Yfg Berhad Audit

[pic 1]

BKAA3023 AUDITING & ASSURANCE II (A152)

(GROUP A)

GROUP ASSIGNMENT

PREPARE FOR:

PROF. MADYA DR. SHAMHARIR BIN ABIDIN

PREPARED BY:

DATE OF SUBMISSION:

2nd June 2016

MEMORANDUM

To        : Audit Partner

From        : Audit Team of YFG Berhad

RE        : Materiality and Risk Identification

Date        : 2nd June 2016

INTRODUCTION OF YFG BERHAD

YFG Berhad which is formerly known as PJI Holdings Berhad is an investment holding company, which mainly operates electrical and mechanical engineering services. The company also takes part in many different businesses such as property development and specializing in engineering activities for the civil, building, mechanical and electrical, infrastructure, power substations, transmission lines, water treatment plants, renewable energy, environment services and other related engineering works. In 1999, YFG was founded and is headquartered in Shah Alam, Malaysia. There are now seven members in the Board of Directors of YFG Berhad which includes one Independent Non-Executive Chairman, one Managing Director, one Executive Director and four Independent Non-Executive Directors.

By having its 25 years of experience in the industry, YFG were able to gain such number of projects which includes Pullman Hotel, Precinct 5 of Putrajaya which relates with electrical and mechanical engineering, Putrajaya International Convention Centre (PICC) which relates with electrical and mechanical engineering as well as building construction and also Kuala Lumpur International Airport 2. Hence, from its success of their projects, they also achieve some awards and also accreditation while its time in the industry such as The Best Electrical Contractor Award in 2004 (AFFEC) and being a member of Master Builders Association Malaysia (MBAM).

ANALYSIS

1. Inherent Risk - Decrease of the company profit margin

Based on the analytical procedure made for annual report of year 2015, YFG Berhad has recorded a decrease in its profit margin from -0.095 to -0.65 as compared to 2014. This means that for every RM1 of sales made by YFG Berhad will generate RM0.65 of loss in the company. But contrast with their gross profit margin which indicates an increase from 0.021 in 2014 to 0.059 in 2015. This means that the Group’s expenditure is higher in year 2015 compare to year 2014.

The likelihood of obtaining this results are due to YFG recent loss of RM256 million contract in Kota Kinabalu, Sabah. Previously, the company was known as PJI Holdings Berhad has rebrand its name on 2013 into YFG Berhad has targeted an order book of RM500 million which was based on RM700 million tender bids submitted over the last two quarters. YFG Berhad was initially met their target of having RM500 million order book when having the Jesselton Residence Waterfront Project in 2013. However, in year 2014, YFG suffers a huge setback as Palikota Sdn Bhd terminated their contract with the company which slashing YFG’s order book to RM200 million due to delay in the works as there are various technical issues faced by YFG Berhad in completing their project there.

Other than that, YFG Berhad faced the decrease of the profit margin due to the increase of the expenses of the company. There are several reasons and one of that is due to the legitimacy issue with Palikota Sdn Bhd. Here, YFG Berhad needs to bear all the costs related with the legitimation. Secondly, YFG Berhad has intended to sell Bukit Jelutong land on 2015. To sell the land, YFG Berhad had incurred some costs that related to renovations, legal fees and stamp duties in order to gain the proceeds from selling the land which amount to RM 1.88 million.  Furthermore, the company is having loss of RM541,444 in the sales of investment property, non-current asset held for sales and disposal of property, plant and equipment. The impairment loss for amount due to contract customer also increase largely compare to the previous year.  

Therefore, the auditor needs to focus on the legitimacy issues and also related expenses that indicates a large number of difference within the company records. This is because the amount can be material for the company.

1. Inherent risk – Increase in impairment loss

In November 2014, the Securities Commission Malaysia (SC) has fine against YFG Bhd for authorizing false or misleading statement to be furnished in its amended audited financial statement with a penalty of RM200,000 to the company’s director. This is because the SC found that the impairment loss of RM3.375 million in the amended audited financial statement for the financial year ended 2014 was unascertainable.

Due to the penalty imposed in the previous financial year ended, the inherent risk for the impairment loss is increased. Furthermore, the impairment loss for amount due from contract customer is increased hugely from RM8.442 million to RM36.955 million. The reason that the impairment loss increase highly is that in the financial year the subsidiaries had received the notice of termination from the contract customer with no reason for the termination. Therefore, the subsidiaries have engaged with the lawyer to defend them as the termination is amounted to an unlawful repudiation of the contract.

Moreover, company will consider the factors such as the probability of significant financial difficulties or insolvency of the receivable and default or significant delay in payment in calculation the impairment loss on the financial assets such as amount due from contract customer. YFG measures the impairment loss by using the difference between the assets’ carrying amount and present value of estimated future cash flows discounted at the financial assets’ original effective interest rate that exclude future expected credit loss. Thus, we suggest that the auditor should focus and identify in the calculation of the impairment loss to prevent the penalty from the Securities Commission. Auditor should also consider the factors that will affect the impairment loss to prevent the company in doing fraud or error in the calculation of impairment loss.