Reference no: EM133266673

Junaidah has been accepted to join the internal audit department of ?Mega Chinos Bhd (MCB), a construction company with the head ?office in Kuala Lumpur and seven branches throughout the major ?cities of Malaysia. MCB is listed on Bursa Malaysia and has reported ?net earnings of RM250 million for the financial year ended 31th   December 2018. After working with MCB for a few months, Junaidah ?has identified the following unsolved issues.

?The Board of Directors (BOD) of MCB consists of eight members ?with experiences of more than 20 years. Due to their experiences, ?four directors are paid double than industry's average. Occasionally, ?some of the company's directors arranged meetings with the senior ?officers of the company without the knowledge of Chief Executive ?Officer (CEO). Junaidah also noticed that there is lack of  communication between the board members and the external ?auditors although the external auditor has served this company for ?the past four years. In many cases, some of the problems are ?covered up due to familiarity and sympathy.

The project controller, Miss Marina, discovered some accounting issues, ?Miss Marina, discovered some accounting irregularities in the ?projects proposed by Dato Syamim, the company's director cum ?Project Manager. The projects specifications do not meet the company's standards and breach the public authority legislation. ?Miss Marina personally believes that the projects might have ?adverse effects on the public and other stakeholders. She has been ?persuaded by Dato Syamim to alter and revise some of the ?accounting figures in order to make the project become viable. Dato Syamim 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 ?Syamim is Miss Marina's uncle.

?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 reluctant to increase the ?allowance because of the adverse effect towards the company's ?profit. The CEO is willing to take full responsibility of many ?misstatements and insisted the auditor to ignore the issue. The ?external auditor agreed to the management request and aware of ?the risk associated with issuing an unqualified opinion on misstated financial statements. The decision was partly influenced by the fact ?that MCB is one of the auditor's main client whose audit fee ?contributions more than 25% of the auditor annual earnings. The ?CEO had once threatened to replace the existing auditor if the issue is highlighted in the auditor's report.

Required:

1. Identify and explain several indicators of fraudulent activities ?that have been highlighted in the issues raised by Junaidah and relate it with fraud triangle. Explain also the possible implications if the fraudulent activities are not addressed by the internal auditor.

2. Comment on the ethical issues that concern the external ?auditors. Support your answer with relevant MIA By-Laws (on ?Professional Ethics, Conduct and Practice)