Reference no: EM132596503

Question - Financial statement fraud is the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users.

a. Explain any three (3) elements of perfect fraud storm that could be related to the corporate scandals of the famous Enron Corporation and WorldCom, Inc.?

b. Amy has been accepted to join the internal audit department of Setia Angkasa Berhad (SAB), a medium-size construction company with the head office in Johor Bharu and four (4) branches throughout the major cities in Malaysia. SAB is listed on Bursa Malaysia and has reported net earnings of RM350 million and RM420 million for the financial year 31 December 2018 and 31 December 2019, respectively.

After working with SAB for a few months, Amy has identified the following unresolved issues that might lead to fraudulent activities:

Issue 1: The board of directors (BOD) of SAB consists of eight (8) members with experiences of more than 10 years. Due to their expertise, four (4) directors are paid three times higher than the industry's average. Occasionally, some of the company's directors arranged meetings with the senior officers of the company without the knowledge of the Chief Executive Officer (CEO). Amy also noticed that there is lack of communication between the board members and the external auditors. In many cases, the BOD failed to identify the problems in SAB.

Issue 2: The project controller, Miss Arina, discovered some accounting irregularities in the projects proposed by Dato Zek, the company's director cum Project Manager. The projects specifications do not meet the company's standards and breach the public authority legislation. Miss Arina personally believes that the projects might have adverse effects on the public and other stakeholders. She has been persuaded by Dato Zek to alter and revise some of the accounting figures in order to make the projects appear viable. Dato Zek is convinced that the projects will eventually generate profits for the company. The company has a policy of rewarding employees based on their contributions to the company's revenues. Dato Zek is Miss Arina's uncle.

Issue 3: Several accounting issues encountered by Amy personally are:

1. Expenses for the Board of Directors' family such as entertainment, hotel charges and cleaning services have been charged to the company's expenses account.

2. There are overdue account receivables from a few companies but no further actions have been taken by the management. These companies have been sponsoring many events organized by the company.

3. It has been the company's policy that any withdrawals, regardless of the amount, to be signed by the Finance Manager, who has been employed since the first day of the company's establishment. Nobody in the company has ever questioned his integrity as he is seen to be a workaholic and seldom takes his annual leave.

4. Most of the junior employees in the accounting department lack experience and are not aware of SAB's accounting principles and procedures.

Issue 4: The external auditor who performed the audit for the financial year ended 31 December 2018 has raised his concern over the insufficient allowance for doubtful debts. Discussion with the CEO revealed that he is aware of the issue, but is reluctant to increase the allowance because of the adverse effect towards the company's profit.

The CEO is willing to take full responsibility of any misstatements and insisted that the auditor ignore the issue. The external auditor agreed to the management request and is aware of the risk associated with issuing an unqualified opinion on misstated financial statements.

The decision was partly influenced by the fact that SAB is one of the auditor's main clients, whose audit fee contributes to more than 20% of the auditor's annual earnings. The CEO had once threatened to replace the existing auditor if the issue is highlighted in the auditor's report.

Required -

i. Describe six (6) indicators of fraudulent activities that have been highlighted in the issues raised by Amy.

ii. Explain the possible implications if the six (6) indicators that you have identified in (a) are not addressed by the management.

iii. Discuss three (3) appropriate actions that should be taken by Amy, as the company's internal auditor, in dealing with the above issues.