AUDIT CASE STUDY - EASTERN MACHINERY BHD

Please submit by 22 MAY 2019.

Najla is the audit manager with Rayyan & Partners. She has been assigned to audit Eastern
Machinery Bhd (EMB). She is new in the audit of this industry since she is replacing Hana who long association
has left the firm. Rayyan & Partners has been the auditor for EMB for the last 7 years. Najla between auditor
and client.
is currently planning the audit of the financial statements for the year ended 31 March 2019. supposedly only 5
The draft financial statements show a revenue of RM68 million (2018 – RM75 million), profit years engagement
so will possed to
before tax of RM9.0 million (2018 – RM9.8 million) and total assets of RM35 million (2018 – objectivity/bias sbb
RM30 million). dah terlalu selesa.

EMB designs, constructs and installs machinery for 4 key customers mainly from big oil and
gas companies. Among their key customers include Gas Malaysia Bhd, Petron Refining Bhd,
Petra Oil Exploration Bhd and Synergy Exploration Bhd. EMB has also some small and
medium companies as their customers. Payment is due in three instalments: 30% is due when
the order is confirmed (Stage 1), 40% on delivery of the machinery (Stage 2), and 30% on
successful installation in the customer’s oil exploration (Stage 3).
trade receivables the slow collection from the TR in the co. posssed threat to the co. cash flow in the long run.
Generally, it takes 4 to 6 months from the order being finalised until the final installation. As of
31 March 2019, there are amount outstanding from the small and medium size companies
amounting to RM1.8 million and another RM2.0 million from the Synergy Exploration Bhd. The
amount RM2.0 million is a disputed Stage 3 payment from Synergy Exploration Bhd. Synergy
is refusing to pay until the machinery, which was installed in December 2018, is running at
100% efficiency.

One of the customer, Atlas Oil, communicated on 10 March 2019, via its lawyers with EMB,
claiming damages for injuries suffered by a drilling machine operator whose arm was severely
injured when a machine malfunctioned. Farah, the chief executive officer of EMB, has told the
auditor that the claim is being ignored as it is generally known that Atlas Oil has a poor health
and safety record, and thus the accident was their fault. Moreover, the National Institute of
Occupational Safety (NIOSH) has issued few warnings to Atlas Oil on their safety records.
Two orders amounting to RM3 million which were placed by Atlas Oil in February 2019 have
been cancelled.

EMB has work in progress is valued at RM6·5 million at 31 March 2019. A physical inventory
count was held on 23 March 2019. The chief engineer estimated the stage of completion of
each machine at that date. One of the major components included in the oil extracting
machinery is now being sourced from overseas. The new supplier, Luke Exploration is located Currency
issue
in Russia and invoices EMB in euros.

There is a trade payable of RM1·5 million owing to Luke Exploration recorded within current
liabilities. All machines are supplied carrying a one-year warranty. A warranty provision is
recognised on the balance sheet at RM1.8 million (2018 – RM2.0 million). Farah estimates
the cost of repairing defective machinery reported by customers, and this estimate forms the
basis of the provision. Farah owns 55% of the shares in EMR. Her father also owned 10%
shares in EMB. Farah at the same time also owns 60% of Pacific Property Sdn Bhd, which hold majority
leases a head office to EMB. Farah is considering selling some of her shares in EMB in late shares in two
companies.
June 2019, and would like the audit to be finished by that time. - lead to bias in
making
decision
(autocratic)
- price of
building leasing
will low
Required:

a. Discuss the ethical issues found in the above case

(4 marks)

b. Using the information provided, identify four (4) audit risks and why it posed a risk.

(8 marks)

c. Describe four (4) audit procedures to be performed during the final audit in respect of the
estimated warranty provision estimated by EMB. jawapan dkt NIK
jawapan dkt NIK (6 marks)

d. Identify and describe four (4) quality control procedures that are applicable to the of EMB
and other individual audit engagements.

(8 marks)

e. Discuss two (2) problems that may be faced in implementing quality control procedures
in a small firm of Chartered Accountants, and provide recommendations.
(4 marks)
Total: 30 marks