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INTRODUCTION

Flat Cargo Berhad (FCB) was one of the largest air freight companies in Malaysia, FCB was
a listed company operating primarily as an air carrier. Its core business was to provide air
freight transportation, which included aircraft charter and leasing. Kencana & Associates
served as its auditors. In 2006, during a routine financial audit, the auditors identified several
suspicious findings that resulted in a delay in finalizing the auditors report.
These are the issues found from FCBs working paper for 2005; 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. Next issue was,
several debtors confirmation letters were returned because the addressees had changed
their mailing addresses, besides that a large sum of sales transactions was found with no
supporting documents. Most of these transactions involved small clients. Next issue found
was a loan received from a Hong Kong based company was found to be incorrectly recorded
in the debtors account. Other issues were found are several abnormal transactions involving
the purchase of aircrafts by FCB and offsetting the debtors accounts were found in FCBs
books.

Based on the audit working paper of FCB in 2005, auditor found some disagreements with
management account which may lead to fraud. They were unable to verify the aircrafts
which was claimed to have been bought by FCB in 2005. The audit team found around
RM231 million of non-functional rundown aircraft in hangar. This situation leads to potential
fraud because these old aircrafts had high price tag. As a result it will increase the holding
cost or storage cost of the assets. In this situation, auditor should have checked with the
company secretary for any documents related to the purchase of those aircrafts. A directors
resolution for purchase of assets has to be passed to all directors which require signature of
two or more directors. This is as an acknowledgement that every directors/shareholders
know the company is buying a new asset. Furthermore, the auditor is supposed to perform
physical examination of those assets in order to verify the existence of the assets. They also
had to verify the purchase by checking the related proof of payment, such as invoices,
payment voucher, official receipt etc. In the situation of assets are not functioning or not
being used in the business operation, it has to be disposed from record to avoid
unnecessary expenses for the company.
The auditor also found some issues which were related to several debtors. The confirmation
letters were returned because those debtors changed their mailing addresses. It is possible
that those debtors has been made up for the companys interest. Thus, as the auditor, it is
their duty to contact those debtors before mailing them the confirmation letter.
No supporting documents found involve a large sum of sale transactions. The issue is due to
missing of documents involving a large sum of sale transactions which is the transaction
occurs between small client is most doubtful. The points that we highlighted here may be
there is fraudulent in the amount of sales disclose. The omission of supporting document for
sales transaction results fraud from audit perspective. Auditor should verify the existence
and proper valuation of account receivable and valuation of recorded revenue. Supporting
document is an important element especially for transaction involving a large sum of sales
but the auditor failed to collect documents such as sales invoice, sales order, and customer
order. The auditor should conduct observation and inspection on sales journal entries and
trade receivables entries. Other than that, he should refer to cut off test and the use of
testing (sampling) must be in proper valuation.
There is an error in double entries and principles accounting. The loan received was
recorded in debtors account instead of creditor account. The auditor should trace the
incorrect entries by comparing the journal entries and also confirmation letter of debtors and
creditors. The auditor should recognised incorrect entry into debtor and creditor ledger for
the imbalance control account.

In addition, other issue that we have identified is about the governance structure in FCB. As
FCB is a listed company in Bursa Malaysia, they are required to follow Malaysian Code of
Corporate Governance (MCCG). MCCG is a code that is mandatory for the public listed
companies (PLC) in doing their report. The main reason for MCG was introduced was to
avoid malfunction in Malaysian public and private companies. The first issue was on 2000
and it was revised on 2007, 2011 and 2012. To relate MCCG and FCs case, the code used
is of 2007 because it aimed on strengthening Board of Director and Audit Committee thus
making sure that they discharge their roles and responsibilities effectively.
In this case, we have found that there was a non compliance of governance structure with
the MCCG as the requirements by the MCCG is that the board of director should be balance
between executive and non executive directors or non executive director must be one third
of the BOD. But in FCBs list of board of directors consist of only three executive directors
out of nine people which are Lim Loon Sim, Ali Bin Ahmad and Lee Guan Choi. Due to the
imbalance between executive and non executive directors, any decision that is made may be
not independence, it affects the BOD integrity and the decision is not effective.
Beside BOD non compliance with MCCG, FCBs audit committee also is not compliance with
MCCG requirements. According to MCCG requirements, audit committee must only consist
of non executive directors but in FCB, there is one executive director as the audit committee,
Mr Ali Bin Ahmad. This may cause management override in the company. The auditors role
in both this situation is to make sure that BOD follows the requirements of MCCG.
Furthermore, internal auditor must evaluates and provide reasonable assurance in
governance system are functioning as intended and provides support to the companys anti
fraud activities.
Another issue that we have found that may lead to fraud in FCB is regarding several
abnormal transactions involving the increase in purchasing of aircrafts by FCB and the
offsetting the debtors account. The highlight in this issue is, when there is a purchase of
aircrafts, the company cannot easily offset the debtors account because the price of an
aircraft is very expensive and it is impossible to pay off within the same year. There also
should be purchase agreement on how long it is supposed to be paid. FCB did this so that in
their report, they can show increase of cash in bank accounts thus investors and creditors
will be happy to see that.

As an auditor, their role is to check the purchase invoices, purchase agreement and also the
account receivables. They must also do their own bank reconciliation to find any fraud done
by this company.

CONCLUSION
From the criteria and issues arise, Kencana as the external auditors of Flat Cargo Berhad
can be considered responsible for not detecting the misstatement only but not responsible
for causing the fraud. The main reason for this justification is because during the audit
process, the auditors have found some suspicious transactions related to sales where one of
them is a large sum of sales transactions were found with no supporting documents. So, this
group of sales transactions can be the main contributor for inflating the FCBs annual
earnings.
Besides that, this finding somehow can be a good evidence to show that misstatement has
been detected then justify the possibility of fraud to be happened in FCB. So, auditors
should report this misstatement in their auditors report after finishing their audit process.
However, Kencana and Asscociates cannot be the one that solely blamed for this issue
because the main parties responsible for leading the misstatements and fraud are the Board
of Directors and Management of FCB who in the first place should ensure good internal
control is implemented in the FCB which at least can reduce the risk of fraud.

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