TO

FROM
DATE
SUBJECT

: MR. KEONG CHEE WAH

: MR. CHUAH MUN SOONG AND AUDIT TEAM
: 8TH FEBRUARY 2006
: POSSIBILITY OF FRAUD IN FLAT CARGO BERHAD

INTRODUCTION
Flat Cargo Berhad is one of Kencana & Associates client and based on the analysis done
by my audit team, we have found some crucial issues that need to be highlighted which acts as
an indicator of fraudulent act. Below are the findings, recommendations and opinion in relation
to this issue.
FINDINGS
Issues in this case can be divided into two categories which are issues related to financial
statement and related to management.
The first issue related to the financial statement is on the major capacity expansion in
year 2005 done by Flat Cargo Berhad despite the rising fuel prices and the mere 3% growth for
the international freight traffic in the Asia Pacific region. To support that statement, it was found
in the financial statement that the value of non-current asset has increased by a significant
percentage of more than 163%, but the audit team failed to locate all the new flights that were
claimed to be bought in that particular year. In relation to the increase in the amount of noncurrent asset and the amount of investment made, the percentage of revenue earned by the
company did not correspond to the percentage of increase in the asset where it only recorded an
increase in revenue of 58.89% from 2004.
In addition, several issues were raised from the audit working paper for 2005. There
issues are several debtors confirmation letters were returned because the addressees had changed
their mailing addresses as well as a large sum of sales transactions was found with no supporting
documents which mostly involving transactions with small clients. Besides, there is a loan
received from a Hong Kong based company was found to be incorrectly recorded in the debtors
account. Several abnormal transactions involving the purchases of aircrafts by FCB and
offsetting the debtors accounts were also found in FCBs books.

On the other hand, issues involving top management includes the purchase of controlling
interest of 55.2 million shares via an off market deal by the Miri Group, which is the parent of
one of the major shareholders of Flat Cargo Berhad. Another issue is that Mr Ali Bin Ahmad who
is the Executive Director of the company also acts as a member of the Audit Committee and a member of
Employee Share Option Scheme Committee. According to the Malaysia Code of Corporate Governance,
an executive director cannot be a member of the audit committee. The last issue discovered is the
imbalanced of Board of Directors of Flat Cargo Berhad where there are six non-executive directors and
only three executive directors of board of director. The code has clearly stated that it has to be balance
between those two.

SUGGESTIONS
We were unable to verify the aircrafts claimed to have been purchased by FCB in 2005.
We have found a non-function rundown aircraft barely worth RM231 million in a hangar. The
impairment requirements in IFRS 9 are based on an expected credit loss model. The expected
credit loss model applies to debt instruments such as bank deposits, loans, debt securities and
trade receivables that are recorded at amortized cost or at fair value through other comprehensive
income, plus lease receivables, contract assets and loan commitments and financial guarantee
contracts that are not measured at fair value through profit or loss. The guiding principle of the
expected credit loss model is to reflect the general pattern of deterioration or improvement in the
credit quality of financial instruments. Adopting the expected credit losses requirements will
require many entities to make significant changes to the current systems and processes. Early
impact assessment and planning will be the key to managing successful implementation.
There is no supporting documents found involving a large sum of sale transactions
involving small clients. The omission of supporting document for sales transaction results fraud
from audit perspective. We as an 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
the documents such as sales invoices, sales order and customer order. Observation and
investigation need to be conducted on sales journal entries and trade receivables entries in
addition to the testing and sampling that must be in proper valuation.

Next, there has been violation of the Malaysian Code of Corporate Governance (MCCG)
as stated earlier. As a matter of fact, the appointment of Mr.Ali as the member of the audit
committee may cause management override in the company and distort the accountability of the
audit committee. Hence, Board of Directors should have a clear view on the exact requirements
in relation to the appointment and responsibilities of audit committee.
The Board of Directors which consists of six non-executive directors and three executive
directors is not in accordance to the MCCG. This imbalance may affect the integrity of the Board
of Directors and biased decision making. Flat Cargo Berhad therefore needs to be advised and
properly decide its directors as to ensure that no group can dominate the decision making.
Furthermore, the error in double entries where the loan from Hong Kong was found to be
recorded in the debtors account instead of creditor need to be taken into account. Therefore, we
need to verify the incorrect entries by comparing the journal entries with the confirmation letter
of debtors and creditors. If the problem only relies on the error in recording the double entry,
then we need to advise the companys accountant on the right way to record the transaction.
Lastly, the abnormal transaction that was found in the Flat Cargo Berhads book
involving the purchase of aircrafts and offsetting the debtors accounts can be investigated by
finding and checking the supporting documents such as purchase invoice, purchase agreement
and debtors to verify the reliability and existence of the transactions. To strengthen our findings,
we need to do our own reconciliation as to confirm the existence of manipulation and fraud.
OPINION
Since we have found many possibilities that may lead to fraudulent act, we think that
expansion of scope of work and involvement of forensic accountant might be needed in this case
due to the limitation of auditors work. However, the final decision will be decided after the
meeting with the top management of Flat Cargo Berhad as we might acquire the answers and
documents needed to verify and resolve some of the possibilities issued earlier.