Internal Audit free essay sample

This case presents the actual family-business dilemma and identities have been changed to protect family privacy. The author’s opinions do not necessarily reflect the views of the Malaysian Institute of Accountants and this case was written for academic purpose only and the author disclaims any legal responsibilities. This report will be discussed more details about the issues that arise in the company. Those issues are about the leadership, management and also accounting of the company. 1. What is the issue arise in the case of Delima? Identify the issue and make some recommendation. ISSUES |RECOMMENDATION | | | | |MANAGEMENT PLANNING | | | | | |Employment of staff | | | | | |The directors of the company, En. Zayed and Pn. Hashimah |The directors should employed qualified person to hold any | |employed a staff that has lower educational background who is |position even though they hired their family members to manage | |En. Salam and Pn. Balqis. Both of them only have seconda ry |the company. | |school background likewise En. Zayed and Pn. Hashimah. The directors also can make an interview before employed staff | |The directors also employed staffs who have no experience in |to manage the company in order to know their educational | |working. Cik Amy is young accounting graduate was employed to |background and working experience. | |manage financial of the company. | | | |Besides, the directors can hire temporary consultant to advise | |Improper organization chart |Cik Amy in perform her duties. | | | |The organisational chart was improperly drawn and too few | | |positions had been added to the chart. The chart does not | | |include distinct departments to show the organisation by |It should be properly drawn with distinct functional departments| |departmental functions. |to show distinct job description for each department and several| | |important positions should be added to ensure effective and | | |efficient control. | | | |ACCOUNTING PROBLEM | | | | | |Improper payroll system. The company paid their general workers in cash on weekly |The company should have a proper system in paying the salary for| |basis. |their general workers. It is better for the company to pay | | |salary to their staff by cheque or bank in through bank account. | |The salary of their workers not deducts Employee Provident | | |Fund (EPF) and Social Security Organization (SOCSO). The payment of the salary should pay on monthly basis so the | | |transaction can be record efficiently | | | | | | | |Lack of consistency of recording (MYOB) | | | | | |The program was not integrated which the data was not |The management should provide training or guide their staff to | |processed and generated automatically between several modules. |using the software | | | | |The document is not properly pre-numbered. | | | | | | | | | | |INTERNAL CONTROL SYSTEM | | | | | |Standard Operating Procedure (SOP) | | | | | |The company does not implement Standard Operating Procedure | | |(SOP) to make decisions . | | | |The company should implement SOP as a guideline for the staff or| | management itself in order to carrying out their work properly. | |Segregation of duties | | | | | |En. Zayed does not exercise his duties as properly as to | | |segregate management duties equally among the employees. |En Zayed should segregate Cik Amy’s workload to other personnel | | |according to the relevant job descriptions. For example, Account| | |payable and receivable should be assigned to the different | | |person. This is to ensure the work is able to complete on time. | | | | |Preparing the timesheet | | | |This is better for the company to implement a system that can | |The timesheet is manually prepared and recorded by the |record the time in and out of the attendance of the employees. |employee for their time in and out in the office. |For example, by using punch card, thumb print or eyes | | |recognition. So, the employee will punctual to come to the | | |office. | | |However, another way is by hiring additional employee to monitor| | |for the attendance and timesheet if the company unable to | | |implement the system due to the high cost. | | | | | | | | | |STRATEGIC PLANNING | | | | | |No business plan and budget | | | | | |No project budget and analysis prepared by individual. There must be someone planning a budget for the company to | | |ensure the company efficiently uses the limited res ources. | | | | | |The budget can be used to compare with the actual performance of| | |the company to know whether there is a variance between the | | |budgeted and the actual results. | | | |AUDITING PROBLEM | | | | | |Regulation and standards of the SDN BHD Company | | | | | |En. Zayed and Pn. Hashimah not understand the business | | |requirements when DESB was upgraded from Enterprise to Sdn. |Before deciding on converting the company to Sdn. Bhd. , the | |Bhd. Both of them actually lack of knowledge about the |directors should aware with the provision of the Companies Act, | |Companies Act, 1965. |1965. Both En. Zayed and Pn. Hashimah should know that private | | |company need to submit Audited Financial Statements every year | | |as the provision provided in the Companies Act, 1965. | 2. From the legal perspective, were they any abuses of power of the management and breach of fiduciary on the part of the directors? Yes. The issue arise is on how board members to comply with their fiduciary duty which in Section 132 Company Act 1965 to shareholders and stakeholders. There are 3 main fiduciary duties on the part of directors: a) Duty of Loyalty In pursuing the duty of loyalty the board member to act in good faith, be faithful to the organization and pursue the organization’s best interests. It means that board members must be dedicated to the organization’s mission and put the interests of the organization above self-interest. b) Duty of Obedience It requires the board member to act accordance with the organization’s rules and policies, and in furtherance of its goals as stated in the mission statement, articles of incorporation and bylaws. In addition, the board must comply with state and federal laws. c) Duty of Care Requires board member to exercise the same care that an ordinary, prudent person would exercise in a like position or under similar circumstances. Refer to the case; both husband and wife have fiduciary duty to the shareholders and staffs. They have to perform audit and meet necessary requirement for the benefit of shareholders and staffs. Manipulating situation or pursuing action that are not in line with the requirement and standards are considered as breach of fiduciary. In this case, an act of misconduct by the management that have been condemned as a breach of fiduciary duty: i) Use of executive position to derive profit or otherwise promote personal interest at the expense of the organization (shareholders and staffs). i) Another form of self dealing occurs when both of them without the knowledge or consent of their shareholders and staff, seizes for their own personal benefit a financial opportunity which should rightfully be an asset of the association. 3. Who should be respo nsible and accountable for an effective leadership and management of Delima Enterprise Sdn Bhd? Responsibility and accountability act as principle agent and a people should responsible to do and done their task given by the company. In this case Delima, all employees are responsible in order to achieve the company objective. However, En. Zayed and Pn. Hashimah act as main directors are more responsible and accountable to the management of Delima Enterprise Sdn. Bhd. En. Zayed and Pn. Hashimah as main director should to know their roles and duties in order to manage the company. Even though they are not familiar to their roles and duties, they should hire a consultant to guide them in how to manage and lead company according to the standards in Companies Act (CA), 1965. Under Section 132 of CA 1965, director of company shall all the times exercise their power for proper purpose in good faith and in the best interest of company. So, En. Zayed and Pn. Hashimah need to exercise their skills, duties with the knowledge and experience. Such as, they need to know the requirement and procedure when DESB upgraded from Enterprise to Sdn. Bhd. Besides, since all decision is approved by both of them, so, En. Zayed and Pn. Hashimah need to supervise, monitoring and control the performance of employee to ensure the employee were adequately trained in order to done their job effectively and efficiently. In this case, Cik Amy needs to train to enhance her skill in accounting and financial as well she did not have any working experiences. From this, she can use the skills and knowledge in preparation of account DESB. It might be easily for auditor to express their opinion of Financial Statement DESB. Moreover, secretary of DESB played an important role and responsibility to advise En. Zayed and Pn. Hashimah to conduct the operations according to Companies Act 1965. In this case, the Company Secretary failed to advise the directors and thus was held responsible and accountable for the failure of DESB to prepare the Audited Financial Statements and filing to the Companies Commission of Malaysia. 4. Can the audit be completed without any qualification? TYPES OF AUDIT REPORT |REASON |RECOMMENDATION TO COMPANY | | | | | | | | | |Unqualified opinion report | | | | | | | |This is a also known as a clean report | | | |which is the report that satisfied with|The audit report can be unqualified opinion |Need to do the reconciliation for Account Payable, | |all audit procedure and obtain |if problem arise in the company can be |Account Receivable, Cash Book and Bank Balance. The | |sufficient appropriate evidence or |resolved by the management. Auditor want to |amount of non-reconcile payment and collection had | |departure from the applicable financial|keep relationship with their client, so that |been detected by auditor, however Cik Amy, finance | |reporting framework. |they need to help the company to resolve |executive realized that the amount of RM150,000 on | | |certain issue to released unqualified opinion|2004 is actually misrecord transaction. The amount | | |report. |should be record as amount due to director after the | | | |amount was detected as cash advance made by En. Zayed. | |The auditor need to investigate certain | | | |matter, in order to released an unqualified | | | |report. |Company need to enhance the recording of account | | | |receivable and keep it properly. In 2005, auditor had | | | |detected missing amount of RM 250,000 . However after | | | |Cik Amy make an analyzing ,the amount is actually | | | |wrongly entered in GL that supposedly record in | | | |account receivable summary record. This is happen | | | |because of the inappropriate recording and safeguard | | | |the debtor detail that missing. | | | | | | |Company need to ask BOD first before ,made any | | | |decision in term of withdrawal or cash advance in | | | |company and prepared properly documentation on it to | | | |be an evidence for transaction detail. In accounting, | | | |no personal interest can be mixed with the business. | | | | | | |Company should ask the credit notes from client and | | | |aware about any transaction regarding payment had been| | | |made to creditor so that there will be no overpayment | | | |to creditor anymore in future. The overpayment amount | | | |will give bad result to financial presentation. | | | |Company need to record properly any transaction that | | | |company made. Double checking must be made by ex pert | | | |so that no double record will happen. | | | | | | | | |Qualified opinion report | | | | | | | |A qualified opinion can result from a | | | |limitation on the scope of the audit or|The audit report also can be classified as |If auditor can confirm company follow Generally | |failure to follow the approved auditing|qualified opinion report due to everal |Accepted Accounting procedure (GAAP), then auditor can| |standards. |unresolved issues. |said that financial statement is fairly presented with| | | |the exception of the issue which could not be audited. | | | |This is due to certain matter that cannot be resolved | | | |such as the evidence of account receivable detail that| | | |had been missing. | 5. What should be done to improve leadership and management of Delima Enterprise Sdn Bhd? There are many ways a company may take in order to improve company’s leadership and management. In this Delima Enterprise Sdn. Bhd. case, Encik Zayed and Puan Hashimah, as the directors of Delima Enterprise Sdn. Bhd. need to take an action to solve many issues that arose in this company. Encik Zayed and Puan Hashimah themselves needs to attend any workshops that related in build-up leadership and management skills. They, as the directors and leaders in the company should have good leadership and management skills to ensure the company continuously operating in good condition. Even though they only have a secondary school background, it will not be a threat to them to be the good leader to their employees. Thus, it is very important to Encik Zayed and Puan Hashimah to improve their skills in leading and managing their company. For example, the segregation of duties is not fully implemented by Encik Zayed and Puan Hashimah in running their company. Segregation of duties is very important in company’s management as to avoid any task redundancy, fraud, negligence, power abuse, inefficiency and work delay. Based on this case, Cik Amy has been assigned numerous workloads and some of the works are not within her job description. This may lead to inefficient works done by Cik Amy since she might be stressed with those jobs assigned to her. Thus, by attending leadership and management workshop and gain more knowledge, Encik Zayed and Puan Hashimah might think the best ways to overcome all issues that rise in their company. Other than that, they also need to plan a training program for the employees to improve their skills in managing all the tasks given to them. As a manager of a department, one is accountable to do his duty effectively and efficiently. Thus, knowledge in managing his task is needed to prevent any problem from happen. Based on this case, we can find out that this company has lack of controlling and monitoring. For example, the employees record their time in and out without being monitored by any staff. This issue might be a serious problem if the employees do not being honest in recording their time in and out. So, in order to prevent this from happen, Encik Salam may ask Encik Zayed to hire an employee to monitor the attendance and timesheet or else he may request to purchase time clock machine to replace the current method. Besides, Encik Zayed and Puan Hashimah need to resolve poor employee performance and eliminate any undesirable methods or behavior in order to improve their company’s management. They also may ask their managers to make a weekly report about their department or tasks. By this way, they will know what a potential problem might be happened and get prepare how to prevent the problem from happen. Thus, the company’s management will be improved. As a conclusion, the leadership and management skills are very important in running a company in order to maintain the company operates properly and in line with standard operating procedure.