aircrafts by FCBand offsetting the debtors accounts were found in FCBs books.


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Accounts Receivables - decrease

Fixed Assets - increase


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


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Solution

SOLUTIONS

SHORT TERM LONG TERM

AUDITOR FCB


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Solution

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

Excerpts 1

The auditors were unable to verify the aircrafts claimed to have beenpurchased by FCB in 2005. The audit team found a non-functionalrundown aircraft barely worth RM231 million in a hangar.


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Solution (Cont.)

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

Excerpts 2

Several debtors' confirmation letters were returned because the

addressees had changed their mailing addresses.


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Solution (Cont.)

Short Term

Ask the engineering department to provide document using courier service

Countercheck with custom department

Should be able to verify turnover figure

Excerpts 3

A large sum of sales transactions was found with no supporting

documents. Most of these transactions involved small clients.


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Solution (Cont.)

Short Term

Countercheck and verify with loan agreement

Correcting the double entry according to MASB

Excerpts 4

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

incorrectly recorded in the debtors' account.


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Solution (Cont.)

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

Excerpts 5

Several abnormal transactions involving the purchase of aircrafts by

FCB and offsetting the debtors accounts were found in FCBs books.


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Conclusion

Deligate and segregate duties

ISO / Countercheck

Transparency

flat cargo

Documents

Transcript of flat cargo