You are the senior audit manager of Mainkind & Co. By rotation, this is the first time you are handling the audit of an existing client, Digest Medical Supplies Co (Digest), whose financial year end was 31 December 2017. Digest is a pharmaceutical medical supplies company, which manufactures and supplies a wide range of medical supplies locally as well as overseas.
The draft financial statements show revenue of RM 46 million and profit before tax of RM 4.2 million. Digest’s previous finance director left the company in October 2017 after he was discovered claiming fraudulent expenses from the company for a significant period of time.
The company appointed a new finance director who was previously the financial controller of multi-national manufacturing company on January 2018. The new finance director has expressed surprise that Mainkind & Co had not uncovered the fraud during last year’s audit. During the year Digest has spent RM 3.8 million on developing several new products. These projects are at different stage of development and the draft financial statements show the full amount of RM 3.8 million being recognised as intangible assets. In order to fund this development, RM 4 million was borrowed from the bank and is due for repayment over a ten-year period.
The bank has attached minimum profit targets as part of the loan covenants. The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of January over RM 2 million of goods sold in December were returned. Your audit team attended the year-end inventory count at Digest’s warehouse. The audit team present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled. During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of RM 2 million.