EXAM TIPS : AUDIT EVIDENCE & GOING CONCERN

- Relevant to Paper 8 (CAT) and F8 (ACCA)




PIC 01: AUDIT EVIDENCE EXPERIMENTED


AUDIT EVIDENCE & GOING CONCERN
The primary objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The audit evidence he has gathered, which enables the auditor to express his opinion.
Auditors obtain sufficient, appropriate audit evidence. Evidence can be in the form of tests of controls or substantive procedures.

ISA 500 AUDIT EVIDENCE
The reliability of audit evidence is influenced by its source and by its nature.
ISA 500 Audit evidence requires auditors to 'obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion'.
· Sufficiency is the measure of the quantity of audit evidence.
· Appropriateness is the measure of the quality or reliability of the audit evidence.
The quantity of audit evidence required is affected by the level of risk in the area being audited. It is also affected by the quality of evidence obtained. If the evidence is high quality, the auditor may need less than if it were poor quality. However, obtaining a high quantity of poor quality evidence will not cancel out its poor quality.

Crucial to audit assertion work is that the company does not have evidence of financial distress that risk it as a going concern position.



PIC 02 & 03: Businessman is out of business. Are you aware?


ISA 570 : GOING CONCERN - AUDIT WORK
When planning and performing audit procedures and in evaluating the results thereof, auditors should consider the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements, and consider any relevant disclosures in the financial statements.
– Review management’s plans for future actions based on its going concern assessment.
– Gather additional sufficient and appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists regarding the going concern concept.
– Seek written representations from management regarding its plans for future action.
– Obtain information from company bankers regarding continuance of loan facilities.
– Review receivables ageing analysis to determine whether there is an increase in days which may also indicate cash flow problems.

Business Journal added : The Economist

CHARTERED ACCOUNTANTS [CA] LET LOOSE TO THE CORPORATE BUSINESS WORLD. CAN YOU BE THERE?
[From left to right]
PIC 01 : SINGAPORE SKYLINE - every company needs accountants
PIC 02 : CONFERENCE HOTEL - every business meeting needs business savvy accountants
PIC 03 : CA in Board meeting : hmmm... debit or credit? Where is Ms Menon?
PIC 04 : CA in Board meeting : (**smile** I think she passes the Porter's ABC tests [P3]) What's your telephone number again?

As professional students, especially at the final P-Level, it is imperative that you are in touch and aware of the LE PEST environment. Ethics, CSR, Strategies and accounting development are just some of them. You are encouraged periodically to go to the links I've posted on the side left bar under heading "International Business". The more you read, the better you are familiarising the terminologies common in business and professional world. Remember, you are coming out as Chartered Accountant which require that you provide broad corporate advisory that includes corporate turnaround, corporate finance, debentures, tax and audit (of course) or just plain business advisory services supporting your boss. In a multi-billion dollar consultancy services industry in Malaysia, estimated to worth RM$7.9 billion, these skills are crucial. So invest in your future as a student and an upcoming professional. I am confident you will.

General Annoucement : Deputy PM annoyed that citizens unappreciative of fuel price cuts

August 24, 2008 at 2:02 pm · Filed under Local News, Malaysian Fuel Prices
According to The Star, Deputy Prime Minister Datuk Seri Najib Tun Razak appeared annoyed that people did not appreciate the recent reduction of price in fuel of between 8 to 22 sen per liter. The RON97 fuel that everyone pumps only received a 15 sen reduction from RM2.70 per liter to RM2.55 per liter.

He asked people to take into account the RM625 rebate given earlier this year as it meant a 35 to 40 sen per liter discount on current petrol prices. Based on what he says, the government is effectively reducing fuel prices to RM2.20 per liter (based on RM0.35) for the first 1786 liters of fuel every year. That’s about 148 liters per month, only enough for 3 full tanks a month. How many full tanks of petrol do you pump a month, thanks to our pathetic public transport system?
It’s worth remembering that originally the RM625 subsidy was explained by the government as being a RM0.78 sen subsidy for 800 liters of fuel a year. 800 liters of fuel is only 66 liters per month, which is between just over 1 full tank to 2 full tanks per month, depending on the car. The 66 liter per month figure could have possibly been a result of some deluded study that expects Malaysians to only use their cars to drive to the nearest LRT station and take the train to work.


Visit http://paultan.org/archives/2008/08/24/najib-annoyed-with-rakyat-who-do-not-appreciate-recent-fuel-price-cut/, http://www.motortrader.com.my/ and http://www.btimes.com.my/Current_News/BTIMES/Saturday/Latest/20080823012311/Article/index_html for references.

Life As a Student

Life as a student is really challenging. The long hours, frustration of trying to remember countless IAS, loneliness and even the pressure from all people around us – parents, lecturers (I know, I’m guilty as charged), friends with high fever of kia-su syndrome. I share your pain as it is reminiscence of my youthful past. There is always silver lining in dark clouds or after dusk is dawn of bright morning sunshine. Imagine over 180,000 ACCA graduates passed that road of difficulty only to succeed and enjoy the fruitages of their hard labour. You too can have the same path. Why not study hard which means working hours in office kind of schedule i.e. 0800 to 1800 hours from Mondays to Saturdays? If you want this nightmare to end, will the sad news is this life is - it will not go away. However, you can ‘expedite’ the process by passing as quickly exams as you can. I know quite of few students took the express road of studying/working hard and passed fabulously.

A road without destination is like a ship sailing without compass. So set some nice fantasies that can be turned to reality. Walt Disney founder Walter Elias Disney once said, “If you dare to dream, anything is possible!” Promise and reward yourself that you are going to enjoy life for “LIFE IS BEAUTIFUL”. Check out the following excerpts on top destinations such as fascinating Hong Kong where you can get there on Air Asia for as cheap as RM299. Or get a soft loan of RM8000 and visit Stockholm, Sweden, no dine in Paris, French restaurant but what am I saying, visit Milan, Italy the fashion capital of the world. That loan you take is easily paid off with 3-4months equivalent salary as an ACCA affliate. So you are not overly-geared but wonderfully endeared to beautiful, wonderful world. The world is so big and open to your learning. Visit them and it will put a grin to your face and a sweet smile to your heart. You will say “I am glad, I worked hard.”

To achieve that it requires one vital quality – DISCIPLINE! Fixate your mind and tell yourself, I am going to pass ACCA! I am going to work very hard. I can do it! I will so no to all the ‘cheap’ temptations like loitering with friends in food stalls, surfing internet aimlessly, visiting Sunway Pyramid for the 89th time. So No! No! No! Paris is a better. Hong Kong is more fulfilling. New York city? London? Sydney? Don’t let me go out of hand. These are serious places of fun.

A good suggestion, why not find 1-3 friends who share the same goals as you. Girlfriends could get together and be group synergy with the purpose, taste life for “Life is Beautiful, Meaningful and Wonderful!” If your motivation is low, come back to this article and read it many times.

The future is in your hands. JOIN US, 180,000 ACCA graduates! You are in Sunway University College, with close to 3,000 students, you really are the minority. We graduates outnumber you 60 times! Follow the majority, not friends in school that are too playful, irresponsible and even immature with regard to your goals. Reap life’s rewards sowed from sheer sweat and hard work in student life. Its only 2-3 years of investment, but 30 years of enjoyment. Do your math and cost/benefits analysis.

The following are some potential rewards that let your fantasy run wild. Look! It can be yours. Remember, key is DISCIPLINE!

Location: Eastern Side of Pearl River Delta, China
HONG KONG – METROPOLITAN. PLACE OF LIGHTS, DELICIOUS FOOD AND SHOPPING PARADISE. WHAT A WONDERFUL ESCAPADE! IS LIFE GOOD OR WHAT?!



Language: Cantonese, Mandarin, English
Best Time to Visit: Mid September to February end
Time Zone: +8GMT/UTC
Driving Side: Right
Emergencies: 999
Main Attractions: Hong Kong Disneyland, Giant Buddha, Stanley Market, Ocean Park, Victoria Peak, Lantau Islands, etc.

Where do you get great shopping, sumptuous dining, fascinating culture and heritage and amazing tourist attractions in one place? The answer is Hong Kong. This nation is one of the two administrative regions of People's Republic of China, the other being Macau. Hong Kong has developed from being a colonial possession to one of the leading financial centers in the world. Not just technology, Hong Kong is also a popular destination for tourists. It has everything that a good tourist destination would offer. Hong Kong has salubrious climate throughout the year which makes it ideal to be visited almost any time of the year. So check out various fascinating places to see and tourist attractions in Hong Kong and let the magic take over!

Theme Parks
Hong Kong is well known for its multitude of theme parks. The Hong Kong Disneyland, Ocean Park and Lai Chi Kok Amusement Park, are must visits if you want a wholesome vacation. The rides are completely awesome and not just kids, but adults too will enjoy themselves to the hilt. Along with the rides, you can watch sea creatures in their natural habitats and even trained animals performing amazing feats.

Shopping!
Hong Kong can be called as a shopper’s paradise. Right from the glittering malls where you can get all branded stuff to the famous flea markets, Hong Kong has it all. Check out places like Jade Market, Temple Street Night Market, Ladies' Market, Stanley Market, etc. which sell anything and everything like clothes, cosmetics, knick-knacks, jewelry, souvenirs, silk, artwork, toys, electronic gadgets, etc. If you have a knack for bargaining and eye for unusual things, this is the place to be.

Fascinating Museums
Hong Kong has a fascinating cultural heritage and mystical historical legacy. If you wish to travel back in time, visit the museums of Hong Kong. They provide a magical glimpse of the lifestyle and evolution of this nation. Popular museums include a replica of the famous Madame Tussaud’s that has over 100 lifelike figures of popular celebrities including Jackie Chan and Arnold Schwarzenegger. You can also visit the Ripley’s Believe It or Not Auditorium and be amazed by the mysterious artifacts displayed there. Other good museums include Hong Kong Museum of History and Flagstaff House Museum of Tea Ware.

Victoria Peak
This one deserves a special mention! Victoria Peak is the highest hill in Hong Kong and is one of the most popular and premier tourist attractions here. The peak provides scintillating views from above and one must visit this place to experience sheer bliss. The best time is evening when you get a bird’s eye view of the harbor when it is all lit up! There is a famous tram service at the Peak that has been in service since 1888 for passengers to explore the peak. There are a multitude of restaurants and thrill centers here for you to pamper your stomach and senses!

Location: Italy

Things To Do In Milan – Scenic!


Language: Italian, Insubric
Best Time to Visit: May to September
Driving Side: Right Side
Main Attractions: The Milan Cathedral, the Duomo, Biblioteca Ambrosiana, the Galleria Vittorio Emanuele II, Castello Sforzesco, Santa Maria delle Grazie

Milan is one of the largest cities in Italy, with a large metropolitan area. The city is renowned as one of the world capitals of fashion and design. There are a number of fashion houses and shops in the area. Milan is also dotted with shopping malls, providing lucrative deals to the customers. The city hosted the World Exposition in 1906 and will also host the Universal Expo in 2015. Though the city is not the capital of the state, it is still regarded as its business hub. It is also seen as a popular tourist and holiday destinations, offering varied tourist attraction. Check out more on places to see and things to do in Milan.

Sightseeing
There are a number of places to see in Milan. The Milan Cathedral is one of the most striking structures in the city. It is the seat of Archbishop of Milan and even played significant role in the establishment of Catholic traditions. The Duomo houses the largest collection of marble statues and the golden Madonna statue. Biblioteca Ambrosiana is a historical library in Milan, which also houses the drawings and notebooks by Leonardo da Vinci.

Dining & Shopping
Milan has its own regional cuisine, offering sumptuous food to be savored by the visitors. The cuisine includes "cotoletta alla milanese", a breaded veal made of pork and turkey cutlet pan-fried in butter. Another specialty here is the salame milano, salami with very fine grain. It is also best known for its Milanese cheese, known as gorgonzola. You can treat yourself with all these delicacies and much more at the various quality restaurants located within the city. Apart from this, Milan is a paradise for shopaholics. For designer shopping, visit Quadrilatero, around Via Montenapoleone and Via della Spiga. For a stroll, try the Navigli or the Brera, which will give you trendy, arty vibes.

Cultural GaloreMilan has no dearth of options for its visitors, as far as entertainment is concerned. There are a number of opera houses and art galleries in the city. One of the most significant places to be visited is The Teatro alla Scala or La Scala. Inaugurated on 3 August 1778, it is one of the most famous opera houses in the world. The opera house also gives way to the La Scala Museum. It exhibits an extraordinary collection of paintings, drafts, statues, costumes and other documents regarding opera and La Scala's history.

Location: Paris, France

DINE, WINE and that is FINE!

- Why not dine in Paris, France with your ACCA graduate friends?

Smiling waiters, "Monsieur, at your service."

Bistro Cassis brings a warm touch of Gallic charm and superb French food to Long Island's Huntington Village. Its ambience and décor are reminders of the smoky bistros celebrated in French film noir. Enter the dining room and be transported to the Parisian Left Bank with carved cherry pilasters, ornate tin ceiling, soaring marble pillars and outsize antique mirrors. The intimate atmosphere of this unparalleled French restaurant combines a quiet elegance with a welcoming, unpretentious spirit. Bistro Cassis stage is further set with amber lighting and large vintners posters lining warm custard-toned walls. Be seated at a marble-topped bistro table and select from an authentic selection of French bistro fare crafted from the freshest ingredients available daily- produce, mushrooms, poultry, meats and seafood. Bistro Cassis invites you to enjoy our distinguished selection of vintages by the bottle or glass. Choose from the best of

French wines, from Bordeaux and Burgundy; aged and rare Cognacs, Armagnacs, ports and dessert wines. Bistro Cassis also invites you to sample unusual vintages from small producers.

Enjoy with your Graduate Friends. Cheers!

Dine on authentic classics served in the finest French restaurants as well as simple country fare- Moules Provencales, Salad Nicoise, Soupe a l'Oignon, Steak Frites, Coq au Vin, Boeuf Bourguignon, Crème Brulee and Tart au Citron. Impeccable service and are knowledgeable in every aspect of our food and wine selections.

Why not, bring your loved ones?

So for an intimate meal, a special occasion, or just for dessert and coffee after a movie; Bistro Cassis offers the best of the Old World, in today's world. Come by soon for a taste of Gallic charm you'll long remember.

ANSWERS RELEASED! - DIAMOND MODEL (MICHAEL PORTER)

PLEASE NOTE : ANSWERS ARE ALREADY GIVEN. PLEASE CHECK WITH YOUR REPRESENTATIVES.
Entertainment Industry : Sustainable Comparative Advantage of Hollywood
- Relevant to P3 Business Analysis (ACCA)

“You jump, I’ll jump!” One of the most memorable romantic phrase ever used in moviedom. An unemployed young man characterized with zeal for survival plus zest for life saved a woman from an attempted suicide i.e. to jump into the deep watery grave from the infamous Titanic ship. The movie Titanic is the highest grossing box-office in American history collecting US$600,788,188 (see Table 1 below). Worldwide sales was a colossal US$1.8 billion.

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Warning: The following video has an especially addictive effect on ladies. Also, please do not imitate the stunts you see in the video at home.

Of course, there are many other memorable movies such as the Batman (speculated to surpass Titanic Box Office's record) , Spider-man, Shrek, Star Wars and big money spinners.

1
Titanic
Paramount Pictures
$600,788,188
2
Star Wars
20th Century Fox
$460,998,007
3
Shrek 2
DreamWorks SKG
$441,226,247
4
E.T. the Extra-Terrestrial
Universal Pictures
$435,110,554
5
Star Wars: Episode I - The Phantom Menace
Lucas Arts Pictures
$431,088,301
6
Pirates of the Caribbean: Dead Man's Chest
Buena Vista Pictures Distribution, Walt Disney Studios Motion Pictures
$423,315,812
7
The Dark Knight
Warner Bros. Pictures Distribution
$405,699,734
8
Spider-Man
Sony Pictures Releasing
$403,706,375
9
Star Wars: Episode III - Revenge of the Sith
20th Century Fox
$380,270,577
10
The Lord of the Rings: The Return of the King
New Line Cinema
$377,027,325

In USA, a free market economy, interestingly all the historic top box office hits are made in Hollywood. A city of about 500 acres but controls excess of 90% of world’s box office receipts for the English language movies.

Why Hollywood has become home for the filmed entertainment industry is explained by several factors.



PORTER’S DIAMOND - DETERMINANTS OF COMPETITIVENESS

CHANCE

GOVERNMENT


For Porter, the key question is why some firms in some nations achieve international success while others fail. He analyses why some industries tend to form clusters suh as Hollywood, Silicon Valley in USA. He concludes that nations do not compete between them, rather, it is the firms within a country than must be competitive. This is applied in the context of Hollywood’s movie making industry.

BASIC AND ADVANCE FACTOR CONDITIONS

Pic 01 : Awww... Shucks! So dark. I should have listened to mom and brought a better torch light.

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Factor conditions explain, in the first place, the movie industry was established in this District lying north-west of downtown Los Angeles, which is today synonymous with the motion-picture industry. At a time where most films were still shot outdoors Los Angeles presented many advantages. Southern California enjoys 320 sunny and/or clear days per year and allowed for year-round production. It has a wide range of topography within a 50-mile radius of Hollywood, including mountains, valleys, forests, lakes, islands, seacoast and desert. In the early 20th century, Los Angeles was a professional theatrical centre. Southern California was, and remains for the movie industry, a tax-friendly environment as well as a reservoir of cheap labour.

Hollywood employs 135,000 skilled workers and accounted for 60 percent of American production. And it had become the centre of the United States motion-picture industry with the Paramount Pictures; Universal Pictures,; Goldwyn Picture Corporation and the 20th Century-Fox.

(Sophisticated) DEMAND CONDITIONS
Domestic demand is a major explanatory factor of competitive advantage. With regard to filmed entertainment the size of demand, the role of language as a natural market and the qualitative aspects of demand are the essential components.

Size of domestic demand
The US domestic film market is large and saturated by Hollywood production. The number of theatrical admissions on the US domestic market was about 1.7 billion in 2007. Common languages constitute natural markets for "talky" filmed entertainment. English ranks only fourth, after Mandarin, Hindi and Spanish. Analyses the language natural market determined by the number of speakers, both native and total, weighted by the GNP per capita. English ranks first far above Japanese, German and French and represents about 40% of the filmed entertainment natural market. Interestingly, the costs of production seem correlated to the natural market. It is not surprising that US movies cost more to make since they are expected to generate more revenues thanks to the size of the English natural market.

Qualitative aspects of domestic demand
Not only is the US domestic demand for filmed entertainment large but also the ethnic and cultural diversity of the United States is to a certain extent a good proxy of world demand. The needs of the domestic buyer anticipate those of other nations.

This means high correlations that movies that succeed in USA will succeed too in the international market.

RELATED AND SUPPORTING INDUSTRIES

Pic 02: Will you marry an ugly ogre? Please do because many people will pay a lot to witness our wedding.

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Another determinant of Hollywood competitive advantage lies with the presence, in the Los Angeles region, of supplier’s industries (studio rentals, editing, lighting, sound recording, film effects, market research, talent agencies, lawyers, writers...) and related industries (television, defence industries...) that are internationally competitive. More than a collection of a few large conglomerates, Hollywood indeed appears to be a network of independent and specialised suppliers. Members of the American Film Marketing Association (AFMA) created in 1980 by a group of 13 independent distributors, such as New Line and Miramax are now subsidiaries of majors, Warner and Disney respectively.

FIRM STRATEGY, STRUCTURE AND RIVALRY
Firm strategies are reinforced by the goals of the individuals. The industry with intensity of rivalry, forces each firm to increase productivity and innovation. Each finding its own niche or differentiated movie themes. For instance Disney Pictures are mainly PG rated for family-centric entertainment while DreamWorks may have had an argument that making movies and promoting sci-fi merchandise are different businesses.

ROLE OF CHANCE

Pic03: (Girl) Do you like spiders? (Boy) Wait here. I got a bug to catch.

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Chance also helped in building Hollywood’s competitive advantage. During the U.S. involvement in World War II, the Hollywood film industry co-operated closely with the government to support its war-aims information campaign. Following the declaration of war on Japan, the government created a Bureau of Motion Picture Affairs to co-ordinate the production of entertainment features with patriotic, morale-boosting themes and messages about the "American way of life," the nature of the enemy and the allies, civilian responsibility on the home front, and the fighting forces themselves. After, World War II the European cinema was entirely destroyed: the German UFI conglomerate dismantled, and the US could systematically flood Europe with the backlog of the war production.

ROLE OF GOVERNMENT
As argued by Porter, "it is tempting to make government the fifth determinant. Yet this is (...) not the most useful way to understand government’s role in international competition. Government’s real role in national competitive advantage is in influencing the four determinants" (factor conditions, demand conditions, firm strategy-structure-rivalry, supporting industries). After noting that "Government policy, in turn, can be influenced by the determinants", Porter mentioned that "successful policies work in those industries where underlying determinants of national advantage are present and where government reinforces them".The Hollywood-Washington link may be envisaged in this context. It makes sense for the US trade policy to actively support an industry whose strength is established by factor and demand conditions, firm strategies and the existence of supporting strategies.

Exam Tips : Please note that Porter’s Diamond model has all but destroyed the mercantilism theory and his work strongly influence governments’ policies. Such important development will not go unnoticed by P3 examiner Steve Skidmore. Try the following question to test if you fully grasp the concept. To do so, please refer to my lecture notes titled “Special Topic Set 2.2”.

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Pic 04: Told her to practice more ACCA questions and not to panic!

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Discursive Question (ACCA case study exam standard)

What initiatives can be taken if China as a nation wishes to develop its own Diamond Factors Model in the entertainment service industry? [10 marks]


SOURCES:
Yahoo! Movies, 2008, Top Box Office, http://movies.yahoo.com/mv/boxoffice/alltime/, Visited 8th August

Jeremy Kay, 2008, Can The Dark Knight sink Titanic?, http://www.guardian.co.uk/film/2008/aug/01/7, August 1st

Luc Véron, 2008, The Competitive Advantage of Hollywood Industry, http://www.ciaonet.org/wps/vel01/, Visited on 8th August

Youtube, 2008, http://www.youtube.com/watch?v=PtS45bh_INY&feature=related, Visited on 8th August

Michael E. Porter, 1990, The Competitive Advantage of Nations , The Free Press Publisher

EXTERNAL STRATEGIC ANALYSIS (WITH FINANCIAL INDICATORS)

ARE YOU REALLY AN ACCOUNTANT?
- Relevant to P3 (ACCA) but not P4 (ACCA)

TABLE 1: TSM GLOBAL BERHAD

SHARE PRICE AS AT 4 AUGUST 2008 : RM 1.27

NET TANGIBLE ASSETS : RM 2.05

MARKET DISCOUNT TO NET ASSETS : 60%

NET CASH POSITION PER SHARE : RM 1.35

PRICE/EARNINGS RATIO : 3.5 times



WORLD'S RICHEST MAN



Would you purchase a used car for RM20,000? You may ask: what is the mileage, condition and car make. Granted, these are factors that determines the market value of a car. But will your perception change, if you found inside the car boot a stack of cash amounting to RM21,200! Of course, as an honest person as I know you are, you will inquire of the seller, if the car comes with “everything” that is in it! The answer is affirmative yes. In fact, the seller said it includes the cash in the boot. So he knows!

In other words, you pay for RM20,000 and in return you get cash back RM21,200, a 6% above the purchase price. What about the car? Sure it will worth much more. So you estimate the car and cash is worth the total of RM32,000 which is a 60% price above the selling price. This is too good to be true. But in life, we do get sweet spots and good deals!

In table 1 above, you pay RM1.27/share for a company which is RM1.35/share backed by net cash! In fact the whole company’s Net Tangible Asset is worth RM2.05! What a bargain, you may say.

There must be a catch! There always a catch in life you may insist! From the report excerpt below judge for yourself by applying external business analytical models. Tell me if TSM Global is in strong or weak financial position?

EXCERPTS from theedgedaily:
“Motor vehicle parts maker TSM Global Bhd is cautiously optimistic on its outlook, leveraging on the expected continuing strong demand for Perodua’s Myvi and Viva. The group was confident about its sales in its financial year ending Jan 31, 2009 as demand for small cars remained resilient despite the partial lifting of petrol subsidies recently. (In fact the oil price increase is good news to the company as people demand cheap mode of transportation.) Compact cars like the Myvi and Viva are very much in demand due to the increase in fuel prices, with Myvi having the lead in sales.

TSM supplies wire harness, automotive accessories, high tension ignition cable sets and PVC wires and cables. Perodua contributes 30%-33% to the group’s revenue. It also supplies its products to Korean makes, including Inokom, and Daihatsu. TSM had been facing rising production cost due to the increase in raw materials but it had been able to pass through the rising cost to its customer.”

Applying the external analysis, I am sure you will agree that TSM has bright business growth prospects. Go ahead! Use the external analysis models like LE PEST and Porter’s Five Forces Model.

Why then the Stock Exchange priced at a discount, a deep 60% discount of NTA for that matter, a sound company with strong recurring business orders ? This is definitely an undervalued stock and bright future in profit growth prospects. Yale University Professor Robert J. Shiller calls this “irrational exuberance” meaning people behave with ‘herd’s instinct’. when there is a stampede of panic, majority investors simply bail out of stock market.

Now what I am going to tell you next may affect you severely and even cause emotional disturbance. So don’t read on, if you are not ready to face the truth!

You will be taught in P4 (ACCA) Financial Strategy a concept called Efficient Market Hypothesis (EMH) where it stipulates that the Stock Market has already priced in all information that will affect share prices. You do not need to seek information ahead of the market because investors already know. If so, why would any ordinary sane human sell his shares at a discount to company’s cash and net asset position? Not only that, TSM will benefit tremendously from globally threatening recessionary conditions.

The PE Ratio means in 3.5 years you will get your cost of capital back based on current constant earnings (see Table 1). But we can project the company’s earning will grow with increasing demand for this fuel efficient car. So the current PE Ratio will improve to smaller single digit number! Now, would you pay for say Maybank Berhad with a PE Ratio that state you have to wait 14 years to recoup your cost of investment or this humble TSM Global company? You may say, Maybank Berhad business is safe. But isn’t TSM Global safer! People still need to own a car to commute, in view that substitute transport threat is low. Wary of poor economic outlook, people look for lowest priced cars. TSM is adopting a cost-leadership strategy (Porter), contributing to most affordable car in Malaysia.

The world’s richest man, Warren Buffet, is just so happy that so many top minds in top universities are forced fed this grave error of EMH investment hypothesis concept which states that you cannot beat the stock market no matter what you do. To these so-called professionals, there is no such thing as under-valued stocks since information are being released to general investing public efficiently. Hence it will be reflected in the price before you can act. While the crowd of ‘professionals’ refuse to buy undervalued stocks, Warren prudently accumulates them over period of 30 years making him the world’s wealthiest!

So what are the lessons for you? I have applied simple accounting/financial indicators with interpretation and business models concepts based on P3 Business Analysis (ACCA). Knowledge is power! Why not consider invest but ‘caveat de emptor’ as a disclaimer of liability. You don’t need to succeed like Warren Buffet but earning fraction of say 1% of his total wealth estimated US$55 billion is more than enough, I believe.

Another disturbing fact, you could have been taught lies? EMH is a possible one. Does this imply you shouldn’t take P4 as you an optional paper is a decision that only you can make. No one, not even your parents, let alone the school you are in, can decide that for you. Still, if you decide to do P4, then totally ignore my article and market reality are neccessary, for you have to blindly believe ACCA examiner is right in order to pass his paper.


Whatever your decision, the reality is TSM will continue enjoy strong business growth which fortunately or unfortunately (depending on how you want to use the information) not reflected in its share price.

Are you really an accountant? A good one will see business investment opportunity (applying P3 ACCA concepts) and evaluating risk investment and risk appetitie approach (appying P1 ACCA concepts).

SOURCES OF REFERENCE:

Edinformatics, 2008, Efficient Market Hypothesis -- Fundamental Analysis, http://www.edinformatics.com/investor_education/efficient_market_hypothesis.htm, Visited on 6th August

John Reeves, 2008, Warren Buffett's Priceless Investment Advice, http://www.msnbc.msn.com/id/25970328/, 31st July

Robert J. Shiller , 2008, Irrational Exuberance, Second Edition, http://www.irrationalexuberance.com/, Visited on 6th August

Theedgedaily, 2008, TSM cautiously optimistic about FY09 http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_6801c30f-cb73c03a-17050f50-ca147bf1, 28th July.

TSM Global, 2008, Quarterly Profit Announcements, http://www.bursamalaysia.com/website/bm/listed_companies/company_announcements/announcements/historical.jsp, Visited on 6th August

MISSION ANALYSIS : A CULTURAL PERSPECTIVE

GM incurs record losses – Why It Couldn’t Revive Itself?
- Relevant to P3 Business Analysis (ACCA)

For all of 2007, GM lost $38.7 billion, the biggest loss ever for an automaker. The loss, equal to $68.45 a share, is about the same amount as a non-cash charge of $38.3 billion that the company took to write down deferred tax assets, meaning that GM almost broke even otherwise after losing $2 billion in 2006.

Uncomfortably high cash position
Wagoner, CEO of General Motors have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.Why is it so hard for those inside GM to see the inevitable? Take a step into the Detroit mindset. No active employee was even alive in 1930, the last time a rival sold more cars in the U.S. than GM. The idea of being No. 1 is etched into the company's DNA -- which makes it all but impossible for execs to embrace a strategy of getting smaller. And union leaders have never seen a problem that couldn't be ironed out at the bargaining table. "I think GM and the American auto industry are facing a lot of competition," says United Auto Workers President Ronald Gettelfinger. "But we've always had difficult times."Still comfortable financial position Increasingly the business solutions will slip from GM's control. GM is at the mercy of global forces. It simply cannot compete in a global economy with the enormous burden it now carries in legacy costs. It certainly cannot meet those costs for long off a shrinking sales base and negative cash flow. And distracted by those woes, it can't begin to make the investments necessary to match the Koreans on price, the Japanese on quality, and the Europeans on performance.

Let's be clear: GM is not in danger of going bankrupt while it still has a cash hoard. It has a ton of liquidity -- $19.8 billion in cash, marketable securities, and money it can tap from a pre-funded retiree benefits fund. That doesn't count $8.3 billion available from bank lines and probably $5 billion GM could draw on from its profitable General Motors Acceptance Corp. finance subsidiary. Several analysts already expect GM might have to cancel its $1.1 billion-a-year shareholder dividend; it could also raise $10 billion to $15 billion by selling GMAC's mortgage and insurance businesses.

Car segments overlapped and cannibalization
Remember the old ad slogan, "This is not your father's Oldsmobile"? Well, this is no longer your father's auto industry -- but GM is still run as if it were. Fifteen years ago management struck a deal with unions that made it all but impossible to close auto plants or lay off workers without incurring massive costs. GM also agreed to cushy retiree benefits that put it at a severe disadvantage. Much of what ails GM today flows from that accounting reality and its inability to increase the business at home. The need to keep those plants running, to generate cash, and to feed a sprawling web of aging auto brands compromises car design and results in too many models that sit for years without an update. The bedrock principle upon which GM was built -- offering a car to feed every market segment -- has degraded into a series of contrived brands, most with little identity, and bland, overlapping product lines.

Critics acknowledge that GM's new models are light years ahead of those they replace. But more often, GM's bold forecasts never pan out. Executives wrongly predicted a comeback in family sedans in the '80s, '90s, and as recently as last year.

Trade Union Powers
There might be loopholes Wagoner could exploit. Read one way, the labor contract does not guarantee benefits to retirees -- who account for two-thirds of GM's health-care costs -- and only covers active workers, says Sanford C. Bernstein's Johnson. But one GM insider says that interpreting the contract that way would spark a "nuclear war." The UAW could find any number of ways to strike key supply factories and gum up the company. Wagoner knows that firsthand. While president of GM North America in 1998, he played hardball with the UAW over a dispute involving two union locals in Flint, Mich. Those workers, who made parts needed by every GM assembly plant, struck for 54 days over what they said were local issues. That shut down the entire company, costing it $2 billion and nine percentage points of market share, though GM recovered all but a point of that by year end.

GM's pension plans are fully funded for now, but if GM's finances worsen or its pension investments sink in the coming years they might still be dumped on the federal Pension Benefit Guaranty Corp. GM also could shed its union contracts, firing anyone who didn't want to take lower wages or benefits. Ending health-care obligations to retirees alone could save $4 billion to $5 billion a year.Imagine the uproar, though, if that happened. Even if GM could demonstrate to a judge that it had negotiated for the cuts in good faith, the UAW would certainly respond with a strike. That would burn up in a few months much of the cash that any raider coveted. And pensioners could still sue for their benefits.

Discursive Questions:

a) Strategically diagnose GM current strategy as to why it fails. You may ignore external threats. [10 marks]

b) Why the company actual position makes it difficult to respond to changes and restructure itself to align to globalization? You are only to focus on its organisational culture context. Marks will be awarded for using a suitable model. [15 marks]


SOURCES FROM :

· David Welch and Dan Beucke, 2005, Why GM's Plan Won't Work http://www.businessweek.com/magazine/content/05_19/b3932001_mz001.htm, May 9

· Nick Bunkley , 2008, GM posts record loss of $38.7 billion for 2007, http://www.iht.com/articles/2008/02/12/business/12gm.php , February 12

· RTTNews, 2008, GM posts Q2 loss of $15.5 Bln on charges, weak North American operations, http://www.rttnews.com/Content/TopStories.aspx?Node=B1&Id=672177&Category=Top%20Stories, August 1

ANSWERS RELEASED! Auditors Appointment & Professional Ethics

Oilcorp Berhad : Auditors professional ethics in practice.
- Relevant to F8(ACCA) and P1 (ACCA)
- PLEASE CAREFULLY CHECK THE ANSWERS "AFTER" YOU ATTEMPTED THEM



BTMH (Baker Tilly Monteiro Heng) asserts that Oilcorp client is overestimating its valuation of biofuel plant by RM10million to RM110million. The client insisted that was the fair valuation. However, BTMH replied that there was insufficient audit evidence and the sum in dispute of RM10 million is material that will impact on Oilcorp Berhad’s earnings.


Picture : Oilcorp's EGM to remove BTMH auditors

Oilcorp resorted to take another auditor, Horwath, to make an independent report on the findings. The latter gave a report consistent with company’s directors valuation of the asset. This pits both accounting firms against each other. BTMH countered that Horwath didn’t explain the inconsistencies it discovered.

Criticism from analysts is that Horwath has self-interest as it is given the offer to take the appointment as new auditors the client. The client announced that it wanted to replace BTMH through an EGM. Naturally, Horwath defended that their report is "strictly professional" and is ready to accept the appointment as Oilcorp’s new auditors. Shouldn’t the firm still decline the offer as they should also must be seen as independent?

Interesting twist to the ongoing politics, Horwath declined the new appointment as BTMH failed to give it professional clearance. Stating advice from the Malaysian Institute of Accountants, Howarth said a new external accountant must obtain the consent from the auditor it was replacing before it could take over.


Discursive issues:
a) What are the professional ethics principles that oblige auditors? Are there any threats? If so, are there any associated safeguards that you identified as threats? [12 marks]


b) What are the proper procedures for appointing new auditors? [8 marks]

Additional References :


Doreen Leong, 2008, theedegedaily.com, http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_4dcbdea3-cb73c03a-9c8c3f00-b27cccce, Visited on : 4th August


Doreen Leong & Jonathan Lim, theedegedaily.com, http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_48e5c0be-cb73c03a-d964af00-1b7200c3, Visited on : 4th August

Thestar, 2008, Bursa action against Oilcorp,
http://biz.thestar.com.my/news/story.asp?file=/2008/7/23/business/21895512&sec=business, Visited on : 4th August

Jagdev Singh Sidhu and Loong Tse Min, 2008, Oilcorp EGM Over Accounting Dispute Open To All, http://biz.thestar.com.my/news/story.asp?file=/2008/7/22/business/21884466&sec=business, Visited on : 4th August

Doreen Leong, 2008, BDO to take up role as Oilcorp’s auditor http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_bf127b3a-cb73c03a-cbd8dc00-e628a126 , 14th August

PARADOX : WHO AM I?

A saying goes, "Tell me your who your friends are, and I will tell you who you are". We are defined by our sorroundings. If you live in a war torn country where hate is rife, killing another human in name of defense and mere fun is really alright. If you are born to a small village with a Dad as a dentist, you may genetically be adverse to Biology, possibly inherited from non-medic mom, still you will grow to have inkling for medic field. A case in point, a dentist dad influenced his 2 older childeren on career choice. Now Son is pursuing his father's dream in Russia while the 2nd child finishing pre-uni is intending to do dentistry.

SO Who am I? lies largely what surroundings you are in. The Beautiful thing is you CAN choose your surroundings. Have set of friends/pals that have common goals, values and aspirations such as yours.

But before that it begs the question as to who am i? We need to discover who we are inside which unfortunately is molded by surroundings outside. thus the paradox is : We want to pursue what we want inside which is motivated by outside factors such as parental, national and cultural upbringing.

To the question posed by a person, "WHo are you?" - You may say, I am a Malaysian. Your family will scream at you and say, "No! You are a Sikh! DOn't you forget that. Your grandfather came here to survive and preserve our family name and values!" But when you are in Sunway University college, and reply the same as I am a Sikh, I will 'correct' you and say, "No, you are an ACCA student. You are the future Chartered Accountant where the world is your oyster. With dynamic ACCA lecturers, you are equipped with the power of knowledge. GO! Graduate! and conquer the world! You are not just a Sikh but a future finance leader! Don't you forget that."

There you go. Who am I? ... your reply?

DEBUT INTO VIRTUAL REALITY

What ease! TO set up this blog is easier than tying my shoe lace! Of course this technology doesn't come cheap. We know a successful creator that sells his/her idea makes an unimaginable fortune. Case was Mark Zuckerberg - the face book creator, sold his idea for a staggering US$4.1 billion! How it come to that valuation boggles and staggers me. That must be 7 digit PE Ratio valuation for a company that has yet to generate profits. Sure beats the theory we learn in Finance Strategy papers! that is a phenomenal sum. We are talking about selling ENTIRE Petronas Dagangan (Main services in oil & gas distribution in Malaysia) "AND" Gamuda (the richest tol collector in Malaysia) to raise the fianance to buy an intangible blog such as Facebook. I mean you would have a Balance Sheet or rather a Statement of Financial Position (sigghhh... ACCA P2 paper never ceases to amaze me with never ending IAS [I Am Stupid ha ha]) you have ONE solitary item called Intangible Asset valued at US4.1 billion. TO achieve that, you have to sell off Gamuda with tol-collecting highways assets that criss cross the heart of K Lumpur that have a "daily" traffic of 3.1 million vehicles and another commercial giant Petronas Services Berhad. Guys, that is mind boggling. Selling sure businesses for intangible asset. Would you?

So with such phenomenal happening in the virtual world, how can i miss this boat. No way!

USA 'burnt' US$5 trillions with the internet bubbles burst in 2000's but this must have paid off. For founders like Amazon, CISCO, Siebel Systems and so list go on for creating billionaires under 40 years of age.

Being my introductory article, i shall not overkill my personal enthusiasm in cyber space. This is virtual world which means 'almost' real. Nothing beats the real thing - like yesterday, I stumbled on a durian store which have un-extractable attraction. D24 durians store offering 3 thorn-balls for RM10!! I don't know how to resist the real world of pleasures.