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Possible Fraud from inconsistence account..................................................................4


Corporate Governance of FCB......................................................................................6


Auditor Dilemma.............................................................................................................7





1.0 Introduction
Flat Cargo Berhad (FCB) was established and started its operation in 1997 as the mean of
providing air freight services to the Intra-Asia air market. FCBs services were not only limited
to air freight and aircraft ground handling but also included aircraft charter and leasing. FCB was
aimed to maintain their niche position not only in the Asia Pacific region but also in China,
Thailand and India by delivering best quality customer service and satisfying customer demands.
On 15 September 2001 the Company was listed in Bursa Malaysia. The main core business
was to provide air freight transportation within the Asian region. As a fast growing company,
FCB secured agreements from well-establish company within the transportation industry which
is among of

their customers such as Worldwide Express, United Parcel Services (UPS),

Nationwide Express, Citylink, Bax Global, Nippon Express, Cargo Malaysia Services and
Bangor Berhad.
Besides that, FSB is one of the largest air freight company in Malaysia which is a high
reputable company. It was a listed air cargo carrier service company which also registered as an
investment holding company with several subsidiaries and the principal activities of its
subsidiaries included air freight services and aircraft ground handling services. They are FC
Spare Sdn. Bhd, Cargo Management Sdn. Bhd, FCB (SPV), Cargo Air Services Sdn. Bhd and FC
Air Ltd. Its primary operation was to provide air freight transportation which including air
freight services, air freight handling services and leasing. The main activity of the company was
as an air cargo carrier, provide air freight transportation which includes aircraft charter and
FCB had appointed Kenchana & Associates as its external auditor. There are many puzzling
issues that could occur in the process of auditing a listed company. These issues could be created
either intentionally or the other way around. Therefore, an objective analysis is needed to clear
the puzzles especially if the auditors wish to curb fraud cases among their clients.
Mr Chuah Mun Soong is the main character in this case; he is the auditor from Kencana &
Associates which responsible to make a financial audit for Flat Cargo Berhad (FCB). In 2006,
while prepare audit work for Flat Cargo Berhad, the auditors discover several suspicious result
which lead to delay a decision in finalizing the auditors report. Mr Chuah had been informed

by his subordinates that there had been inconsistencies in the accounts of Flat Cargo Berhad. Mr
Chuah needs to gain more information from the company in order to inform his boss, Mr Keong
Chee Wah about the situation occur in the clients company and he also required to present the
financial report to the audit committee of FCB in two weeks. Mr Chuah was in dilemma because
he wants to keep good the things.

2.0 Issues
In the case of Flat Cargo Berhad, the auditor has been found some inconsistencies in the
accounts of Flat Cargo Berhad (FCB) and there was possibility of fraud that commit within the
company. By thorough study on this case, there have several issues that can be raise in the Flat
Cargo Berhad case regarding the inconsistencies of account and the possible reason that lead to
the fraud.
For the first issues is regarding to the possible of fraud that will be occurs in the Flat Cargo
Berhad. This is because based on the audit working paper have been reveal few inconsistencies
in the accounts such as the auditors of FCB were unable to verify the aircrafts claimed to have
been purchased by FCB in year 2005, several debtors confirmation letters were returned due to
the addresses had changes of their mailing address, a large amount of sales transactions without
any supporting document, incorrectly record the loan received from Hong King based company
into debtors account and lastly is the several abnormal transaction and offsetting the debtors
account were found in FCBs book. Other than that, by conduct analysis on outsider event such
as growth rate of the international industry, profit margin of the competitor and so on able to
reveal some important information whether the company engages into the fraud activities.
While for the second issues is discuss about the weakness of the corporate governance in the
FCB who play a vital role in detecting any possible fraud that might occur within the
The last issues in this case are about the auditors dilemma. In this case, as an auditor, what
decision and action should be taken to overcome the situation whether to issues qualified or
unqualified report regarding the information that found in the company?

3.0 Discussion
3.1 Possible Fraud from inconsistence account
After thorough study on the Flat Cargo Berhad case, the company has been suspected that
the FCB is involved in the fraud scandal. As reveal by the audit working paper that conduct
by the auditors, there have several inconsistencies in the accounts of FCB. One of the
inconsistencies accounts is that the auditors were unable to verify the aircraft that purchase by
FCB in 2005, however, just able to found a non-functional rundown aircraft barely worth
RM231 million in a hanger. From this event, there is a risk that FCB tried to forge the
purchase of aircraft to conceal their theft action. This action is call as asset misappropriation
frauds. By doing so, they could steal the company money by taking the alleged money to
purchase the aircraft. Besides that, there is also a risk that the company overstated the value of
the aircraft to increase the equity of the shareholder.
Apart from that, in order to verify the accuracy of the amount that stated in the debtors
account, the auditors have applied the confirmation method to obtain the evidence from the
several debtors that exist in the companys transaction. The purpose of the auditors using
confirmation method is to increase the reliability of the debtors balance that present in the
financial statement. However, some of these debtors confirmation letters have been return
due to the invalid address. This raises the question regarding the existence of the debtors that
is recorded in the companys book. There are 2 possibilities that can be deducted from this
scenario. One is that the information recorded regarding the debtor was incorrectly recorded
and another possibility is the debtor was created by the company. It is possible that the debtors
do exists, it is just that their address is incorrectly recorded by the staff. However, it is also
possible that the management of FCB created phantom debtors in order to boost their current
assets so that this will reveal that the FCB is in the favorable position in term of ability to
repay the current liability in the short period.
Not only that, the auditors also discovered that most of the large amount of sales
transactions was without supporting document. The documentation is the most useful
evidence for verification by the auditor of the accuracy of the clients record for sales

transactions. This lack of supporting document raises the question regarding the existence of
the sales transaction. Besides, it also raises issue towards the internal control of the FCB.
FCB might have weak internal control environment and the possibility of its worker
committing fraud is high.
Other than that, the auditors also found that the loan received from Hong Kong based
company was incorrectly recorded in the debtors account and there have several abnormal
transactions such as purchase of aircraft by FCB and offsetting the debtors account that was
found in FCBs book. The incorrectly recorded loan received into the debtors account
reveal that there is high a possibility of FCB trying to hide the loan from its shareholders and
potential investor. This raises the question of whether the company is practicing windows
dressing for their financial statement. As we know, if the company is mostly finance by the
high loan, this indicate that the company is not in a good position to investment because there
will be low return as the company is borne to pay the high interest rather than pay high
dividend. Besides that, the investor also needs to bear high risk as the liabilities of the
company are high. The low return and high risk will certain discourage investor to invest in
the company. Hence, in order to portray a good image and financial position, there is high
possibility that FCB tried to minimize the amount of loan by recognizing it as debtors. The
auditor s also detected several abnormal transactions involving the purchase of aircraft and
offsetting the debtors accounts in FCBs books. This provides an indication that FCB
might have been trying to conceal the large outflow of transaction that occurs in the company
to provide misleading information to the shareholders that the company is in the favorable
situation. From these events that have revealed by the auditors, there is a high possibility of
the FCB are engaging in the fraud activities.
On the other hand, to evaluate whether the FCB have commit fraud by produce a
fraudulent financial statement, it is also important for the auditors to conduct the analysis
regarding the outside event rather and not just focus on the internal information. Through the
analysis of the outside information, the air cargo industry within the Asia Pacific region is
describe as highly competitive with low profit margin and there will be an international crisis
will the occurred with the exceptional increase in oil prices in year 2005 and this will
dramatically affected the freight forwarding industry. Therefore, the growth rate for the

international freight traffic for 2005 was a mere 3% which having a dramatically decline
compare to the previous year as the growth rate is about 21.3% per year from 1991 to 2003.
However, Flat Cargo Berhad experienced a significant growth in 2005 with a growth rate of
59%. From here, we can notice that the FCB is experience a high growth rate in 2005 whereas
the overall air cargo industry in Asia Pacific region is suffer in declination in growth due to
the inflation of fuel price. This information shows that the FCB is in an abnormal situation
where the risk of fraud being committed is quite high, so as auditors, they have to conduct
their audit works in more details and with extra due care.
3.2 Corporate Governance of FCB
For the second issues that mention in the above, corporate governance plays a vital role
within the company which they help to strengthen the role and responsibilities of Board of
Director and audit committee in overseing the management activities to detect and prevent the
fraud of the company. The practice of the corporate governance has been highlight in the
Malaysian Code on Corporate Governance and is mandatory follow by the Malaysian public
listed company. However, in the Flat Cargo Berhad case, the audit committees challenged the
Malaysian Code on Corporate Governance. In the Code, it required the entire audit
committees must comprised of at least three members, a majority of whom are independent
and all of the members should be non-executive members. However, the Flat Cargo Berhad
appointed the executive director, Ali Bin Ahmad as the member of the audit committee.
Through this appointment of executive director, it will indirectly impair the independent and
objectivity of the audit committee when they discharge their duties. This is because as an
executive director, Alis responsibilities is to prepared financial statement while as an audit
committee, he is responsible is to oversee the management activities and to detect the fraud
occurs. Therefore, by having this two position at the same times, there will be arise of conflict
of interest when Ali is performing his duties, which he might try to conceal the important
information in the audit committee to make them unable to detect the fraud that he might have
committed as executive director. This will result in the failure of the audit committee to act as
an oversight of the management.

3.3 Auditor Dilemma

In this case, Mr Chuah Mun Soong who was the auditor for the Flat Cargo Berhad was
facing the auditors dilemma when his audit team discovered that there are several
inconsistencies in the accounts of FCB which the company was possibly engaging in fraud
scandal. In this situation, Mr. Chuah Mun Soong has to determine whether to issues
unqualified or qualified report regarding the financial statement of the company. As auditors,
their responsibilities are to provide reasonable assurance that the financial statements taken as
whole are free from material misstatement (ISA 200) which meant they are responsibility to
detecting the material misstatement in the financial report. Besides, they also have to perform
their duty with the professional skepticism to detect both material and fraud in the financial
statement. Hence, every decision that is made by the auditors is very influential and gives a
big impact to the shareholder and the potential investors. This is because both of them are
based on the work and information that is released by the auditors to make any investment on
the company. When deciding on what kind of report he should issue, he might find it hard to
decide and provide a objective opinion. This is because whatever report he provide to the
shareholder, there is risk that he will be affected by it. For example, if he issued unqualified
report and later, it is found that the company has committed fraud, he might be sued for
negligence. This is because he failed to detect the fraud even though the audit team discovers
so many suspicious transactions. If he issued qualified report, the company might discontinue
hiring his audit firm in the next year. This is why before making any decision regarding the
report, he should conduct more tests and gather more evidence to support his report.

4.0 Recommendation
Before issuing the report, Mr. Chuah need to conduct more tests on the company to
ensure that he could justify whichever report that he is going to show to the audit committee.
Regarding the rundown aircraft worth RM231 million, he should consult expert in that field to
help him evaluate the value of the aircraft. If the expert give an opinion that the aircraft does
worth that much, then, there should not be any problem. However, if the expert does not agree
that the aircraft worth that much, Mr. Chuah should then bring this matter to the management.
Based on their explanation, Mr. Chuah should decide on what report to be presented to the audit
committee. If the explanation provided by the management is unreasonable, a qualified audit
report should be presented to the audit committee.
Regarding the debtors confirmation letter, Mr. Chuah should first enquire the
management whether they have the updated addresses of the debtors and whether they know the
current status of their debtors. If they do not have them, Mr. Chuah should evaluate the financial
statement whether appropriate allowance of bad debt is created. If the amount is set at a
reasonable rate, then an unqualified report can be issued. If not, he should bring this matter to the
audit committee.
Regarding the sales transaction without supporting document, he should analyze the
company internal control. Such a transaction might be created under poor internal control. Mr.
Chuah should then determine the possibility that the transaction is fictitious or is as at is due to
poor internal control. After analyzing the internal control, he should provide recommendation to
the management to strengthen the internal control to prevent such incident from occurring again.
Regarding the loan being incorrectly recorded in the debtors account, Mr. Chuah
should conduct more tests on other debtor to determine whether the existence of similar error is
common or rare. If it is rare, the possibility that recorded erroneously is high. Mr. Chuah should
then identify the causes for the error and provide suitable recommendation to strengthen the
internal control of the company. If the existence of such transaction is common, he should
conduct more tests on the internal control and the sales account to determine whether the element
of fraud exists. If the tests show that the transaction does not exist, he issues a qualified audit
report and inform the audit committee.

Besides that, Mr. Chuah should also advise the company to re-elect the audit committee.
This is to ensure that conflict of interest will not occur in the committee. The company needs to
make sure that the majority of the new audit committee comprised of independent director and
all of them are non-executive. This is to ensure that they will not have conflict of interest and
they can perform their task thoroughly. The company need to avoid repeating the same mistake
of hiring an appointing an executive officer to the audit committee. This is to ensure that the
audit committee will function well as the oversight of the board of director.

5.0 Conclusion
Mr. Chuah should not issue an unqualified audit report as there are a lot of uncertainty
regarding the transactions in the financial statement and he risk of fraud happening is high.
Without doing any further tests and getting new evidence, he should not issue unqualified audit
report. This is because there is still a lot of things that needs to be explained by the management
and until they can provide a reasonable explanation, Mr. Chuah should not issue unqualified
audit report. Mr. Chuah should not issue unqualified report just because he fears offending the
company. He should only issue the unqualified report based on the evidence that he has gathered.
If he issued an incorrect report, it will damage his reputation. In audit work, reputation is very
important. If his reputation is damage, other company will not dare to hire him anymore. Besides
that, he might also be sued due to the incorrect report issued by him. Since investor and
shareholder relied on the audit report to know the trust worthiness of the financial statement, if
he issued a wrong audit report, investor will make wrong decision as the information provided in
the audit report is inaccurate, resulting in them suffering losses. They might then sue him
because he is one of the reasons why they suffered losses.